1.1 We have recently been involved in a number of matters for our Health Practitioner clients involving restraints of trade inserted in written practice agreements such as sale of business agreements, health practitioner service agreements and employment contracts.
1.2 Health practitioners should be aware of the future implications to them of entering into a restraint of trade that can impact upon their practice many years into the future.
1.3 Health practitioners should have a clear understanding of what they are signing in relation to restraint of trade clauses in agreements.
- What is a Restraint of Trade
2.1 A restraint of trade is where a contract is made between one party (the covenantor) with another party (the covenantee) to restrict his or her liberty in the future to carry on trade with other persons not parties to the contract in such a manner as the covenantor chooses. Basically a restraint of trade restricts an individual from practising in a particular geographical area, for a specific period both during, and after, working for a specific practice.
- Restraints of Trade Law
3.1 The general rule is that a contract in restraint of trade is as a matter of presumption, void. The presumption can, however, be rebutted, that is the restraint may be justified. It may be justified if the restriction is reasonable.
3.2 The onus of establishing if the restraint is reasonable rests upon the person seeking to justify the restraint, at the time of entry into the contract.
3.3 Reasonableness is the key. Reasonableness is assessed by reference to the interest of the parties concerned and to the interests of the public at large.
3.4 The restraint of trade clause must be framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.
3.5 In summary, the onus is on the person seeking the protection from the restraint to show that it has a legitimate interest to protect, and secondly that the protection of the restraint covenant goes no further than is reasonably necessary for the legitimate protection of that interest.
3.6 Recent case law suggests that reasonableness in the Heath Services Industry is roughly three (3) years from the date the Heath Practitioner ceases working in the practice and if located in metropolitan Adelaide no more than between five (7) and ten (10) kilometres from the geographical location of the practice.
3.7 However, each case is different and must be considered on its merits. If the restraint is deemed to be unreasonable, then it is void.
- Non-solicitation and Confidential Information
4.1 Restraint clauses also usually include provisions regarding non-solicitation and confidential information.
4.2 The non-solicitation clause usually involves a restraint on the health practitioners soliciting clients or patients from the practice.
4.3 The confidential information clauses usually restrict or prohibit the medical practitioner from taking away or using any confidential information in relation to the practice after they leave the practice.
- Breach of a Valid Restraint
5.1 The consequences of breaching a restraint clause are determined by what is set out and agreed to in the contract. However, common remedies for breach of restraint are as follows:-
5.2 An Injunction:
5.2.1 An injunction is known as interlocutory relief. An injunction is a Court process whereby the Court orders the party that has breached the restraint to do certain things to remedy the breach which often involves restraining the other party from working or carrying out the prohibited activity at another place.
5.3 Monetary Compensation:
5.3.1 The party seeking to enforce the restraint may also seek monetary compensation and/or liquidated damages. The Court will consider if the parties seeking to enforce restraint has suffered damage and, if so, the amount of that damage.
5.4 Liquidated Damages:
5.4.1 It is more common to see a liquidated damages clause in an agreement attached to a restraint.
5.4.2 It is common for the party breaching the restraint to have to pay damages of about 50% of the gross fee payable to the Health Practitioner in respect of each medical service rendered in breach of the restraint.
- “Employment” Restraint and “Sale of Business” Restraint
6.1 The courts are generally more likely to enforce “employment” restraints than restraints where there is a “sale of a business”.
6.2 That is, whilst it is harder for an employer to restrain an employee from working in his or her chosen field, the law says the where a personsells a business the restraint is easier to enforce because the vendor could easily, by setting up in competition with the purchaser, effectively take away the very thing that it has sold.
6.3 It should also be noted that the Courts in more modern times are far more likely to uphold the validity of restraints than they were in the past.