A recent decision in the NSW Court of Appeal, Hanna v OAMPS Insurance Brokers Ltd [2010] NSWCA 267 has put restraint of trade clauses back on the agenda for employers by demonstrating that properly drafted restraint clauses can protect employers from former employees seeking to poach clients.

In the OAMPS case the employer succeeded in obtaining orders that prevented Mr Peter Hanna (Hanna) from canvassing, soliciting, dealing with, counselling or procuring listed clients or assisting another to do so for a period of 12 months after ceasing employment.

This gave OAMPS a realistic opportunity to retain the clients’ business as their policies came up for renewal annually.

The case highlights the need for restraints to be tailored to the specific requirements of a business in order to deliver effective protection.

The restraint clause under consideration in the OAMPS case was in the form commonly known as a ‘cascading’ or ‘step’ clause. These clauses provide for a number of variables usually around the time period and geographic area covered.

The decision:

  • confirms that restraint clauses containing ’cascading’ or ’ladder’ restraints, if drafted properly, are enforceable, and
  • clarifies that a cascading clause is not void for uncertainty if each covenant is expressed as being separate, independent and severable from each other covenant in the clause.

Employers should now review restraint clauses in light of this decision, to determine whether they are likely to be enforceable. Clauses containing too many variables or a clause which invites the Court to determine which period or area should be enforced are likely to be unenforceable.

Facts

In April 2010 Hanna, a broker employed by OAMPS with some 30 years’ experience in the industry, resigned and moved to a competitor. Three clients of OAMPS followed him.

Hanna’s contract of employment contained a ’cascading restraint’ which contained nine separate post-employment covenants. Specifically, the clause restrained Hanna from canvassing, soliciting, dealing with, counselling or procuring clients of OAMPS with whom he had dealt in the previous two years (or assisting another person to do so) for periods of (a) 15 months, (b) 13 months and (c) 12 months in the restraint areas of (a) Australia, (b) New South Wales and (c) Sydney.

OAMPS commenced proceedings in the NSW Supreme Court to enforce the restraint. Hanna argued that the restraint clause was unenforceable on two bases, being that:

  1. it was void for uncertainty because of its many options – the combinations of period and area resulted in nine different permutations and there was no mechanism for determining which was to apply, and
  2. it was void as it went beyond what was reasonably necessary to protect OAMPS’ legitimate interests.

At first instance, Justice Hammerschlag upheld the validity of each covenant in the restraint clause. He found that the clause clearly operated on the basis that each of the nine permutations was a separate and independent provision.

In considering the second basis of the challenge to the restraint clause, he found that the critical point for OAMPS in securing its customer relationships was the policy renewal date which occurred annually. On that basis, Justice Hammerschlag found that a 12 month period was all that was reasonable to protect OAMPS legitimate business interests.

Hanna appealed that decision.

Decision

The NSW Court of Appeal1 rejected Hanna’s appeal, affirming Justice Hammerschlag’s decision at first instance, finding that the restraint was not void for uncertainty, and that the nine covenants were separate and independent provisions each of which could be understood from its clear words. Therefore, because it was intended that each covenant apply, there was no need for a mechanism to determine which was to apply.

In other words, the employee was able to comply with each separate covenant. The Court of Appeal made clear that a cascading restraint clause needs to be clear and that compliance with any one aspect of the clause must not lead to a breach of any other aspect. It is important to avoid multiple permutations and combinations that are ‘impenetrable so as to lack coherent meaning and be uncertain’2.

Some cascading clauses are drafted so that it is clear that only one covenant is actually intended. Such clauses must include a mechanism for determining the hierarchy or order of operation of the clause, so that it is clear to the court what the parties intended.

Conclusion

If a cascading restraint provision is to be used it is important to ensure that:

  1. each covenant is a separate and independent restraint severable from the other restraints, and it should be clear that the parties intend each covenant to apply
  2. a covenant does not invite the court to determine which area or period should be chosen to make it enforceable, and
  3. the restraint clause goes no further than is necessary to protect the employer’s legitimate business interests (the employee’s role, seniority and extent of access to confidential information about clients and the employer’s business are relevant considerations).

Action required

Drafting a restraint clause is a complex balancing exercise. This is a significant decision that provides useful guidance on how restraint clauses can be drafted. We recommend that you periodically review your restraint clauses for key employees and in template contracts to ensure they remain enforceable in light of emerging judicial opinion. For current employees, the salary review process can be a convenient time to do this. We can assist with reviewing your contracts and if necessary, introducing revised contracts.