Contractor Doctor: Can a restrictive covenant be implied if not in the contract?

Dear Contractor Doctor

I’ve been working for the same client for the last four years. The agency that first hired me went into receivership after two years and my contract was bought by a larger agency.

I am now considering contracting direct with the client. However, I have never signed a full contract with either agency, just a simple schedule detailing rates and notice period. I am concerned that the agency which took over my original contract may have the power to restrict me from contracting direct and might take legal action.

Can a restrictive covenant be implied if it is not in the contract?

Thanks,

Paul

Contractor Doctor says:

“An agency can’t simply imply a term in a contract because they think it might be a good idea,” explains Roger Sinclair of contractor legal specialist Egos. “A term in a contract may only be implied from one of three sources: by common custom of an industry sector; by statute; and by the courts.

“There are no contracting sector common customs which require that a restrictive covenant is included in all contractor contracts, and there is no legislation requiring the inclusion of such clauses. So we need to consider whether the courts would imply a restrictive clause.”

According to Sinclair, the courts would only imply terms in a contract if they were required to provide ‘business efficacy’, or if the terms satisfied the ‘officious bystander’ test.

‘Business efficacy’

He explains: “Business efficacy is when you have to imply a term to make the contract work. So, for example, if a contractor books a taxi to take them from their home to the station, a contract is formed.

“The contractor may not have explicitly said ‘collect me from my house’, but in order for the taxi to make the contract work and take the contractor from their home to the station, it is implicit that the contractor must first be collected from their house.”

Sinclair highlights that there is clearly no requirement for a restrictive covenant, or indeed any kind of restriction on the contractor for the contract to work. Therefore such a clause cannot be implied under the business efficacy principle.

The ‘officious bystander’ test

“For the officious bystander test to be satisfied, one has to imagine the two parties to a contract standing next to each other when forming a contract,” continues Sinclair.

“An officious bystander might say to each party, ‘shouldn’t you include such and such a clause?’. If it is obvious that both parties would clearly reply ‘yes, of course, the clause is so obvious that it does not need to be stated’, then it would be likely to satisfy this test.”

There are no legal grounds to imply a restrictive covenant into a typical contractor contract with an agency

Roger Sinclair, Egos

As with business efficacy, the inclusion of a restrictive covenant, or any kind of restriction on the parties, is by no means an obvious inclusion in a contractor contract. A restrictive covenant would fail the officious bystander test and would not be implied in the contract.

How changing agency may affect contracts

“If the shares of the original agency were simply acquired by the new, larger, agency then the contract will continue as it did the day before the acquisition occurred, with no change to the contractor,” says Sinclair.

“But if the original agency ceased trading and the arrangement transferring the contract was more complex, then the contractor would need to examine what the express terms of the contract say, what the words are likely to mean and what the effect will be on the contractor.” At this stage, particularly if the paperwork is not clear, professional legal assistance might be appropriate.

Sinclair concludes: “There are no legal grounds to imply a restrictive covenant into a typical contractor contract with an agency, so the contractor may be able to contract direct with a client without fear of penalty if such a clause is not expressly included. However, before embarking on such a course of action, it is recommended that contractors seek advice on their options.”

Published: Tuesday, January 29, 2013

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