How to break free from a restrictive covenant following a client/agency dispute

If you’ve lost a contract due to a breakdown between your agency and the client, you may be entitled to treat yourself as no longer bound by some restrictive covenants. It could mean you are free to contract direct with the client or via another supplier.

However, Roger Sinclair of contractor legal specialist Egos warns that each case depends on individual circumstances, and encourages contractors to take a considered approach when assessing whether a restrictive covenant applies.

“You won’t necessarily arrive at an answer that is either black or white. You’re more likely to end up with a shade of grey. It’s a matter of where along the grey scale you arrive. The upside for the contractor is that they may be home and dry if any one of the points considered is decided against the party imposing the restriction.”

Conduct regulations – is there a valid opt out?

Sinclair advises that the first step is to consider the contract itself, specifically:

If the answer to the first of these questions is yes and the second is no, it may be that the restriction is unenforceable. Regulation 6 of the conduct regulations (which will apply if there is no valid opt out) prohibits the agency from imposing any detriment on what the contractor might do after the conclusion of the contract; and a contractual restriction may well be likely to constitute such a ‘detriment’.

The three types of restrictive covenants

You then need to evaluate the restriction itself. This means looking at the specific wording, considering what it means in context, and concluding whether it is clear.

Sinclair explains that there are three types of restrictive covenants:

  • Non-solicitation – ‘You won’t try and get work directly from the client’
  • Non-dealing – ‘You won’t work for the client’
  • Non-competition – ‘You won’t try to carry out the same work as we do’

Non-competition restrictions are less likely to be enforceable than non-dealing restrictions; and non-dealing restrictions are less likely to be enforceable than non-solicitation restrictions.

What are the restraint of trade principles?

According to the restraint of trade principles, a restriction which interferes with a person’s rights to earn a living in the way they choose will only be enforceable if it goes no further than reasonably necessary for the protection of some legitimate commercial interest of the party imposing it.

Agencies will generally claim that their restrictive covenants are justified in order to achieve ‘protection of business connections’ – in most cases the agency’s business connection with the client.

From this, it would seem to follow that, if the client is no longer willing to do business with the agency, the business connection is gone – and so is the justification for the restriction.

For example, an agency will often impose a non-dealing restriction, preventing a contractor from engaging directly with a client for a certain period following the completion of the contract.

If the legitimate commercial interest either isn’t effectively protected by the restriction, or the restriction goes further than reasonably necessary to protect it, the restriction may be unenforceable.

If the duration of the restriction is longer than the duration of the original contract, there may be good grounds to argue that the restriction extends beyond what is reasonably necessary to protect any legitimate interest in the business connection.

Is a restriction still valid when the client/agency relationship ends?

Critically, the question of whether the agency has a legitimate commercial interest also needs to be considered at the time the agency wants to enforce it.

“If there had once been a legitimate commercial interest at stake that is no longer present, it could be argued under restraint of trade principles that a restriction which had originally been justifiable by reference to that commercial interest has now become unenforceable,” highlights Sinclair, who considers three scenarios.

Scenario 1:

  • The client/agency relationship breaks down
  • The client declares that it will no longer engage with the agency
  • The contractor wants to work for the client directly

“The contractor may have a reasonable argument to say that a legitimate commercial interest no longer exists at the time that the agency wants to enforce it, as the client itself has stated that its relationship with the agency is over,” notes Sinclair. “It could be argued that the restriction is no longer enforceable.”

Scenario 2:

  • The client attempts to impose a new framework on the agency
  • The agency won’t commit to the framework and the relationship breaks down
  • The breakdown is because of the client who wanted the change

“Even though the agency is not at fault for the breakdown, because it is the client who is trying to make changes, the argument still stands that there may no longer be a legitimate commercial interest to protect.”

Scenario 3:

  • The agency wants to change the terms of its contract with the client
  • The client is unwilling to agree to amendments and the relationship breaks down
  • The breakdown is because of the agency who wanted the change

“This is an interesting one, as it seems the client would be willing to deal with the agency on the same terms as before, but the reality is that it is the agency that won’t do so,” comments Sinclair. “So the agency has by its own actions put its business connections at risk. This is a little trickier but the contractor may still have an argument.”

Restrictive covenants when the agency is in breach of contract

A contractor may also be able to terminate a contract and disregard any restrictions if the agency has committed a breach, but the severity of the breach needs to be considered.

“The contractor needs to assess whether the agency’s actions indicate that they have no intention whatsoever to be bound by the contract,” Sinclair explains. “If so, a contractor could quite rightly decide that they themselves are released from any obligation to be bound by it.”

Sinclair uses late payment as an example. If an agency makes a payment to the contractor seven days late and then continues as usual, it is unlikely that the breach would be an indication that the agency is unwilling to honour the contract.

However, if the agency is two months overdue, the breach may be considered severe enough for the contractor to take the position that the agency has by its actions shown that it no longer intends to be bound by the contract.

Contractors, approach restrictive covenant issues with caution

“Also be aware that, if an agency owes you money but thinks you are in breach, there’s a real risk that, whether it’s lawful or not, the agency will sit on the money,” adds Sinclair. “In which case you have a problem.”

If you think you have a just cause to break free from a restrictive covenant, remember that decisions in this area aren’t risk free. You need to approach such issues with caution, and base decisions on a full assessment of the circumstances and relevant law. Legal assistance is often advised.

Published: Monday, February 13, 2017

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