Template Contract not signed ? No chance…

Recently, an interesting case was decided in relation to an injunction in Victoria. The matter before the Court concerned an employer dentist seeking to restrain a contractor from engaging in dental practice within an area of alleged restraint.

FACTS

From about 14 years until May 2013, the principal dentist conducted a dental practice, trading as Brunswick Family Dental Surgery (the dental practice company) in Melbourne. In 2013, the dental practice company was incorporated and previously the principal dentist had engaged the dentist contractor as a subcontractor. The dentist contractor worked as a dentist until May 2014 in the practice, at which time she left to set up her own dental practice in North Carlton, about 3 km from the dental practice company. In the application, the dental practice company sought an injunction to restrain the dentist contractor from practicing as a dentist within 5 km of the Brunswick address.

What is relevant for dental practitioners, employers and independent contractors is that, apparently, a template was used for the restraint clause in the draft contract and this was not executed.

LAW

In a previous case[1], the Supreme Court of Victoria had approved a statement of principles in relation to restraint clauses, and they are reasonably well settled. It’s important for practitioners to understand that any contractual provision to restrain is prima facie void. This presumption can be rebutted if the restriction is reasonable. The validity of such a clause is judged at the date of the execution of the agreement that contains the restraint of trade clause. It is the case that a stricter view is taken in relation to restraint of trade for employment, as opposed to restraints in the sale of a business. The onus of proof in relation to those circumstances regarding the restraint is on the person seeking, or the corporation seeking, to enforce the covenant. As far as the interests of the parties are concerned, the restraint must impose no more than an adequate protection to the party who is seeking the restraint. The meaning of the restraint may be construed by reference to the facts, documents and any surrounding circumstances.

DECISION

This decision of McCauley J of the Supreme Court of Victoria, delivered on 8 July 2014, is in relation to an injunction only, and is not in any way determinative of the final issues. The matter is yet to go to trial. The critical aspects of the case that should be borne in mind by practitioners signing independent contracts or, indeed, employment agreements with dentists or clinicians, is that it is much easier for a party to enforce the agreement if the agreements are actually executed (signed). It is often the case that practitioners draft agreements in whole, or in part, without legal assistance – merely taking a template and drafting changes themselves-  and then leave the documents unexecuted. This case demonstrates the risks associated with non-execution of critical employment or contractor agreements that are not well drafted. Much of the case speaks about the detail in relation to correspondence between the parties and involves emails, draft contracts, and face-to-face meetings.

Ultimately, the Court found that, at least, on an interlocutory basis,  the dental practice company had established a prima facie case that there was an agreement with the dentist contractor. Even if that was the case, the Court said that there would be a number of hurdles at trial, which would pose a real threat to that success. And those were summarised as difficulties with oral agreements, implied agreements, and the issue of estoppel (where a party is stopped from a certain course because of an expectation induced by that person)

The whole construction of the restraint of trade clause was problematic. In essence, the restraint of trade clause, as inserted in the contract was unclear and perhaps mistaken. The Court ultimately agreed with the dentist contractor’s submission that the issues of construction and enforceability of the restraint of trade clause undermined the likelihood that the dental practice company would succeed at any trial.

Finally, the laws and policy against restraint are such that a successful plaintiff would need evidence that the protections were reasonable at the date of the agreement. The number of patients treated, the financial circumstances around the practice of the dentist contractor and the size of the practice of the dental practice company were all discussed.

Apparently the dentist contractor was only seeing 2-4 patients a week and, by contract, the dental practice company had seven other dental practitioners and a ‘very substantial client base’. The Court did not underestimate the possibility that there will be some flow of clients to the dentist contractor from the dental practice company practice but, even allowing for that, it would take some time before there would be serious inroads into the number of clients that had been provided service by the dentist contractor at the dental practice company ( some 7500). Ultimately the Court  was not satisfied that the dental practice company’s claims had sufficient probability of success, and so denied the injunction sought by the dental practice company.

DISCUSSION

There would seem to be a number of important considerations arising from this judgement for dental practitioners who seek to enforce restraints against other dental practitioners in contracts.

The first is that to rely on any contract, it should be executed and both parties should seek legal advice prior to and at the time of execution

Secondly, a restraint should be carefully drafted and checked by a legal practitioner and only formed on the basis of some notional template provided by any organisation.

Thirdly, careful thought needs to be given to what is reasonable in terms of restraint between the parties in both geographic area and time period.

Fourthly, unless the restraint arises from the sale of a practice, and, therefore, the goodwill that’s associated with it, it will be much more difficult to enforce restraints against previous employees or contractors, unless the contracts and agreements are drafted very carefully with consideration and that both parties have agreed that the terms of the restraint are reasonable.

The judgement, and that of Wallis Nominees (Computing) Pty Ltd v Matthew William Pickett is available on www.austlii.edu.au and should be read by practitioners who have employment or contractor agreements and seek to enforce restraints.

It is prudent for practitioners who employ clinicians, to seek appropriate legal advice and not to “cut and paste” draft restraint clauses from other documents: because to do so risks these clauses being inappropriate, unreasonable and to be struck out.

It is imperative to engage a lawyer to give you advice and to draft and settle your contract.

Brad Wright

Chambers July 2014