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Employment Law News, September/October 2010
The validity of “cascading clauses” in employment contracts in respect of restraints of trade was recently considered in the case of OAMPS Insurance Brokers Ltd v Peter Hanna
This case concerned “cascading clauses” in restraints of trade clauses of employment contracts. A “cascading clause” is one which seeks to restrain trade of a terminated employee on the basis of a number of alternative geographical and time covenants. Each of the covenants is severable by the court without having effect on negating the enforcement of the more reasonable of the alternative restraints where the court strikes out the too severe alternative restraint.
Peter Hanna was employed by OAMPS Insurance Brokers for 19 years. After being approached by a competitor, Mr. Hanna ceased his employment for OAMPS and commenced work for the competitor, including service to a number of clients who had approached him at his new employer. However, the employment contract of Mr. Hanna stated:
1. To reasonably protect the goodwill and the legitimate business interests of the Company, during the Restraint Period and within the Restraint Area (referred to below), you will not, without prior written consent of the Company, directly or indirectly:
(a) Entice or solicit, or assist another person to entice or solicit, an employee, contractor, officer, agent or supplier of the Company with whom you have had dealings prior to your employment ending, to cease to provide services to the Company;
(b) Canvass, solicit or deal with, or counsel, procure or assist another person to canvass, solicit or deal with any client of the Company with whom you have had dealings during the two year period prior to your employment ending.
2. Restraint period means, from the date of termination of your employment:
(a) 15 months;
(b) 13 months;
(c) 12 months.
3. Restraint Area means:
(a) Australia;
(b) The State or Territory in which you are employed at the date of termination of your employment;
(c) The metropolitan area of the capital city in which you are employed at the date of termination of your employment.
4. Each restraint contained in this Deed (resulting from any combination of the wording in clauses 1 and 2) constitutes a separate and independent provision, severable from the other restraints. If a court of competent jurisdiction finally decides any such restraint to be unenforceable or whole or in part, the enforceability of the remainder of that restraint and any other restraint will not be affected."
OAMPS argued there was a breach of the employment restraint deed and requested an injunction to prevent any further breach. Mr. Hanna claimed the post employment deed was void due to uncertainty of the scope of the restraint and further argued he did not solicit any clients and they had volunteered all information to his new employer.
The Supreme Court of New South Wales held that a cascading provision in a restraint of trade clause will be valid and certain if each restraint covenant is clearly expressed, capable of simultaneous compliance and does not require an inquiry of the court to make it operative. The court followed the reasoning in J.Q.A.T. Pty Limited v Storm [1987] 2 Qd. R 162. The Court in the present case noted there was importance to look to the maximum specified period in the restraint clause and what would be reasonable to sever the relationship between the contracting parties. In the present case this meant that Mr. Hanna was bound by the 12 month restraint of trade because this was reasonable to protect OAMPS legitimate interests. This decision suggests that in New South Wales a “cascading clause” will be valid if the terms are not mutually inconsistent but as always care should be taken in the drafting of restraint of trade clauses. Cascading clauses also appear in other commercial contracts and similar considerations should be taken into account when entering into franchise agreements, shareholders agreements and other agreements containing these clauses.