12 month non-solicitation clause held enforceable against ICT on-hire employee: First lessons.

silhouette-of-scaleThe decision of the NSW Supreme Court in Thinkstorm Pty Ltd v Farah [2017] NSWSC 11 (per Lindsay, J) which was handed down on 30th January 2017, is instructive for what it tells us about the enforceability of non-solicitation clauses in professional on-hire employee contracts.

Brief facts

Mr Farah (the defendant) was a computer engineer, who had expertise in “WorkBrain” workforce management software.

He was engaged, through Thinkstorm Pty Ltd, described by the court as a “recruitment and consulting services firm”, to provide services to Queensland Health.

His employment contract with Thinkstorm included a non-solicitation clause that prevented him, for 12 months following the end of his employment, from supplying services to any client of Thinkstorm for whom he had worked during the previous year.

Upon resigning from Thinkstorm, he continued to provide services to Queensland Health through Paxus Australia Limited.

Thinkstorm sought and obtained an injunction restraining Mr Farah from performing any services involving the use of WorkBrain software for the Payroll Portfolio section of the Queensland Department of Health until 4 November, 2017 (being 12 months following his resignation from Thinkstorm).

The arguments: what worked; what didn’t

“Never signed the contract”

Mr Farah argued that the contract containing the non-solicitation clause was not enforceable because he had not signed it.

The Court rejected that argument, holding that there was sufficient evidence that the parties had conducted their relationship on the basis of the contract to indicate that Mr Farah had accepted its terms regardless of whether he had signed it or not.

“Only an employment agency”

The next argument advanced on behalf of Mr Farah will likely raise the hackles of many in the recruitment sector, so I had best put it in the terms in which it was described by the Court:

24. …[The defendant] says that the plaintiff lacks a “protectable interest” and, in any event, that the restraint is unreasonable because the plaintiff was, in substance, little more than an employment introduction agency.

The Court rejected that argument also, holding that Thinkstorm had a protectable goodwill interest.

The Court highlighted the importance of agencies’ maintaining links with their clients independently of those established through their on-hire contractors. It is perhaps something that many recruitment agency managers and consultants already know and do intuitively, but it may be affirming to see how it was set out in the judgment, so let me set it out verbatim:

28. I do not accept, as the defendant contends, that the plaintiff must fail for want of an interest able reasonably to be protected by these restraint of trade provisions. The defendant may well have exercised considerable autonomy in the performance of duties owed to Queensland Health; but he did so as an employee of the plaintiff and in the provision of services he was contracted by the plaintiff to provide to Queensland Health. Independently of him, the plaintiff had regular contact with Queensland Health, giving rise to commercial goodwill vis-à-vis Queensland Health, which chooses to obtain services through consultants. That goodwill is and was at all material times a “protectable interest”.

Was 12 months too long?

The Court thought that the 12 month duration of the restraint was the “greatest potential weakness” of the clause relied on by Thinkstorm and considered it to be “at the outer limits of what would be reasonable”. Nevertheless, the Court was prepared to enforce it.

Amongst its reasons for doing so were:

  • the Court’s acceptance that consultancy agreements in this area not uncommonly include a post-employment contractual restraint expressed to operate for 6-12 months;
  • the fact that the defendant had voluntarily agreed to such a restraint, more than once, and expressly agreed that it was no more than what was reasonable to protect the plaintiff’s legitimate interests;
  • a view that, in an industry in which restraints of 6-12 months are not uncommon, the defendant’s express agreement that a 12 month restraint was reasonable should not lightly be discounted;
  • the fact that the restraint did not prevent Mr Farah from providing his professional services to parties other than Queensland Health; and
  • the fact that services, which Mr Farah was qualified to provide, required particular expertise, with commensurate remuneration. On that basis, the Court distinguished between the case of an unskilled worker, and that of a “highly-paid consultant whose services Queensland Health chose to acquire through corporations, known to it, responsible for procurement and employment of particular consultants”.

The result was that the Court held the restraint was enforeceable and made orders to that effect.

Take away

This is a case in which the pendulum seems to have swung in favour of the employer. Of course, not every case is the same and it is widely recognised that there is no “one-size-fits-all” standard in this area of law.

Nevertheless, the enforcement of a 12 month restraint against an on-hire employee is no little thing – especially as the Full Court of the Federal Court of Australia in Informax International Pty Ltd v Clarius Group Limited (2012) had previously set the bar much lower.

Accordingly, many recruitment and consulting services firms might now wish to review the restraint provisions in their on-hire contractor agreements to see what scope there may be to enhance them so as to provide greater protection for what the Court described as their “commercial goodwill”.

Appeal?

At the time of writing, the appeal period has not expired. So there may yet be more to come.

Deeper analysis

The case warrants deeper analysis with regard to the Court’s consideration of the scope of a recruitment and consulting services firm’s protectable interests and also with regard to what may have been some broad hints given by the Court concerning a couple of arguments that might appeal to it in future cases.

That analysis is best provided in a follow up article, once it is known if the matter will go to appeal. For the moment, the decision will have given the recruitment and consulting services industry enough to think about.

 

Andrew C. Wood

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