Think before signing your life away: Restraint of trade clauses

Restraint Clauses

Anita Filleti

Claims & Legal Services at MIGA

Often as a practitioner plans their next career move, they realise the restrictions imposed by an existing Employment Agreement. The importance of reading, understanding and negotiating acceptable terms of an Agreement before signing, cannot be overstated. Once the Agreement is signed it is very likely to be binding.

An increasing number of health practitioners are seeking our advice regarding the validity of restraint of trade clauses included in their employment contracts. Unfortunately, our advice is often sought under circumstances where the health practitioner has already breached the clause. Accordingly, MIGA strongly encourages health practitioners to carefully consider the terms and conditions of proposed employment contracts before accepting them as a failure to do so may have career consequences.

A client recently requested our assistance after a breakdown in the relationship with their employer. They had resigned, and wanted to move immediately to a nearby practice to continue treating their current patients.

Unfortunately, the Employment Agreement they had signed 3 years prior prevented this. The Agreement required 4 weeks written notice of termination, and provided that upon termination they could not work within a 5 kilometre radius of the practice for 1 year, and could not treat existing patients of the practice. This prevented the client from pursuing the position they wanted, and meant they had to move to a practice away from the area and “their” existing patients. The client admitted to not having read or sought advice about the Agreement before signing.

What does a restraint of trade clause look like?

It is now common place for larger medical practices to require a health practitioner to accept a restraint of trade clause before being permitted to work at the practice. A typical restraint of trade clause might state:

“The Doctor acknowledges and agrees that upon termination of this contract, he or she will not, without the prior written consent of the Medical Centre, be directly or indirectly involved in any other medical centre and shall not attempt to entice or obtain any patients to another medical centre within a radius of 15 kilometres and for a period of 12 months from the date of termination of this contract”.

Is the restraint of trade clause in my contract unfair?

Whether or not a restraint of trade clause is fair and enforceable is ultimately determined on a case by case basis, however the following general matters are likely to be considered by a Court making this assessment:

  1. Whether the geographical distance and period of time prescribed is required for the reasonable protection of the employer’s legitimate interest.In a medical setting, the legitimate interest of the employer is likely to include preserving the confidentiality of its patients’ information.
  2. Whether the geographical distance and period of time prescribed is reasonable based on the location of the employer and the nature of the business. For a medical practice based in a metropolitan area, a Court may consider a restraint in excess of 15 kilometres and 12 months to be unrealistic and therefore unreasonable.
  3. Whether the parties voluntarily accepted the restraint of trade clause at the time of entering into the contract. It will be difficult for a health practitioner to later claim that the clause is unreasonable if he or she voluntarily agreed to it before commencing employment.

What might happen if I have already breached the restraint of trade clause in my contract?

The following remedies are available in the event of a breach of a restraint of trade clause:

  1. A Court ordered injunction. An injunction might restrain the health practitioner from working at another medical practice for a certain period of time. The period of time set by the Court might be equal to the amount originally envisaged by the employer (i.e. 12 months).
  2. A Court ordered monetary award that is payable by the health practitioner in favour of the medical practice. The amount of the award as determined by the Court is likely to be an amount that is sufficient to compensate the employer for any financial loss incurred as a result of the breach (i.e. the loss of patients to another medical practice during the period of the breach).

What can I do if I think the restraint of trade clause is unfair?

MIGA encourages doctors to engage in open and transparent communications with their potential employers prior to entering into any employment contract and engaging in any activity that may constitute a breach of a restraint of trade clause.

It is open to both parties to negotiate the terms of a proposed contract prior to and during the term of employment. We recommend documenting such negotiations in writing to protect both parties in the unfortunate event of a future dispute. This process is often facilitated by other terms in the employment contract which set out alternative dispute resolution processes for the parties (i.e. in the event of a disagreement or dispute regarding the terms of the contract).

If you suspect that you may have already breached a restraint of trade clause in your employment contract, we suggest clients of MIGA contact our Claims and Legal Services team for further advice and support.

