Restraint of Trade

 In Uncategorised

Epichealth Pty Ltd v Peng-Kung Yang [2015] VSC 516

Employees and independent contractors are sometimes engaged in positions where they are the friendly front line face of a business. Amongst other things, employees and independent contractors have access to the businesses records, client files, databases, procedures, templates, pricing structures and the day-to-day knowledge and rapport with clients.

Sadly, not all things can last forever and there will be a time when a well-liked employee or independent contractor leaves a business. When this occurs a business is faced with the inevitable and significant risk that the departed employee or independent contractor will set up business in competition to their former employer. This risk includes the risk that client’s will be approached, encouraged and/or enticed to join the new business.

The inclusion of restraint of trade clauses in employment and independent contractor agreements is a commonly used legal tool to mitigate this risk. The importance of a well drafted and executed restraint clause is paramount to ensure that it will be upheld by a Court, should the need arise. Equally as important as the clause itself, is the record keeping and communication of the parties during negotiations and the period of time leading up to the execution of the agreement, and the events surrounding any subsequent termination.

The recent Victorian Supreme Court Case of Epichealth Pty Limited v Peng-Kung Yang [2015] provides detailed commentary as to the factors that the Court will consider when upholding the validity of a restraint clause.


Background

Epichealth (the plaintiff) owns and operates a medical clinic called “Langwarrin Clinic”. The Langwarrin Clinic is staffed by General Practitioners who are each engaged by the plaintiff as independent contractors.

The Defendant is a General Practitioner who worked at Langwarrin Clinic subject to a written independent contractor’s agreement. The written agreement included a restraint clause.

The Plaintiff alleged that the Defendant breached this restraint clause. The Plaintiff commenced proceedings seeking an injunction preventing the Defendant from providing any general medical services within a 10km geographic radius of the Langwarrin Clinic, for a period of three months from the agreed termination date of the agreement.

Timeline of Events

  • 21 January 2013 – Parties enter into written independent contractor’s agreement.
  • 28 April 2015 – Defendant provides the Plaintiff with six months written notice that he would be ceasing to provide services to Langwarrin Clinic. Both parties agreed that the final date that the Defendant would provide his services to the Plaintiff would be 27 October 2015.
  • 1 August 2015 – The Carrum Downs Medical Clinic, located 6kms from the Langwarrin Clinic, commences operation. The Defendant is the director of a corporate trustee that is the owner of the Carrum Downs Clinic. The Defendant is also the beneficiary of the associated Trust and the sole employee of the Carrum Downs Clinic.
  • 22 August 2015 – The Defendant refuses to attend and provide any services to Langwarrin Clinic.
  • 30 August 2015 – The Plaintiff discovers that the Defendant is the owner and sole employee of the Carrum Downs Medical Clinic.
  • 14 September 2015 – The Plaintiff commenced proceedings seeking an urgent injunction restraining the Defendant from providing medical services within a 10km geographic radius of the Langwarrin Clinic until at least January 2016 or the conclusion of the Court’s substantive proceedings. The Defendant opposed these proceedings.


The Restraint Term

The written agreement included what we refer to as a cascading restraint clause, which provides for various options to be available to the entity wanting to enforce the restraint. The best position is originally asked for, then it ‘cascades down’ to lesser positions.

In summary, the restraint clause provided that the defendant was restrained during the term of the contract from providing services to “any person other than the Langwarrin Clinic, without obtaining prior written consent”.

The restraint clause further provided that upon termination of the contract, the defendant “was restrained from providing his services as a general practitioner within: a 25 kilometre, alternatively 10 kilometre, alternatively 5 kilometre, radius of the Langwarrin Clinic during the term of his engagement and for 12 months, alternatively 6 months, alternatively 3 months, following the termination of the contract”.

The Plaintiff included the cascading definitions of the restrained geographic and time periods so that if a Court held that the greater restraint was either unreasonable or invalid, a lesser restraint could instead apply. This effectively operates as an insurance policy ensuring that the Court does not entirely strike out the restraint clause deeming the clause to be entirely invalid. Instead the cascading clause allows the Court to impose a lesser restraint period.

The Court acknowledged and upheld the use of cascading terms in restraint clauses. It is a common and safe practice.

 

Defendant’s Claim

The Defendant accepted that he had signed and was bound by the written agreement. However, the Defendant argued that the restraint clause was void, as he had raised issues with the Plaintiff regarding the reasonableness of the restraint clause prior to entering into the agreement. Further, the Defendant argued that the Plaintiff knew that he provided services to other medical providers.

