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Enforceability of restraint of trade clauses – the three things every medical practitioner and practice must know

By Marcus Fogarty LLB (Hons) GradDipLegPrac 

A common feature of employment contracts is the restraint of trade clause, which if valid and enforceable will restrain a former practitioner from, depending on its terms, working with a former practice’s patients.

1. All restraints are void, unless…

Practices and practitioners should not presume that a restraint of trade clause is enforceable at law. A restraint of trade clause is, on its face, void. That is, unless the practice can show that it has a legitimate interest that requires protection and that the restraint affords no greater protection than is necessary to protect that legitimate interest.

Examples of legitimate interests capable of protection are goodwill, confidential information and customer and client bases.

A broader scope of restraint is more likely to be reasonable in the eyes of the Court in a sale of business context. The Courts have held that a restraint against medical practitioners in favour of a company to whom they had sold their practice, which restrained the practitioners from operating for one year within a 3 kilometre radius of the practice, was reasonable.

2. Reasonableness assessed at time of contract

Over time a practitioner’s role and responsibilities may change and so with it the reasonableness of a restraint against him or her. For example, a broad restraint is more likely to be reasonable as against a senior practitioner with higher levels of patient interaction and a greater knowledge of the business than a more junior practitioner commencing their career.

However, the reasonableness of a restraint of trade clauses is assessed at the time the contract is executed rather than when the employment comes to an end or when the practice is seeking to enforce the restraint.

To ensure that a restraint is reasonable, the scope of it should be drafted to afford only the protection that is necessary taking into account the practitioner’s position, responsibility, level of experience, and knowledge of the business, in their existing role rather than a role that they may have in the future.

As a practitioner’s career progresses the risk to the practice posed by that practitioner leaving employment increases with it, as does the reasonableness of a broader restraint. For these reasons, the scope of restraints should be updated throughout the development of the practitioner’s career.

3. Cascade clauses

Drafters of restraint of trade clauses will often use ‘cascade’ or ‘step-down’ clauses such that the scope of the restraint, in terms of the geographical and time boundary, is defined in decreasing stages. An example of a cascade clause, which was found to be enforceable by the New South Wales Court of Appeal in OAMPS Insurance Brokers Ltd, was;

“… during the Restraint Period and within the Restraint Area (referred to below), you will not … :

a) …
b) Canvass, solicit or deal with, or counsel, procure … any client of the Company with whom you have had dealings during the two year period prior to your employment ending.

Restraint Period means, from the date of termination of your employment:

a) 15 months;
b) 13 months;
c) 12 months.

Restraint Area means:

a) Australia;
b) The State or Territory in which you are employed at the date of termination of your employment;
c) The metropolitan area of the capital city in which you are employed at the date of termination of your employment.”

Cascade clauses are used by drafters so that, should the Court decide that any one or more of the geographical or time boundaries is unreasonable they can be struck out, leaving only those boundaries which are reasonable.

A criticism of the cascade clause is that a practitioner cannot know which elements are reasonable and therefore the extent to which he or she will be restrained following the termination of their employment.

However, the Courts have held that cascade clauses will be valid and enforceable provided that;

–  it is clear that each of the variations is a separate clause (importantly, the contract in the OAMPS decision also contained a clause stating that each combination of the geographical and time boundaries was a separate and independent provision; and

–  the clause itself and each boundary are expressed in clear words, the separate boundaries are capable of simultaneous compliance, and the reasonableness of the boundaries does not require any inquiry or finding by the Court.

4. Conclusion

Practices must be mindful that any restraints upon practitioners must do no more than is necessary to protect the practice’s interests, or risk losing protection altogether. Also, cascade clauses must be drafted with caution to ensure they are not void for uncertainty.

Standard form contracts containing restraints should not be used, rather, the restraints should be adapted appropriately to the practitioner considering his/her position, responsibility, experience, and business knowledge, as at the time of entering into the contract. Such restraints should be updated on an annual basis.

