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Contractor guide to the ‘restraint of trade’ principles

Contractors may sometimes face contractual restrictions imposed by agencies and clients on their freedom to do business. It can be tricky to deal with these; but an understanding of the basic restraint of trade principles will ensure that contractors are able to know when to seek expert advice, in order to make informed decisions about how to tackle attempts to restrict their business.

“Recognising what contractual restraints to a contractor’s trade are unlikely to be enforceable, and when to seek competent legal assistance, is a key contracting skill,” says Roger Sinclair of contractor legal specialist Egos.

“Contractors typically encounter restraint of trade issues through restrictive covenants in agency contracts. And client contracts sometimes have exclusivity clauses, which may also be in restraint of trade. So it’s important that contractors understand how to deal with clauses of this kind,” adds Sinclair.

What are restraint of trade principles?

The restraint of trade principals are rooted in public policy, which considers that the right of each individual and business to trade freely on terms of their own choosing is a positive thing. Sinclair explains: “It is seen as a general benefit that we are able to exploit our skills and capabilities through trade, and it is a fundamental principle of contract law that we are free to enter into contracts on terms that we choose with other parties.

The restraint of trade principles manage the area when the freedom of parties to create contracts may interferes with the interests, rights and freedoms of others, or of the public at large

Roger Sinclair, Egos

“The restraint of trade principles manage the area when the freedom of parties to create contracts may interferes with the interests, rights and freedoms of others, or of the public at large.”

These principles are not rooted in statue, which means no written set of formal rules or laws has been reviewed and passed by Parliament to become law, although Sinclair highlights that the European Union’s Article 101 covers similar ground. “Management and enforcement of the principles is through precedent and case law,” he says.

What the restraint of trade principles do

“If there is a provision in a contractor’s contract with their agency or client that might operate to prevent or interfere with what a contractor does in the operation of his/her business, then it is possible that it might fail, or be unenforceable.

“Any restrictions on a contractor by an agency or client should go no further than reasonably necessary to protect the agency or client’s legitimate commercial interests.”

Potentially legitimate commercial interests would general be regarded as:

  • Business connections
  • Trade secrets
  • Confidentiality.

Most agencies are concerned with protecting their business connections, such as client relationships, and clients may be concerned with all three commercial interests.

When contractors may encounter restraints on their trade

“Contractors rarely encounter restraints on their trade beyond agencies’ restrictive covenants, and exclusivity or non-competition clauses imposed by clients,” says Sinclair.

In practical terms, restrictive covenants by agencies are designed to prevent a contractor from going on to work direct for a client, without involving the agency, once an initial contract is completed. Given that the agency invested in creating the relationship, placing such a restriction on a contractor may be considered to go no further than ‘reasonable’.

“However,” notes Sinclair, “if the contract states that the restriction will remain in force for five years and includes all parties the contractor may meet in connection with the contract, then according to restraint of trade principles such a restriction may well go much further than that.”

Similarly, if a client were to include a clause that said, ‘we don’t want you working for one of our competitors during your contract with us’, this may be considered to go no further than reasonable. but a clause saying, ‘we don’t want you to work for our competitors ever’ would almost certainly go much further than that, in which case it would not be enforceable.

Application of the restraint of trade principles

Restraint of trade principles may impact on contractor contracts in two ways:

  • If a clause goes beyond a ‘reasonable’ restriction, then it may not be enforceable, in which case the contractor may choose to disregard it
  • If a clause places a restriction on the contractor that goes no further than what is reasonable, but the contractor proceeds with the restricted activity.

On matters relating to restraint of trade, Sinclair urges contractors not to go it alone: “Contractors concerned about the impact of a clause restricting their actions should ideally seek competent professional advice about the implications and risks associated with ignoring a restriction.”

The consequences of a contractor ignoring a restriction that subsequently is upheld by a court can be costly. And the cost is certainly likely to be significantly greater than that of involving a legal professional who will review the contract and attempt to negotiate out any unreasonable clauses.

Disputes arising over restraint of trade

Restraint of trade court proceedings are rare in the contractor world, says Sinclair, as it would be the agency or client that would start proceedings to enforce a restriction, which requires the commitment to invest a lot in legal expenses. In Sinclair’s experience, an agency is more likely to sit on cash it owes the contractor by way of enforcement – thus giving the contractor an uphill struggle to simply get what (s)he is owed.

In the event that a court is asked to adjudicate on whether a contract includes clauses that go further than is reasonable to protect an agency’s or client’s interests, the court will confirm those elements that are reasonable, and simply strike out those which are not.

Sinclair provides an example: “If the contract included a clause saying, ‘you cannot work for our competitors during the contract and for six years afterwards’, the court may decide that the six year period is unreasonable and strike the words ‘and for six years afterwards ‘ out of the contract as unenforceable.

The words that are left – ‘you cannot work for our competitors during the contract’ – would be all that remained of the restriction – the courts would not amend the period to a shorter duration.

Injunctions and legal costs

“However, things may well be different if the court upholds a clause, such as a restrictive covenant in an agency contract prohibiting the contractor from working directly for the client for a period considered to be no longer than reasonably necessary to protect the agency’s legitimate commercial interests. If the contractor has ignored the clause, the agency could request an injunction preventing the contractor from working direct for the client.”

Although an injunction may not sound particularly threatening, Sinclair warns that legal costs are likely to be awarded against the losing party. For a restraint of trade case, these could easily run into five figures, which the losing party would generally be required to pay.

Sinclair concludes: “When contractors are confronted with a contractual clause restricting their activities, they should ask whether the agency or client has legitimate commercial interests that are being protected by the clause, and whether the clause goes no further than is reasonable to protect those interests - or whether they are simply trying to restrict competition.’

Published: 29 November 2012

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