Quantcast

04 Jan 2011

Cascading restraint clauses valid and enforceable

by Joe Catanzariti

The important decision of Justice Hammerschlag in OAMPS Insurance Brokers Ltd v Hanna [2010] NSWSC 781 upheld the validity of a clause which provided for different periods and distances of restraint of trade.

The recent decision of the NSW Court of Appeal in Hanna v OAMPS Insurance Brokers Ltd [2010] NSWCA 267 has now provided further guidance for practitioners and employers concerning the validity and enforceability of these "cascading" restraint clauses.

Facts and procedural history

Mr Hanna was an insurance broker employed by the insurance broking firm OAMPS for 20 years. On 22 April, Mr Hanna resigned from OAMPS after accepting employment with another insurance broking firm.

A dispute then arose between Mr Hanna and OAMPS concerning the enforcement of the restraint deed in Mr Hanna's contract of employment. The restraint deed contained nine different restraints of trade, which ranged from 15 months across Australia, down to 12 months across metropolitan Sydney. OAMPS sought an injunction to prevent Mr Hanna from providing services to a specified list of its clients. Justice Hammerschlag ultimately granted an injunction restraining Mr Hanna from dealing with 17 clients for a period of 12 months.

Appeal grounds

Five grounds of appeal were advanced by Mr Hanna. First, the restraint deed was said to be void for uncertainty. Secondly, it was submitted that the restraint deed went beyond what was reasonably necessary to protect OAMPS' interests. The remaining three grounds of appeal were challenges to factual conclusions made by Justice Hammerschlag which were relevant to the reasonableness of the restraint and criticism of the test he used in assessing the reasonableness.

Was the restraint void for uncertainty?

Mr Hanna argued that this cascading restraint clause was uncertain because the provision contained no mechanism for the selection of which restraint would operate. This meant that in effect the contracting party could not know, from the terms of the contract itself, what the operative obligation was.

Two principal reasons were propounded for the asserted uncertainty of the restraint deed.

First, Mr Hanna argued that the restraint deed contained a single covenant which contained mutually inconsistent obligations. The Court of Appeal referred to clause 4 of the employment contract and held that it was clear that the various periods and areas in clause 2 were part of separate and independent provisions.

Importantly, clause 4 provided that "Each restraint contained in this deed constitutes a separate and independent provision, severable from the other restraints". The Court held that therefore, there were nine separate restraints ranging from the widest to the narrowest and all were binding. As they could be taken as individual covenants, were capable of being understood by the use of clear words, and all were capable of being complied with without breaching any of the others, the one covenant argument failed.

The second argument was that the restraint deed was uncertain because it did not contain a mechanism for determining which one of the several restraints applied and in what order. The essential thrust of the argument was that there was uncertainty in more than one clause covering by different terms the same ground of a party's obligation.

The Court held that there was no conflict between the different restraint terms, as compliance with one of them would not lead to the breach of the others. While on a practical level the most relevant clause was the one containing the widest restraint, all were binding. The Court further held that "neither their operation nor any principle of law concerned with certainty of contract requires a mechanism or hierarchy of order of operation". It acknowledged that a complex and difficult clause with multiple permutations and combinations may lack coherent meaning and be uncertain, but the clause in this case did not.

There was a further argument advanced by Mr Hanna: that cascading clauses which amounted to repetitive and overlapping restraints of ever widening reach and subject matter were against public policy for the purpose of section 4(1) of the Restraint of Trade Act 1976 (NSW).

Essentially the argument was that clauses between employer and employee should exhibit a reasonable attempt to identify a clear and agreed reach for any post-employment constraint. As this ground was not fully argued, the Court held as a preliminary view that in these circumstances, the operation of the clauses was "tolerably clear" as they were apparently an attempt to ensure that some post-contractual restraint would apply to Mr Hanna.

The Court distinguished decisions such as Northern Tablelands Insurance Brokers v Howell [2009] NSWSC 426 and Lloyd's Ships Holdings v Davros Pty Ltd (1987) 17 FCR 505, where the restraints were held to be void for uncertainty, on the basis that the decisions were predicated on the reasoning that there was one covenant. This was contrasted with the matter before the Court, where "all the covenants are binding, severally and independently".

Reasonableness and "dealing"

The next issue to be determined on appeal was whether the restraint imposed on Mr Hanna was reasonable. It was common ground between the parties that the reasonableness should be assessed at the time of entry into the contract. the Court of Appeal noted that the appellant had correctly conceded that in the respect that the clause was limited to clients with whom Mr Hanna had dealings with prior to his employment ending, it was reasonable. the Court of Appeal further held that it was not necessary for the clause to limit dealing only to clients with whom Mr Hanna had a "strong connection".

Mr Hanna argued on appeal that the Court should not as a matter of discretion have extended the clause to 17 clients because Mr Hanna was not dealing with them at the time of his departure and the evidence adduced was inadequate to conclude that a restraint on dealing was justified. the Court of Appeal rejected this argument on the basis that the evidence had indicated Mr Hanna had a strong connection with 15 of the clients, which were all corporate entities in the Swire group of companies.

In relation to the other two clients, the Court of Appeal noted that Mr Hanna had not been dealing with them at the time of leaving, however it held that he had dealt with them and, being a highly competent and experienced broker, he was likely to have created a real connection with these clients.

The test to judge "connection"

The approach of Justice Hammerschlag at first instance to judge the reasonable protection of the connection of the clients to OAMPS was to identify a period (12 months) which would substantially ensure that OAMPS was able to undertake renewal of all the insurance policies of the relevant clients, without the competition of MrHanna in his new employment.

On appeal, Mr Hanna argued that this was the wrong test to apply. However, the Court rejected this argument, holding that "there is no legally required test in these circumstances". Rather, the appropriate test will depend on the facts and the judge's evaluation of the approach that is reasonable. It further held that the judge is required to evaluate the evidence about connection and adopt an appropriate approach to assess what is required to reasonably protect the connection of the former employer.

The 12 month period

The final ground of appeal was that Justice Hammerschlag erred in deciding upon a 12 month period of restraint. However the Court held that once it was accepted that on the evidence, renewal was a critical time for each client, the use of 12 months was difficult to criticise.

Although Mr Hanna's replacement could have been introduced to clients within 12 months, the Court held that this did not mean the 12 month period was not reasonably required to show the skill and competence of the firm to maintain the connection. The evidence was sufficient to show the importance of renewal and the three month period before renewal. Accordingly, the appeal was dismissed with costs.

Implications

As the NSW Court of Appeal upheld the validity of cascading restraint clauses, employers may wish to reflect on whether this type of restraint is appropriate in their employment contracts. This decision should provide practical guidance for employers regarding what kind of restraint clauses they can employ. As the decision was largely based on the Court of Appeal's conclusion that the cascading clause was not a single covenant containing conflicting obligations, employers should ensure that their restraint clauses make clear that each restraint is independent and separate to ensure that it is not void for uncertainty.

This article was written when Joe Catanzariti was a partner at Clayton Utz and does not necessarily reflect his views as Vice-President of the Fair Work Commission.

You might also be interested in…

Related Knowledge

Get in Touch

Get in touch information is loading

Disclaimer

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.