Things to keep in mind

Restraint of trade clauses

Restraint of trade clauses are used to protect a genuine business interest. Such a clause usually prohibits the practitioner from working in a particular geographical area, for a specific period of time after the Agreement is terminated. It can also prohibit the practitioner from “taking” patients or employees of the practice when they go.

The laws governing restraint of trade clauses vary between states, however they will only be enforced to the extent that they are reasonable. The Courts have upheld restraint of trade clauses and each case is determined based on its unique facts. In the case Dr Angel-Honnibal v Idameneo (No 123) Pty Ltd1 the Court upheld a restraint of trade clause preventing the doctor from practicing within an 8 kilometre radius of her former practice for 5 years. The doctor was required to pay approximately $58,000 in damages.

Our recommendation

Before signing an Agreement, check the restraint of trade clause. Consider whether you are likely to want to stay in the area once the Agreement comes to an end and if so, consider whether the proposed clause might limit your options. If you think it could, you should negotiate this term before signing the Agreement. For example you may be comfortable agreeing to a 1 kilometre restriction for 3 years, but not a 5 kilometre restriction for 1 year. 

Indemnity clause

Be wary of indemnity clauses which require you to indemnify another party.  We sometimes see agreements which attempt to extend the practitioner’s liability to include liability arising from acts and omissions of the other party, or their employees.  These contractually assumed liabilities will not necessarily be covered by your medical indemnity insurance policy, and could leave you personally exposed.

Our recommendation

Ordinarily you are liable for your own acts and omissions, not those of another entity.  You should carefully review any indemnity clause and contact your medical indemnity insurer if you are in any doubt as to whether your insurance will cover your liability under the clause.

Termination clause

Termination clauses govern the way in which an Agreement can be ended, including whether written notice is required, length of any notice period, and under what circumstances the other party can end the Agreement. Often Agreements are drafted to give the health company or employer broader powers to terminate the Agreement than the practitioner.

Our recommendation

If you are signing a fixed term agreement it is particularly important to pay attention to the termination clause, to ensure it is reasonable and that there is a way for you to end the Agreement if you need to before the term is complete.

The Agreement provided to you is a starting point and should be open to negotiation. It needs to work for both you and your employer. Once signed it is binding, and it could leave you in a disadvantaged position if it is not read, understood and negotiated appropriately upfront.

If you have concern about certain clauses in your employment contract please contact your medical indemnity insurer.  They may be able to provide you with preliminary advice or refer you to someone who can assist you on a private basis.  Where an issue arises concerning your employment and your policy provides cover, please contact your insurer early so that they can advise and assist you in managing the situation.

Guidance such as that provided in this article is just one of the many ways MIGA helps its insured clients.  We offer superior cover complemented by expert medico-legal support that is available 24/7.  If you are not insured with us, give us a call to see if MIGA can offer you more value and better protection.  At MIGA, we are always here for you.

 

Anita Filleti

MIGA Solicitor – Claims & Legal Services

1[2003] NSWCA 263

 

Insurance policies available through MIGA are issued by Medical Insurance Australia Pty Ltd.  MIGA has not taken into account your personal objectives or situation.  Before you make any decisions about our policies, please read our Product Disclosure Statement and Policy Wording and consider your own needs.  Call MIGA for a copy on 1800 777 156 or visit our website at www.miga.com.au.  The information contained in this document is of a general nature only and does not purport to take into account, or be relevant to your personal circumstances. This information is not intended to be nor should it be relied upon as a legal or any other type of professional advice.

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Risk management resources

MIGA has helpful risk management resources specific to this topic which are available to clients, or by contacting their Risk Management team on 1800 777 156. In addition to their industry-leading risk management education, MIGA offers superior cover and expert medico-legal support 24/7. If you are not insured with MIGA, give them a call to see if they can offer you more value and better protection. Or please contact us if you would like an introduction to Marie-Clare Elder.

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