If you have any queries in relation to the article or require any assistance with restraint of trade in any profession, please contact Harrick Lawyers on 03 9670 2266 or enquiries@harricks.com.au

Changes to the Privacy Act

Changes to the Privacy Act – the provision of goods on credit

Increased compliance obligations for SME’s that provide credit, including to commercial customers

As of 12 March 2014, The Privacy Amendment (Enhancing Privacy Protection) Act 2012 (“the Act”) commenced, with the expanded definition of credit provider now applying to a number of businesses that may have been previously excluded from the old provisions.

In the past, businesses may have been excluded from the definition of credit provider based on their legal structure, or if turnover was less than $3 million, or the type of credit that was offered (commercial credit as opposed to consumer credit).

The Act now applies to businesses that provide credit, regardless of turnover, if that business meets the definition of a ‘credit provider’ under the Act or regulations. The definition now includes credit providers that provide exclusively commercial credit (and do not provide any consumer credit).

New definition of ‘credit provider’

In summary, the definition of ‘credit provider’ under s 6G of the Act covers banks, organisations or small business operators for whom a substantial part of their business is the provision of credit, retailers who provide credit cards to customers, businesses that are prescribed as credit providers by the regulations, and further includes businesses that provide goods and/or services, and where payment for those goods and/or services is deferred for at least 7 days.

Substantial part of the business or undertaking is the provision of credit

Under the new law, there are two ways in which certain businesses may meet the definition of credit provider. The business may elect to meet the definition of credit provider under the Act if “a substantial part of the business or undertaking (of the business) is the provision of credit.” Alternatively, the business may be prescribed to be a credit provider by the Act or the regulations. Where the business elects to be a ‘credit provider’ under the Act, it is also an APP entity and must adhere to the Australian Privacy Principles. However, if the business is prescribed to be a ‘credit provider’ under the Act, the Australian Privacy Principles apply, but only in relation to the credit that it provides.

Australian Privacy Principles

The Australian Privacy Principles set out how businesses should collect, use and disclose personal information of individuals, and the individual’s rights to their personal information that is held or managed by the business. More on the APPs can be found in a separate Harricks’ briefing on this topic.

 New definition of credit

The Amended Act deletes the definitions of loan and credit from s 6(1) and all references to loan from the relevant sections. The following definition of creditis inserted at s 6M(1) and (3) of the Amended Act:

(1) Credit is a contract, arrangement or understanding under which:

(a)              payment of a debt owed by one person to another person is deferred; or

(b)              one person incurs a debt to another person and defers the payment of the debt.

 

(3) Without limiting subsection (1), credit includes:

(a)              a hire-purchase agreement; and

(b)              a contract, arrangement or understanding of a kind referred to in that subsection that is for the hire, lease or rental of goods, or for the supply of services, other than a contract, arrangement or understanding under which:

(i)                full payment is made before, or at the same time as, the goods or services are provided; and

(ii)              in the case of goods—an amount greater than, or equal to, the value of the goods is paid as a deposit for the return of the goods.

 Compliance obligations upon credit providers

The Act requires compliance by credit providers in relation to the collection, use and disclosure of credit information and credit eligibility information. These provisions apply in addition to, and in some cases, in place of the Australian Privacy Principles.

Credit providers under the Act must have a transparent management policy for the credit information and credit eligibility information that they handle, and it must be available in a form that is accessible. In most cases, publishing the policy on the website of a business that is a credit provider will be sufficient. Credit providers must also advise as to the name and contact information of any credit reporting body to whom the credit provider is likely to disclose credit information or credit eligibility information, and must advise if the information is likely to be provided to an entity outside Australia.

Credit providers may also be required to join an accredited External Dispute Resolution Scheme.

If you have any queries or require any assistance with regards to the Privacy Act please do not hesitate to contact Harrick Lawyers on (03) 9670 2266.