Employment Law Update – Cascading clauses may save restraint of trade clauses from being unenforceable

The Singapore Court of Appeal recently commented on ‘cascading clauses’ that has sometimes found its way into employment contracts. An example of a cascading clause would be a restraint covenant that states that an employee would be restrained from competing for a period of X months; but if the same is not enforceable to a shorter period of Y months; or if not enforceable to an even shorter period of Z months.

In the Court of Appeal case of Smile Inc Dental Surgeons Pte Ltd v Lui Andrew Steward (copy attached) at paragraph 31, the Court referred to the Australian case of Hanna  v OMPS Insurance Brokers. Whilst the Court of Appeal made no definitive pronouncement as to whether such cascading clause would find favour, the decision of the Court of Appeal does indicate that, in the appropriate circumstances, where parties have intended any clause of the contract to be severable, the Singapore court may considering severing unenforceable clauses in the contract (using the ‘blue pencil’) rule to give effect to the parties’ intention.

The relevant paragraph of the judgment, para [31] reads,

Whether the court can read down the Restrictive Covenants

DOCTRINES OF SEVERANCE

31 In Man Financial, it was confirmed that the law in Singapore recognizes two forms of severance of contractual terms: (a) severance of entire or whole clauses in a contract; and (b) severance via the “blue pencil test” (see Man Financial at [126]-[131]). It was accepted by counsel for the Appellant, Mr Aqbal Singh (“Mr Singh”), that severance via the “blue pencil test” could not be effected for the Restrictive Covenants, since there was no time limit expressed in the contractual terms at all; in other words, there was nothing to strike out in the first place. We pause to observe that the phenomenon of “cascading clauses”, ie, restrictive covenants that provide for a variety of durations or geographical scopes, has taken root in Australia, and such clauses have been held to be valid by the New South Wales Court of Appeal decision in Hanna v OAMPS Insurance Brokers Ltd [2010] NSWCA 267 (affirming the New South Wales Supreme Court decision in OAMPS Insurance Brokers Ltd v Peter Hanna [2010] NSWSC 781). Such cascading clauses are engineered specifically to accommodate the “blue pencil” test, in order that the court may strike out provisions for, for example, unreasonably long durations of restraint, whilst preserving the restrictive covenant concerned if at least one of the durations passes the tests of reasonableness ….”

This recent Court of Appeal case suggests that a cascading clause, if properly worded and if the intention of the parties is that the various period of restraint are severable, does not necessarily cause uncertainty in the contractual terms and would be a valid and binding term of the contract.

 

Prepared by Joseph WW Liow,
Director