When I talk about employment agreements with employers, I often hear murmurings that restraint clauses aren’t worth the paper they are written on. It is certainly true that the courts have in the past at times erred on the side of the employee when deciding whether a restraint is enforceable, however many restraints will be enforceable (contrary to popular belief) if they have been drafted correctly.
An important case of the NSW Supreme Court of Appeal that looked at the issue of employment restraints, and the drafting method of using “cascading clauses”, has recently confirmed that the drafting of this type of clause can make all the difference.
What is a restraint of trade clause?
Many employment agreements these days contain a restraint of trade clause. Essentially a restraint of trade clause seeks to protect the legitimate interests of the employer by restraining the employee from doing certain activities after the employment arrangement has ended – for example, the clause might try to prevent an employee from working with clients if they move to another employer.
These sorts of clauses will only be upheld by a court where the restraint is reasonable to protect a legitimate interest of the business. So it’s really important that the restraint is drafted in a way that it would be considered by a court to be reasonable.
In an attempt to make restraint of trade clauses in employment agreements binding and enforceable, there has been a growing trend towards “cascading” restraint clauses – that is, a clause that is worded with alternative variations with larger to narrower periods and geographical areas in the restraint.
Below is a very simplistic example of a type of “cascading” clause:
The Employee must not deal with any client of the Company after termination of their employment for a period of:
(a) 18 months;
(b) 12 months;
(c) 6 months.
in the following areas:
These clauses often raise eyebrows of those who aren’t so familiar with them.
The concept of cascading clauses is that the variations are intended to be read separately, so if a court was to find that the maximum interpretation of the clause (ie 18 months throughout Australia) was “unreasonable” then they could read the clause down to a position that they viewed as reasonable. If the clause instead only set out the maximum position, and a court found that position “unreasonable” then the court could strike out the clause entirely (rather than reading it down) – leaving the employer with no restraint rights at all.
However, when these sorts of clauses have come before courts in the past, there have been inconsistent decisions as to the validity of the clauses, which has left unanswered the question – when are clauses like this valid and binding?
The OAMPS case
Mr Hanna, the employee in question, had worked for OAMPS Insurance Brokers (OAMPS) as an experienced insurance broker. He subsequently resigned from his employment to work with a rival insurance broking firm.
Mr Hanna then started providing services to a number of clients of OAMPS through his new employer.
OAMPS sued Mr Hanna, claiming that he’d breached the restraint clause that was contained in his employment agreement (preventing Mr Hanna from soliciting clients of OAMPS).
The cascading restraint clause in question sought to prevent Mr Hanna from soliciting OAMPS’ clients and employees for periods ranging from 15 to 12 months, and for geographical areas ranging from the whole of Australia, to the city of Sydney. There were 9 possible combinations of restraint variables.
Mr Hanna argued that the restraint clause was void because the restraint clause was not clear as to the real meaning. The crux of his argument was that “each permutation is inconsistent with every other one and no mechanism is provided for the selection of the one which is to operate”.
The court discussed the varying views of courts in the past, and found that a restraint of trade clause is valid and certain if each individual restraint covenant is:
- Expressed in clear words
- Is capable of simultaneous compliance, and
- Does not require an inquiry or finding by the Court to make it operative.
In this case the Court found that these criteria had been met, so the restraint was upheld.
Mr Hanna then went on to appeal this decision, but the court again upheld the finding that a clause that provides for different periods and distances of restraint is valid. The Court held that in this case there were 9 separate restraints, and they were all binding. They could be seen as individual covenants, they were able to be understood and used clear words, and so all were able to be complied with without breaching any of the others.
The lesson from this case is that restraint clauses can be very complex. However, if drafted correctly, they can indeed be enforceable.
Using a cascading clause approach can provide a higher degree of likelihood that a clause will be enforceable (whilst still maintaining the ability for an employer to attempt to maximise the restraint period and area).
However the drafting is critical – if the wording is unclear, or if even the minimum interpretation of the clause is seen by a court to be “unreasonable”, then the clause might not be worth the paper its written on…!
So if you want to make sure your employment agreement has the effect you’re after, or you want help with understanding your employment obligations, ensure that you have it carefully checked. Contact us at Aspect Legal if you’d like us to review your employment agreement – 02 8006 0830 or [email protected]
 OAMPS Insurance Brokers Ltd v Hanna  NSWSC 781