Dear Contractor Doctor,
I’ve just had my IT development contract terminated. I was on a good rate and the contract had another six months to run. The way the project was shaping up, there’s a good chance that I’d have also secured an extension.
The contract was terminated because my agency was fired by the client. I’ve also been told that my agency contract won’t allow me to contract with the client for 12 months.
Can I sue my agency for loss of business income because it was fired by the client?
Contractor Doctor says:
“For a contractor to be able to take action against their agency, there have to be some proper grounds, or what lawyers call a ‘cause of action’,” explains Roger Sinclair of contractor legal specialist Egos. “So for Arvin to have grounds, we would have to identify on what legal basis the agency might be liable.”
According to Sinclair, in Arvin’s case, there are likely to be three key issues for consideration: whether the contractor’s termination by the agency was lawful; whether the restrictions preventing the contractor from working directly with the client can be enforced; and the reason behind the agency getting fired.
“If the contract between the agency and the contractor included a termination clause, and the agency terminated the contract in accordance with the requirements of that clause, then there are no grounds to take action against the agency and no basis for a claim,” says Sinclair.
However, if there was no termination clause and the agency unilaterally terminated the contract, or the agency did not abide by the requirements of the termination clause, for example by not adhering to notice period requirements, then the contractor may have grounds.
“In the event of a breach of contract by the agency through not lawfully terminating the contract, the contractor may have grounds to sue the agency for compensation to cover the loss of earnings, at least until the earliest point by which the agency could lawfully have terminated the contract.”
And in Arvin’s case, with six months to run on the contract, the sum could be substantial. However, Sinclair notes that the contractor would have a ‘duty to mitigate’ by finding alternative work, and cannot expect to simply take a six-month paid holiday funded by the agency.
Contractual restrictions on going direct to the client
Sinclair suggests that legal advice is a must when considering restrictions: “Whether the restrictions imposed on the contractor which might appear to prevent him from going direct are legally valid and capable of being enforced by the agency will depend on the exact provisions detailed in the contract, and the surrounding circumstances.”
A legal adviser might suggest an alternative angle, as Sinclair explains: “If the agency did not act lawfully in terminating the contract, there may be a basis for suggesting that the agency has indicated that it is not prepared to be bound by the contract - because it has committed a serious breach itself.
“The contractor’s position might be to take advantage of this serious breach, and claim that any restriction in the contract could be disregarded, on the basis that, ‘If you don’t honour the contract, you can’t take advantage of it either.”
However, Sinclair warns contractors that there may be additional barriers to going direct to the client itself: “Whether the contractor can disregard agency contract restrictions presupposes that the client is willing to enter into a direct contract or a contract via another agency.
In the event of a breach of contract by the agency through not lawfully terminating the contract, the contractor may have grounds to sue the agency for compensation to cover the loss of earnings
Roger Sinclair, Egos
“Some end clients are particularly risk-averse. There may be restrictions contained with the agency-client contract that appear to prevent the client from hiring Arvin, and the end client may not be prepared to take the risk of breaching those.”
The client’s reasons for firing the agency may qualify as grounds
Assuming the contractor has secured legal representation, Sinclair can see another strategy that a lawyer might exploit: “Why was the agency fired? If it was as a result of the client adjusting its agency roster because the procurement department felt the need to justify its existence, then perhaps the agency’s performance could not be faulted.
“But if the agency’s contract was terminated because of some fault on the part of the agency, then it might be possible to argue that a term should be implied in the contractor’s contract with the agency – and that agency had itself breached that implied term - presenting possible grounds for legal action – or grounds for regarding the restriction as unenforceable.”
In conclusion, Sinclair suggests that there might be a case for the agency to answer, but contractors should not tackle a potentially complex legal challenge such as Arvin’s case without seeking professional legal advice.
Good luck with your contracting!