The Federal Court has delivered an important ruling dealing with the enforceability of restraint clauses in the labour hire context (Informax International Pty Ltd –v- Clarius Group Limited  FCA 183 (4 March 2011)).
The decision expands the categories of legitimate protectable interests recognised in Australia in relation to labour hire firms and contains lessons for such firms in implementing effective restraints.
A labour hire firm had a Preferred Supplier Agreement (PSA) with Woolworths under which it supplied IT contractors. The PSA contained a mutual non solicitation clause under which Woolworths and the labour hire firm agreed they would not directly engage those who had worked for the other for a period of 12 months (the PSA Restraint).
The labour hire firm also had a separate contract with the contractor who was to provide IT services to Woolworths. That contract contained a more limited restraint clause which prevented the contractor working for Woolworths for a period of 6 months after ceasing work with the labour hire firm (the Contractor Restraint).
When the agreement between the labour hire firm and the contractor ended, the contractor promptly negotiated with Woolworths to work for it directly. Upon learning of this, the labour hire firm queried the matter with Woolworths, raising the possibility of a potential breach of the PSA Restraint.
On investigation, Woolworths terminated its contract with the contractor in the belief that it was bound to observe the PSA Restraint.
The contractor commenced proceedings in the Federal Court seeking approximately A$400000 damages from the labour hire firm for the loss of the value of its direct contract with Woolworths. The contractor argued a range of grounds including that:
- both the Contractor Restraint and the PSA Restraint were invalid restraints of trade and unenforceable
- the agreement between the labour hire firm and the contractor contained a clause which stated that it 'constituted the entire agreement' for the supply of the services. The labour hire firm therefore breached this clause by entering into the PSA Restraint with Woolworths which also regulated the supply of the contractor's services
- the agreement between the labour hire firm and the contractor was unfair within the meaning of section 12(1) of the Independent Contractors Act 2006 (Cth) because, amongst other things, the labour hire firm did not reveal the existence of the PSA Restraint with Woolworths to the Contractor.
Legitimate restraints in the labour hire context
In a lengthy judgment Perram J considered the restraint of trade doctrine as it pertains to labour hire firms in Australia.
He noted that in Australia there was a well recognised category of interest which a labour hire firm might seek to protect, being its interest in maintaining its customer connection and protecting itself against the risk of contractors or employees placed with its clients exploiting the relationship and poaching the client.
However, Perram J went further, following a line of United States authority, to establish a second category of protectable interest not previously recognised in Australia, namely, the interest of a firm in avoiding 'opportunistic disintermediation', which he defined as 'the middleman's risk of being cut out'. The labour hire firm argued that it was, in effect an introduction agent and that, as an intermediary, it was entitled to be rewarded for the introductory services it provides. Accordingly, it argued that it had a legitimate interest in protecting itself against the loss of its duly earned reward if its contractors were permitted immediately to deal with its clients. Perram J accepted the argument, concluding that 'a labour hire firm has a legitimate interest in protecting itself from the perils of opportunistic disintermediation.'
Notwithstanding that the Court acknowledged in principle that a labour hire firm had legitimate interests to protect by restraint clauses, on the facts before it, the Court found both the PSA Restraint and the Contractor Restraint unenforceable for the following reasons:
- the labour hire firm had not demonstrated on the evidence that there was sufficient customer connection or risk of the middleman being cut out to constitute a legitimate protectable interest. As a result, neither clause validly operated in the period when the contractor sought direct employment with Woolworths
- in respect of the unfair contracts claim, because the contractor was not told about the existence of the PSA Restraint with Woolworths, its contract with the labour hire firm was unfair to the extent that it allowed the labour hire firm to seek to prevent the contractor working with Woolworths directly when in fact no legal fetters existed. The Court concluded that the contract between the labour hire firm and the contractor should be varied by the addition of terms which promise that the firm would not seek to enforce the PSA Restraint.
It is relatively common in the labour hire and outsource provider context to see firms seek to achieve a form of double restraint by imposing non solicitation obligations not only on their workers but also on their clients.
This recent decision shows that whilst it is legitimate for firms to seek to protect these interests separately, such a strategy can back fire if not implemented carefully. Some steps for firms to minimise the risk of such restraints being found unenforceable include:
- making sure the firm can justify the interest it seeks to protect by the restraint
- informing employees/contractors at the outset if a separate restraint has been negotiated with the client
- ensuring the scope of any separate restraint clause with a client is consistent with the terms of the restraint between the firm and its employee/contractor
- ensuring that any agreement between the firm and its employee/contractor does not state that it 'constitutes the entire agreement for the supply of services' if in fact a relevant clause has been negotiated with the client in a separate agreement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.