Are your restraints of trade effective?

The New South Wales Court of Appeal has upheld a decision of a single judge to enforce a post employment restraint of trade, preventing an employee from trying to canvass clients of his former employer.

In June, OAMPS Insurance Brokers successfully obtained an injunction from the Court, preventing a former employee, Mr Hanna, from soliciting clients of OAMPS on behalf of his new employer.

The restraint agreement was drawn in a manner commonly referred to as a “cascading” clause. That is, the clause provided for the employee to be simultaneously restrained from soliciting clients within a range of geographic areas (in this case Australia, NSW and the Sydney Metropolitan areas) and for a range of time periods (15 months, 13 months and 12 months). This created in effect nine separate and overlapping covenants.

The reason that restraints are drafted in this way is to circumvent the rule of law that restraints of trade will not be enforceable unless, and to the extent that, they are reasonably necessary to protect the business of the employer. By having a series of separate obligations in place, the Court is able to sever (not give effect to) those restraints that it considers are not reasonable and give operation to whatever is left.

Such clauses are often criticised on the basis that it is difficult for the employee to understand exactly what the scope of the restriction on them is meant to be, and that was the principle argument used by Mr Hanna. However the Court drew a distinction between the legal concept of uncertainty in a contract, where it is impossible for a person to comply with different obligations under a contract, and overlapping obligations which can be simultaneously complied with. The acceptance by the Courts of cascade clauses as a legitimate means prevent former employees from taking the business of a former employer was firmly restated.

If you are considering implementing post employment restraints among your workforce the case highlights some important considerations:

  • The nature of the employer’s business. The court enforced the restraint for a period of 12 months across Australia. Normally for sales based roles this would be considered a long restraint, however it was recognised that the insurance industry was one where clients usually renewed their policies at 12 month intervals.
  • While there were nine possible combinations of restraint, the employer had been careful to draft a clause which did not attempt to impose clearly onerous restrictions on the employee. Nor had the employer tried to cover too many bases by imposing a clause with dozens or even hundreds of separate restraints, as the Courts have reviewed over the past 30 years.
  • Enforcing restraints of trade is a costly and time consuming exercise – think very carefully about who could really make such a difference to your business as to warrant such a restraint. Think about updating employee’s contracts if they are promoted.
  • When drafting the clause, it is important to clearly identify how the overlapping restraints are to operate and be read as separate obligations. This involves some drafting skill and you should consult a lawyer who is familiar with employment restraints to ensure that it’s done correctly.
  • The Courts will focus on how long it is reasonable for the employer to have in order to secure its clients or customers. The enforcement of a restraint is not intended to punish the employee and employers who approach restraints of trade in this way will be wasting their time and money.

This article was originally published on SmartCompany.com.au where Peter is a regular contributor.

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