In a move worthy of Lazarus himself, the Full Court of the Federal Court has ruled that the unfair contract provisions in Part 3 of the Independent Contractors Act 2006 (Cth) can be used to remedy a terminated contract. It decided that an IT project manager could ask a court to vary an expired agreement in order to obtain compensation from a labour hire firm.
The project manager contracted through her company Informax with Clarius Group to provide IT services to Woolworths in February 2007, under a contract which was later renewed to extend through to June 2008. Informax’s contract contained a provision which purported to prevent the project manager from working directly for Woolworths for six months after the termination of her agreement with Clarius. However, unknown to Informax, Clarius Group’s contract with Woolworths contained a 12-month restraint clause.
Informax contracted directly with Woolworths in July 2008 to provide services for a few months. When Clarius found out, it raised the 12 month restraint provision with Woolworths, who immediately terminated its direct agreement with Informax.
At first instance, Justice Perram of the Federal Court found that the contract between Informax and Clarius was unfair, and that both restraint clauses were invalid under the common law doctrine of restraint of trade. But he also ruled that section 16(4) of the Independent Contractors Act, which states that any order made to remedy an unfair contract “takes effect on the date of the order or a later date specified in the order”, prevented him from varying the contract to grant Informax relief, as this would be a “retrospective order”. This interpretation essentially made the unfair contract provisions a “dead letter” for any applicant whose contract had already come to an end.
Informax appealed to the Full Court of the Federal Court, which determined that Judge Perram was too narrow in his interpretation of section 16(4).
The Full Court traced the history of unfair contracts legislation, and concluded that section 16(4) was not intended to override previous case law where courts were willing to vary terminated contracts to provide a remedy. The Full Court stated that the Act does not preclude the making of orders with future effect, but in respect of past matters or events.
The contract between Informax and Clarius Group was determined to be unfair because at the time the contract was made, Clarius had not informed Informax or the project manager of the restraint in the contract with Woolworths, which (for reasons explained below) was longer than any restraint that could reasonably be imposed as between Informax and Clarius. In effect, Clarius was seeking to achieve indirectly (through its contract with Woolworths) what it could not validly achieve by direct agreement with Informax.
Unfairness is to be remedied from the time the contract was made, said the Full Court. But in doing so, to be “prospective in nature”, the variation to the contract is to be operative only from the date of the court order. Essentially, the Full Court found that while any variation will necessarily be “retrospective”, in the sense that the variation is to a contract already formed (and in some cases already terminated), this does not conflict with section 16(4). That provision is satisfied so long as the variation can only be enforced from the date of the order, that is, “prospectively”.
Informax had not in their appeal asked for a variation to be made in this way, and in the unusual circumstances of the case, the Full Court gave them additional time to vary the orders.
The Full Court also made some important comments in relation to restraint of trade clauses in contracts. They noted that such a clause can be void as unreasonable under common law principles, as well as found to be unfair under the Independent Contractors Act. The Court explained that the Act did not override the common law principles on restraint of trade.
Importantly also, the Full Court held that restraints in labour hire agreements are only reasonable for shorter periods than in an ordinary employment contract. This is because labour hire agencies experience less risk in losing staff than other employers, and the reasonable time for a restraint clause is the time it takes to organise a replacement worker who is prepared to be assigned to a client. In this case, a reasonable length for the restraint of trade clause was found to be four weeks.
The key point to take away from the Informax appeal decision is that the Independent Contractors Act can be used to vary terminated agreements, and provide a remedy in those circumstances, so long as the variation is worded so as to take effect only from the date of the order.
The decision is also important for the comments made about labour hire companies and restraint of trade clauses. Businesses must be mindful in engaging contractors that any restraint clause in the contract is not unreasonable, having regard to the principal’s ability to acquire additional workers in the event of termination.
Emily Haar, Law Clerk