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