As a business owner, one of your top priorities is protecting your confidential information and client relationships from competitors in the market. People such as employees, business partners or directors could have had access to this information. So what happens when they decide to leave or the owner wants to sell their business?
You’d want to prevent them from sharing this information.
A Non-Disclosure Agreement (NDA) is a great place to start. It ensures that people who have been involved with your business don’t go around sharing your trade secrets. However, most businesses also include a Restraint of Trade clause in their employees’ contracts. And Restraint of Trade clauses can often be presented as a Cascading Clause.
As the name suggests, you “cascade” or go down a list of several restraint options until you get to the most appropriate one.
Restraint Of Trade Clause vs Cascading Clause
Let’s touch on Restraint of Trade clauses. These clauses are often presented as Cascading Clauses.
They can be found in a variety of contracts like Business Sale Agreements and Franchise Agreements. It’s also common for businesses to insert these types of provisions in their Employment Contract, Contractor Agreement or Non-Compete Agreement to prevent them from working with competitors in the market, and risk sharing trade secrets.
They last for a particular time period and could stop employees, business partners and the like from joining a competitor’s business, or starting a similar business.
Generally, a Restraint of Trade clause will set out:
- Geographical restrictions
- Time restrictions
- Activity restrictions
John is selling his Thai food restaurant business to Harry. John’s restaurant is called “Thai Tanic” but he doesn’t want to include that name as part of the sale.
The restaurant is well liked in the neighbourhood, so Harry thinks this is a good business opportunity.
However, Harry is worried that John might want to keep the name so he can open another restaurant under the “Thai Tanic” name nearby. This would mean restaurant regulars might go to the new place instead.
Here, he inserts a Restraint of Trade clause in the contract to ensure that John doesn’t open another restaurant with that name within a certain proximity in time and distance.
It says John cannot open a new restaurant named “Thai Tanic” in Australia within a 3 year time period.
This clause might seem a little excessive – keep reading to see how Cascading Clauses can come in handy here.
We’ve written more about Restraint of Trade clauses here.
What Is A Cascading Clause?
A Cascading Clause is like a regular Restraint of Trade clause, except it provides some extra options or alternatives.
If there’s a dispute about a Restraint of Trade clause and the Court finds it unreasonable, it will be considered void and struck out. This means the entire clause goes away and may allow your former employees or business partners to work with your competitors.
This is why if there’s a Cascading Clause, the Court can strike out the unreasonable part, and the next one in line will be enforceable.
From our example above, the Court decides that preventing John from opening a restaurant named “Thai Tanic” for 3 years and in all of Australia is unreasonable. Instead, the Court narrows it down to a term of 1 year and only in the suburb where the original restaurant is.
To better understand how this works, let’s look at the format of a Cascading Clause. It should look something like this:
Period of the term:
- 3 years
- 1 year
- 6 months
- South Yarra, Melbourne
The struck out version should look something like this:
Period of the term:
- 1 year
- 6 months
- South Yarra, Melbourne
Put simply, a Cascading Clause allows the Court to remove any unreasonable terms in the clause, and keep the ones that are reasonable. It also means the parties don’t need to go through the stress of re-doing the entire contract or re-negotiating terms since all the options are already there.
How Do I Know What Is ‘Reasonable’?
While it is up to the Court to decide what is reasonable, it’s a good idea to understand how they do this.
For example, an insurance company can impose a Restraint of Trade clause to stop their employees from working with other insurance companies, but it wouldn’t make sense for them to do this with a fast food chain.
In Hanna v OAMPS Insurance Brokers Ltd , the operation of cascading restraint clauses was tested. The restraint clause Mr Hanna was subject to ranged from 15 months across Australia, to 12 months across metropolitan Sydney.
The insurance company restricted Mr Hanna from working with other insurance brokers for 12 months after his employment termination. The Court held that the 12 month duration of the non-compete clause was reasonable, and therefore not void.
The Court will need to ask, “what is reasonably necessary to protect your business’ interests?” The connection between the companies was clear, so the clause was reasonable and enforceable.
Can A Cascading Clause Be Void For Uncertainty?
In contract law, a clause will be void if it is deemed uncertain. Mr Hanna argued that the clauses in his contract should be void because they were separate provisions and therefore unclear.
However, the Court ruled that each term was separate and comprehensible, and as such, they still applied.
This is why it’s important that your Cascading Clause format is clear, so that it is understood by all parties and there is no risk of being void for uncertainty.
Cascading Clauses are an effective way to alter non-compete agreements without invalidating the clause entirely. Courts can strike out terms to the extent that it is reasonable, and it saves a lot of time and stress for businesses.
However, it’s important that the format and terms are 100% clear, otherwise there could be issues if it is enforced. It’s good business practice to check with a lawyer before finalising these clauses.
Sprintlaw has a team of experienced lawyers who can help you sort out the paperwork. Feel free to reach out to us at firstname.lastname@example.org or contact us on 1800 730 617 for an obligation-free chat.
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