 

Interlocutory Injunctive Relief

The Court referred to the High Court case of Australian Broadcasting Corporation v O’Neill regarding the principles required to be satisfied to obtain interlocutory injunctive relief. These are:

  1. The Plaintiff must prove that it has a prima facie case;
  2. The balance of convenience must favour the granting of the injunction;
  3. Damages will not provide an adequate remedy; and
  4. Other discretionary considerations.

 

Enforceability of Restraint Clauses

The Court reproduced the required principles as outlined in Wallis Nominees (Computing) Pty Ltd v Matthew William Pickett which include:

  1. A restraint clause in a contract is prima facie void;
  2. The presumption can be rebutted and the restraint justified by the special circumstances of a particular case. This requires the restriction to be objectively reasonable by reference to the interests of the parties;
  3. The validity of the clause is judged as at the date of the agreement;
  4. A stricter view is taken of restraint clauses in employment contracts as opposed to those contained in contracts for the sale of a business;
  5. The party seeking to enforce the restraint bears the onus of proving the existence of special circumstances justifying the restraint;
  6. The restraint must impose no more than adequate protection to a party in whose favour it is imposed; and
  7. The meaning of the restraint clause may be construed by reference to the factual matrix, documentary context and surrounding circumstances.

 

Prima Facie Case

Both parties relied on affidavit evidence surrounding the conduct and conversations between the parties; 1) at the time of making the agreement; 2) during the term of the agreement; 3) when notice of termination was given; and 4) upon termination of the agreement becoming effective.

The Court gave significant weight to this affidavit evidence. The Court drew inferences about the reliability of the evidence. These inferences had significant bearing on the Court’s determination as to the existence and strength of the Plaintiff’s prima facie case.

 

Damages

The Court determined that damages would not provide an adequate remedy to the Plaintiff for the following reasons:

  • The difficulty of detecting breaches of the restraint clause – The Court referred to the confidential nature of doctor patient conversations;
  • The difficulty of establishing causation between any loss of business with customers and any actions of the Defendant – The Court again referred to the confidential and personal nature of the doctor patient relationship;
  • The difficulty of calculating the quantum of any damage arising from loss of business – The Court referred to the difficulty that the Plaintiff would have in establishing how many patients had left as a result of the Defendant, due to the sporadic nature of patient visits and the confidentiality of doctors records;
  • The Defendant’s evidence suggested that his only asset was a loan account with a family trust; and
  • The Court held the view that “it is not readily apparent that the Defendant would be able to meet an order to pay damages” in the event that such an adverse order was made against him at trial.

 

Balance of Convenience

The Court determined that the course of action that carried the lower risk of injustice, in the event that the Court’s decision turned out to be wrong, was to grant the plaintiff injunctive relief. The Court reached this decision based on the following:

  • The Plaintiff established that they had a strong, prima facie case;
  • Damages are not an adequate remedy;
  • The Plaintiff acted promptly when it became aware of the Defendant’s role in the Carrum Downs Clinic;
  • The Plaintiff acted in good faith;
  • The Defendant did not have “clean hands;”
  • The risk to the defendant’s investment in the Carrum Downs Clinic (including contributions made by his elderly parents who were suffering from ill health) was not a relevant injustice. The Court contended that this was a commercial risk that was undertaken by the Defendant with his clear and express knowledge;
  • The Court did not accept the Defendant’s submissions that he would be unable to find employment and would be without income during the period of the restraint; and
  • The Court took into consideration that the Plaintiff would be “permanently deprived of the protection afforded to its business by the contract.”

 

Conclusion

When considering the validity and enforceability of a restraint clause, the Court will look beyond the words contained within the clause. Simply having a signed agreement with a restraint clause is not enough. Instead the Court will review the clause against the factual background at both the time the contract was entered into and the time the contract was terminated. The Court will compare and contrast these facts with the objective reasonableness of the clause and the unique circumstances of each situation. The inclusion of cascading definitions in the restraint clause provides greater flexibility and reduces the risk of a clause being struck out entirely.

Finally, business owners who have encountered difficulty attempting to enforce restraint clauses will take comfort in the Court’s comments that “a contractor like the defendant who, fully cognisant of the terms and extent of the restraint, nonetheless sets up a competing business largely because it suits him to do so, could be thought to be the author of his own misfortune.”

If you require advice about employment law issues please contact Christie Howson, Solicitor Director at Osborn Law, for confidential advice and assistance.

 

Recent Posts

Start typing and press Enter to search