Australia: Enterprise update: Restraints of trade – the Informax v Clarius case

Introduction

In Informax International Pty Limited v Clarius Group Limited [2011] FCA 183 (4 March 2011) (the Informax Case), the Federal Court of Australia (FCA) handed down a judgment that has the potential to expand the scope of interests upon which an employer or principal may rely in seeking to enforce a contractual restraint of trade.

While the development is of general interest, its impact may be sharpest-felt by those in the labour-hire and contracting industries. The judgment places in serious doubt the ability of a labour-supplier to restrain its on-hired labour from contracting directly with its customers; and vice versa.

Restraints of trade

It has long been established that a restraint of trade is unenforceable unless the restriction is reasonable in order to protect one or more of the legitimate business interests of the employer or principal. This assessment ultimately falls to the Courts, most typically when they are approached by an employer or principal seeking to enforce a restraint against a former employee or contractor.

Lawyers, managers and individuals also have to make an assessment of enforceability when drafting a proposed restraint, when making decisions about entering into a contract, or when confronted with an allegation that a restraint has been contravened. In the latter case, it is important to remember that a new employer, while not party to the contract between the old employer and the employee, may unlawfully interfere with contractual relations if they knowingly encourage, assist or acquiesce to a breach.

Importance of "legitimate business interest"

In forming a view in relation to the enforceability of a restraint of trade, there is often a tendency to focus on the geographical and temporal boundaries of the restraint. That is, the assessment is one of "how long" and "where" the individual is bound by the purported restraint of trade. Such a limited assessment takes for granted the existence and extent of the "legitimate business interest" that must be present to underpin a valid restraint of trade.

Without a legitimate business interest to underpin it, no restraint of trade (no matter how limited) will be enforceable. Moreover, the assessment of the geographical and temporal aspects of a restraint of trade can only properly be undertaken by reference to the legitimate business interest that is to be protected.

Traditionally, the Courts have recognised three categories of legitimate business interest as being capable of protection. These are the protection of confidential information, customer connexions, and staff relationships.

Informax – The facts

In the Informax Case, Justice Perram of the FCA was asked to consider 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).

Informax had been assigned by Clarius to provide labour for the benefit of Woolworths (a customer of Clarius). Subsequently, Informax had sought to contract directly with Woolworths, in essence cutting out Clarius from its "middle-man" role. The contract between Clarius and Informax contained a provision which purported to restrain Informax from contracting directly with Woolworths. Clarius sought to enforce that restraint.

Informax – The legitimate business interest

In support of its application Clarius pleaded two legitimate business interests. First, Clarius sought to rely on the "traditional" customer connexion interest. For reasons that turn on the facts of the case, that argument was rejected.

In addition, Clarius argued that it had a legitimate business interest to avoid what it called "opportunistic disintermediation". In other words, Clarius alleged that a middle-man's interest in "not being cut out of a bargain" is capable of forming a basis for the enforcement of a contractual restraint of trade. Justice Perram accepted this argument.

Informax – The extent of the interest

Interestingly, Justice Perram held that Clarius' legitimate business interest extended only to its right to "recoup... expenditure [expended in relation to the contract in question,] together perhaps with a profit component". This meant that, once Clarius had through the performance of the contract received sufficient revenue to offset its costs and obtain an element of margin, it no longer held a protectable interest. As it turned out, Clarius had already obtained such revenue, and the restraint was deemed to be unenforceable.

This approach sits in contrast with that usually taken in breach of contract cases. Ordinarily, a Court will seek to place the aggrieved party in the same position as though the contract had been fully performed. However, in this case, Justice Perram approached the matter as though it were akin to a negligence claim (placing the aggrieved party in the position where they are compensated for loss, but not allowed to profit).

It remains to be seen whether this aspect of the judgment will form the basis of an appeal.

Informax – Woolworths Clause

Separately, Justice Perram considered the enforceability of a provision in the contract between Clarius and Woolworths which precluded Woolworths from directly engaging any Clarius contractor (the Woolworths Clause). Informax argued that such a clause, which is present in the vast majority of labour-hire contracts, was effectively a restraint of Informax's trade. Justice Perram accepted this argument and – adopting the reasoning applicable to the restraint in the contract between Informax and Clarius– held that the Woolworths Clause represented an unenforceable restraint of trade (to the extent it could be applied to Informax).

Informax – Unfair contract

The Woolworths Clause resides in a contract upon which Informax cannot sue. Allowing for this, Informax alleged that the contract between it and Clarius was unfair contrary to the Independent Contractors Act 2006 (which allows the Court to review a services contract to assess whether it is unfair or harsh, and make orders varying such a contract). In doing so, Informax alleged that the contract was unfair insofar as it could operate in a manner whereby Clarius could seek to persuade Woolworths to break up the relationship between Woolworths and Informax in circumstances where Clarius had no legal right to prevent either party from working together.

Justice Perram concluded that the Clarius/Informax contract was unfair and varied the contract so as to prohibit Clarius from seeking to enforce the Woolworths Clause in relation to Informax.

Implications

The decision in the Informax Case may have the following wide-ranging implications:

Those involved in the on-hired labour space should take heed of the judgment, and re-examine the enforceability of their restraint of trade arrangements (both on the labour- and customer-sides).

Lawyers, managers and individuals need to be alive to the fact that the categories of "legitimate business interest" include "opportunistic disintermediation", and may expand further in the future.

While the extent of the interest identified in the Informax Case was limited by reference to the recouping of costs, that element of the decision may be overturned on appeal or in future decisions.

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.