Australia: Enterprise update: Unfair contracts - Informax v Clarius revisited

Introduction

In Informax International Pty Limited v Clarius Group Limited [2011] FCA 934 (18 August 2011) (Informax No.2), the Federal Court of Australia has confirmed that the unfair contract provisions of the Independent Contractors Act 2006 (the IC Act) do not provide the Court with an ability to retrospectively amend a contract.

This represents a move away from previous authority and has far-reaching consequences for principals or contractors who may seek to rely on those provisions to remedy a services contract.

Informax No.1

Earlier this year we reported on the decision of Justice Perram in Informax International Pty Limited v Clarius Group Limited [2011] FCA 183 (4 March 2011) (Informax No.1). In that case, Justice Perram considered the enforceability of a restraint of trade provision in a contract between Clarius Group Limited (Clarius, a labour-hire provider) and Informax International Pty Limited (Informax, a company through whom an IT contractor provided her personal services) (the Informax Contract).

Informax had been assigned by Clarius to provide labour for the benefit of Woolworths (pursuant to a contract between Clarius and Woolworths (the Woolworths Contract). Subsequently, Informax sought to contract directly with Woolworths, in essence cutting Clarius out of the picture. The Informax Contract contained a restraint of trade provision which purported to restrain Informax from contracting directly with Woolworths. In addition, the Woolworths Contract contained a provision which precluded Woolworths from directly engaging any Clarius contractor (including Informax) (the Woolworths Clause).

In Infomax No.1, Justice Perram made two key findings (summarised for present purposes):

  • The restraint of trade in the Informax Contract was not enforceable because it was unreasonable in its operation.
  • The Woolworths Clause rendered the Informax Contract unfair, contrary to the IC Act (which allows the Court to review a services contract to assess whether it is unfair or harsh, and make orders varying such a contract). Justice Perram found that the Woolworths Clause, while not in the Informax Contract, operated as the de facto inclusion of an unreasonable restraint of trade in that contract. That inclusion, according to Justice Perram, was contrary to the IC Act.

In accordance with the unfair contract finding, Justice Perram ordered certain amendments to the Imformax Contract. The amendments had the effect of precluding Clarius from taking any step to enforce (against Woolworths) the Woolworths Clause to the extent that doing so would act as a restraint of Informax's trade

Informax No.2

Informax subsequently applied to Justice Perram for orders that the amendments would have retrospective effect. If the amendments have retrospective operation then it becomes possible for Informax to sue Clarius for breach of contract in relation to conduct by Clarius that occurred before the amendments were ordered by Justice Perram in Informax No.1. Not surprisingly, Clarius resisted the application.

Informax No.2 is the judgment which deals with the determination of this application.

Analysis

As a starting point, Justice Perram found that his orders for the amendment of the Informax Contract (in Informax No.1) had, indeed, been intended to apply retrospectively. However, his Honour also found that the IC Act does not afford the Court a power to make such an order. Accordingly, he declined to grant Informax's application. In effect, Justice Perram overturned his own previous decision in the proceedings.

Justice Perram analysed the unfair contracts provisions of the IC Act and found as follows:

  • On application, the Court may review whether a contract is 'harsh' or 'unfair'.
  • In conducting its review, the Court is limited to the state of the contract and surrounding circumstances as they were at the time the contract was formed.
  • If, following review, the Court is of the opinion that the contract in question is 'unfair' or 'harsh', it is empowered to make an order setting aside the contract or varying the contract.
  • However, in accordance with the words of the IC Act, the Court may only make an order "for the purpose of placing the parties to [the contract] as nearly as practicable on such a footing that the [harshness or unfairness] on which the [Court's] opinion is based no longer applies".
  • As such, the orders may only go to the unfairness or harshness identified in the opinion (which, in turn, may only be based on matters subsisting at the time of the contract's inception).

Based on this analysis, Justice Perram found that the IC Act does not empower the Court to make an order which seeks to address the consequences of that unfairness (because the Court cannot take those consequences into account when making the orders).

Implications

The decision in Informax No.2 is important because it confirms that the IC Act is limited to the reform of unfair contracts "going forward" and does not concern itself with the remediation or reversal of unfair behaviours conducted pursuant to an unfair contract.

This has far-reaching consequences. Take the example of a principal and contractor who are party to a services contract and begin to experience difficulties in their relationship. The Informax No.2 decision, effectively, means that the termination of the services contract (prior to the commencement of proceedings under the IC Act) will render that contract immune from review pursuant to the IC Act (because any order made by the Court can only be prospective, and the variation of a terminated contract will have no effect whatsoever).

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.

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