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Restraints of Trade & Non-Competition Clauses – Independent Contractors

By Richard Gordon

Restraints of Trade & Non-Competition Clauses – Independent Contractors

It is common to see a restraint of trade clause in an employment agreement or an agreement for the sale and purchase of a business. But what about independent contractor agreements?

Can an independent contractor be subject to a restraint of trade?

Businesses looking to protect their confidential information and client base will often insert a clause preventing independent contractors who provide services for the business from providing similar services directly, or through a third party, to an existing client.

These clauses (commonly known as “restraint of trade” or “non-competition” clauses) apply during the course of the agreement, and for a defined period after the agreement ends.

It is important that the restraint of trade clause is worded carefully, and is reasonable in the circumstances. This is because the accepted legal position is that restraint of trade clauses are, on the face of it, void and unenforceable. The Courts are reluctant to stop people from earning a living using their skills and knowledge. If there is not a genuine interest to protect, the Court may see a restraint of trade clause as an effort to prevent or reduce competition in a marketplace.

The party seeking to enforce a restraint of trade must establish that it is reasonable, and that the context supports the restraint. The most common reason a restraint of trade is reasonable is that the party seeking to enforce the restraint has a proprietary interest to protect - such as protecting its existing clients. If there is no proprietary interest to protect, the restraint may be viewed as an effort to prevent or reduce competition in the marketplace and it will not be enforced.

If there is a dispute about the validity of a restraint of trade, the party seeking to enforce the restraint of trade must go through the costly process of applying to the Court. The Court may either delete or modify the restraint, or, in some circumstances, may decline to enforce the entire contract.

By comparison to the employment context, independent contractors are in business on their own account. The presumption is that they have some commercial experience and near-equal bargaining power and this context supports the restraint. Courts are more willing to uphold restraints where both parties are experienced commercial contractors. By contrast, where one of the parties is a lone independent contractor the Court may find there is an unequal bargaining position. This context would not support the restraint.

Example – Independent Contractors in the Health Service Industry & Tenders

It is common in the health service industry for large organisations (such as ACC or DHBs) (“Organisation”) to tender large contracts. The successful tenderer (“Contractor”) then sub-contracts the actual work to health providers (“Sub-Contractor”) around the country.

The agreement between the Contractor and Sub-Contractor often includes a clause restricting the ability of the Sub-Contractor to provide, or tender to provide, the same or similar services to the Organisation (directly, or through a different Contractor).

For this restraint in the sub-contract to be valid, there must be a proprietary interest for the Contractor to protect. One example of a possible proprietary interest is if the Organisation’s decision as to the successful Contractor will be influenced by the identity of the Sub-Contractors associated with each Contractor. However, if the reason for the restraint was only to prevent or restrict competition, the restraint is likely to be invalid.

Arguably, a Sub-Contractor could tender with, and provide services to, multiple Contractors, so long as the Sub-Contractor is able to perform the services for both Contractors and there is not a conflict of interest affecting the performance of services in either case.

This article should not be considered as specific legal advice regarding restraints of trade and non-competition clauses.  If you have any questions regarding this article, or you wish to seek advice about your specific circumstances, please contact the author at richard.gordon@gibsonsheat.com or on 04 916 7464.