Can you restrain a financial services provider?

How useful are restraint clauses in employment contracts?

It has become commonplace for insurance broking firms to insert “restraint of trade” provisions into employment contracts in an attempt to prevent ex-employees taking “their book” with them to a new employer. A recent New South Wales Supreme Court decision provides useful guidance on the courts’ approach to such clauses.

OAMPS Insurance Brokers Ltd v. Hanna [2010] NSWSC 781 (27 July 2010)

Mr Hanna commenced employment with OAMPS on 8 October 1990. On 30 September 2008, Mr Hanna and OAMPS signed a written employment contract which included a “post employment restraint deed”.

The restraint deed provided for a series of cascading restraints. Pursuant to the restraints, Mr Hanna was precluded for a maximum period of 15 months and a minimum period of 12 months from directly or indirectly canvassing, soliciting, or dealing with any client of OAMPS that he had dealt with during the two year period before the termination of his employment relationship with OAMPS. The maximum area of the restraint was the whole of Australia and the minimum area was the city of Sydney.

“Cascading” restraints, which provide for a series of decreasing periods and areas of restraint, are common in employment contracts. The purpose is to allow an employer to argue for the greatest possible period and area of restrain but, if the employer fails to convince a court that such restraints are necessary, the employer then “drops back” to the next level of proposed restraint.

Mr Hanna resigned from OAMPS on 22 April 2010 with effect from 28 May 2010. At the time he resigned, Mr Hanna was a team leader/client director, responsible for up to six brokers including two senior account managers, one account manager and three account executives.

On 7 June 2010 he commenced employment with a competitor of OAMPS, Strathearn Insurance Brokers (Strathearn).

Mr Hanna was aware of the restraints in his employment contract and told Strathearn that he would not be able to bring with him any business from OAMPS’ clients. However, evidence was produced to show that Mr Hanna told clients he was going to work for Strathearn and that if they wanted him to “look after them”, he would be able to do so.

OAMPS brought legal proceedings to enforce the terms of the restraint deed. Mr Hanna challenged the deed on the basis that the restraints were void for uncertainty and were also void because they went beyond what was reasonably necessary to protect OAMPS’ interests.

Even though the restraint deed provided for nine separate combinations of possible restraints, the court found that the deed contained a clear and unambiguous statement that each restraint was a separate and independent provision, severable from the others. As such, the restraints were not void for uncertainty.

New South Wales employment contracts which contain restraints of trade are governed by the Restraints of Trade Act 1976. Queensland has no comparable legislation.

The New South Wales Act provides that a restraint is valid unless it is against public policy. The legislation also required OAMPS to “establish that the restraint deed is reasonably necessary to protect its legitimate business interests”. Although Queensland relies on common law principles rather than legislation when dealing with restraints, we consider that a Queensland court would take a similar approach to the New South Wales Supreme Court’s approach in this case.

The court considered the various tests of “reasonableness” laid down in other court decisions and found that the question to be determined was whether the restraint deed offered “no more protection than was reasonably necessary to protect legitimate business interests of OAMPS”.

The court considered that the deed was intended to protect customer connections by preventing Mr Hanna from using his personal knowledge and influence over clients built up during his employment with OAMPS. Because renewal periods for the portfolio controlled by Mr Hanna were spread throughout the year, preventing Mr Hanna from soliciting or canvassing OAMPS clients for 12 months was reasonable. In the court’s view, “(12 months) was the minimum necessary (period) to give OAMPS one opportunity to cement its connection or for (Mr Hanna’s) connection to be severed across the portfolio”.

The court ordered that Mr Hanna be restrained from soliciting clients with whom he had dealt in his time with OAMPS for a period of 12 months after the termination of his employment. The finding that a period of restraint of 12 months was reasonable was based on the facts in this particular case. Faced with a different situation, a court might find that such a lengthy period of restraint is too long.

There is often a perception that restraint clauses in employment contracts have deterrent value only and that courts will not act to enforce them. The case of OAMPS Insurance Brokers Ltd v Hanna illustrates that restraints in employment contracts should not be ignored – courts are willing to enforce restraint clauses that are reasonable in their scope and duration. The area of restraints in employment contracts is complex – any restraint clause must be carefully and properly drafted to maximise its potential effectiveness.