30 Aug 2018
Independent contractors and restraint of trade terms: can they be used to protect a principal's business?
By Abraham Ash, Heloise Ormandy
Restraints in independent contractor agreements can be complicated, as the goodwill / interests of the principal can be hard to distinguish from that of the contractor's own business.
It is not uncommon for employers to seek to protect their businesses by ensuring their employment contracts have post-employment restraints. But what about the engagement of contractors? Can a business restrain the post engagement activities of a contractor?
The decision of Isaac v Dargan Financial Pty Ltd [ 2018] NSWCA 163 has provided clarity on how courts will consider restraint of trade covenants in contractor agreements, and the circumstances in which they are likely to enforce them.
The independent contractor switches to another company
From 2012 to 2016, Mr Nassif Isaac was engaged as a mortgage broker as an independent contractor for Dargan Financial. Mr Isaac brokered loans for Dargan's existing clients using Dargan's client list, as well as bringing in his own customers.
Mr Isaac subsequently commenced work with a rival broker. Dargan alleged that during his engagement with the rival broker, Mr Isaac made use of Dargan's client list to solicit and organise new loans for nine of Dargan's existing customers.
Dargan brought proceedings in the Supreme Court of NSW for breach of contract and misuse of confidential information, alleging that Mr Isaac had breached the 18 month non-competition and non-solicitation and non-interference restraints. Mr Isaac argued that the restraints were unreasonable and therefore unenforceable.
At first instance, Justice Sakar upheld Dargan's claim, finding that by using Dargan's client list and accepting approaches from Dargan's existing clients, Mr Isaac was in breach of the restraint of trade covenants. The Court of Appeal allowed Mr Isaac's appeal in part; finding that as Mr Isaac had merely accepted the approaches of existing clients, the non-interference restraint was not breached. Therefore the only consideration was the non-solicitation restraint.
The Court of Appeal set out some useful considerations for restraint of trade covenants in independent contractor agreements:
- to be enforceable, there must be a legitimate interest to protect, which can include commercial interests of the business, or good will (such as the name of the business or its reputation);
- the restraint must be no more than reasonably necessary to protect that interest (ie. the time period and geographic scope of the restraint must be reasonable);
- in employment agreements, restraints clearly protect the legitimate interest and goodwill of the employer. Restraints in independent contractor agreements can be more complicated, as the goodwill / interests of the principal can be hard to distinguish from that of the contractor's own business. This was the case with Mr Isaac's close relationship with Dargan's clients, some of whom he brought in to the business. It was accepted that these clients were "shared clients".
A critical question for the Court of Appeal was therefore whether the primary judge failed to distinguish between Dargan's legitimate interests and Mr Isaac's legitimate interests as the independent contractor. The Court found that that the client list used by Mr Isaac was ultimately Dargan's protectable interest and confidential information. Even though Mr Isaac was managing the client relationships, and introducing new clients, Dargan always maintained an overriding level of control, having the ability to reject applications for loans.
The other critical question was the reasonableness of the restraint. The 18 month duration of the restraint was found to be reasonable in the circumstances, given the buying cycle of customers in the mortgage broking industry was long, and it could take years for customers to go from researching to buying a property.
Key takeaways when engaging independent contractors
When engaging independent contractors, be careful to ensure:
- that restraint of trade covenants in an independent contractor agreement are carefully drafted;
- if the contractor is engaged in a client-facing role, that the principal retains an overall level of control over the client relationship, especially if the contractor brings in new clients to the business; and
- when considering the duration of the restraint, think carefully about how the timeframe could be justified to a Court. For example, if the contractor is involved in sales, how long is the client relationship brought in by the sale likely to continue with the business, or what is the duration of the deal / service being provided?