A cascading clause is a clause that outlines several variations applicable to the same term within a contract. These most commonly appear as cascading restraint clauses within non-compete and employment agreements. Namely, they will restrict the signing party from conducting business/trading/associating with certain persons or businesses within an area for a period of time. However, what terms apply are dependent on what the courts can feasibly enforce.
The key benefit to contract creators using these is that it is often easier to have a term enforced to the extent it is feasible, rather than negotiate the exact terms and have them added into the contract retroactively. How these will generally appear is (for example):
The period of the term:
- 6 months
- 1 year
- 2 years
The area to which the term applies:
- Balmain, Sydney
- New South Wales
- Australia
The clients to which this term applies:
- John Smith
- Jane Doe
- Kinder Ltd.
The creator of the contractor will often look to provide restraint to the maximum extent possible. Likewise, the signee will look to restrict the clause to its minimum effect.
However, the seminal case of Hanna v OAMPS Insurance Brokers Ltd [2010] NSWCA 267 (‘OAMPS‘) has since provided guidance to the enforcement of cascade clauses. It dealt with a cascading clause very similar to the example above. Below we discuss the key takeaways from the case.
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Uncertainty of the cascading clause
Within contract law, a clause is void if it is not clear about what it means. This means, that unless the party it binds is aware of the exact obligations the clause requires, it cannot be enforceable.
OAMPS discussed whether a cascading clause would be considered uncertain under this definition. It was argued that the terms were uncertain as:
- As the various restraints appeared as separate, severable provisions, it was unclear whether to comply with one would then breach another via noncompliance; and,
- There was no mechanism within the contract that provided an order to the compliance of the terms.
On this first point, the court ruled that as each term was clear and severable it was not uncertain within this sense. Of note, these terms were held as separate, severable clauses, because a specific clause within the contract provided that these restraints were to be considered as such.
On the second point, the court ruled that there was no precedent stating that a hierarchy is required of terms. Further, it held that the clause with the widest restraint would take priority.
However, as we discuss below, the reasonableness of the restraint ultimately determines its application.
The reasonableness of the restraint
The key factor determining whether the clause is enforceable is that it must be reasonable to do so. This means that the court will assess the scope outlined within the clause and its overall effect. This assessment will include the period of the restriction, the scope and the connection between the restricting entity and the clients.
OAMPS discussed what this connection means. It refers to the proximity of the client to the entity seeking a restriction. For example, a company that makes electric cars would have a strong enough connection to other electric car developers to restrict trade with them. However, it would be unreasonable for them to then restrict trade with a fishing company as there is an inherent lack of competition.
The value of a cascading clause here is that the court can then rule to who the restriction applies without invalidating the contract.
Final thoughts
Ultimately, while cascading clauses are a valuable tool for employers, they must still be careful when and how they use them. Of note, within OAMPS thought was given to the application of the Restraint of Trading Act 1976 (NSW). While it was not ruled on, it may be assumed that without clarity within a cascade clause it may be held to breach s 4(1) that prohibits employer-employee agreements that do not provide a reasonable attempt to clarify post-employment constraints. Hence, we would advise that if you wish to include a cascade clause within your employment contracts, you contact a lawyer first to ensure compliance.
