Showing restraint when contracting with surgeons

By Craig Hong, Director at Hillhouse Legal Partners
| 5 min. read

Key takeaways

  • In Australia, restraints of trade are considered by the Courts to be prima facie, unless the person seeking to enforce the restraint can establish that the restraint is reasonable protecting the interest of that party and that it is also in the interest of the public that the restraint should be enforced.
  • Where possible, avoid boilerplate agreements when it comes to service agreements, contracts and employment arrangements which have a broad “10km from the practice for three years” as they can often be unenforceable.
  • Consider the practice’s goodwill and then work around those sources of goodwill as the basis for the restraint clauses.

As a practice owner, it is natural for you to want to protect the business that you have built.

One mechanism that business owners commonly rely upon to ensure that people who work in, or with their businesses are restraint of trade clauses.

These clauses seek to place some sort of restrictions upon a third party in their future business dealings. Often these will be expressed as an agreement not to trade in a particular type of business, within a specified area and for a specified period of time. However, there are a range of different clauses to restrain other types of behaviour, such as approaching patients and referrers or making approaches to employees or suppliers.

As a starting position in Australia, restraints of trade which seek to limit a person’s ability to engage in trade or work in a particular fashion are considered by the Courts to be prima facie void unless the person seeking to enforce the restraint can establish that the restraint is reasonably required for protecting the interest of that party and that it is also in the interest of the public that the restraint should be enforced.

 For medical practices in particular, enforcing a restraint of trade can be a difficult proposition and there can be a number of additional factors which work against the party seeking to enforce the restraint, namely:

  • In many instances, the contractual relationship may be that the practice is a service provider to the Doctor, so seeking to restrain the Doctor may not mesh with that relationship. Even worse, in some circumstances, a restraint of trade can be seen as an indicator of an employment relationship, which can potentially have adverse tax and other consequences for the practice.
  • There are stronger public policy arguments as to why there should be little or no restriction on where Doctors can practice. As a general rule, increasing accessibility to medical services will generally have a strong public policy appeal.
  • As a result of significant value in the personal skills of each Doctor, determining where goodwill in any practice lies can often be a difficult proposition so there can be a live question as to what, if anything, the practice has to protect. In many cases, this can be a practical consideration around how patients and referrals are obtained.

Too often in practice, we see service agreements, contracts and employment arrangements which have a broad “10km from the practice for 3 years” that has clearly been inserted from a boilerplate agreement and where no real consideration has been given to the appropriateness of the restraint. In most cases, if these clauses were ever tested, there is a reasonable chance that they will be unenforceable and even worse, there is the possibility that they can be used as evidence of a contractual relationship different to what the parties intended. In worst case instances, the restraint clause that has been included for the protection of the practice can offer no protection and can actually endanger the practice in the form of significant adverse tax, including payroll tax, consequences.

However, simply because there are factors which can work against the enforceability of a restraint, this is not to say that you should not take any steps to protect your practice. Rather, it means that you should take the time to really consider the true nature of your practice, work out the exact protections that your practice actually requires and then craft specific clauses to reflect those protections.

In order to properly do this, you should consider the sources of the practice’s goodwill and then work around those sources of goodwill as the basis for the restraint clauses (and other relevant clauses such as protection of confidential information and patient records), in many cases, this process should be undertaken in a consultative practice with the surgeons in your practice, as in many cases, protecting their goodwill can be a significant way to protect your goodwill.

Some of the components that you may wish to consider are as follows:

  • Does your Practice have “brand” goodwill? Do referrers and patients gravitate towards your practice rather than an individual Doctor or Doctors?
  • Does your practice have locational goodwill, that is, do patients, referrers and potential additional Doctors gravitate towards the location of your practice? Is that location goodwill easily replicable and would you suffer loss and damage if someone were to “start up shop” very close to you? Even if you have this, are there public policy reasons that you may find enforcing a restraint difficult (i.e. it may be difficult to enforce a restraint preventing someone operating from a hospital).
  • If you operate as a service entity, are there relationships between your clients (surgeons) and third parties that you need to protect (i.e. do you need to restrain surgeons from interfering with referral relationships that they become privy to as a result of working within the practice)?
  • Do you have employees, referrers, suppliers or other contractual relationships that you need to protect?
  • What confidential information do you have in the practice that you need to protect?
  • What do your surgeons actually want to do? Do they want relative freedom to practice anywhere they want but do not have any designs on actually establishing their own practice i.e. continuing to work as a consultant or locum at another practice or various other practices?

There are a wide range of clauses and strategies that can be adopted, so once you have considered these factors, quite often you will determine that a simple “X kilometres for X years” may not be appropriate or if that type of clause is appropriate, you may not want a blanket restriction, you may only want to restrain certain behaviour (i.e. you may get agreement not to establish a practice within a particular area, but the surgeons may be free to do anything else they wish within that area).  

Sometimes, you may simply need non-solicitation clauses to stop surgeons from attempting to entice away employees from your practice, or to stop surgeons from interfering in relationships already established between existing Doctors and referrers.

In almost every case, you should be considering confidential information and patient records and determining what data a leaving Doctor will be entitled to take, what data will remain with the practice, how any data is to be transferred and what each party can and cannot do with confidential information that they have gleaned throughout the course of the contractual relationship. These clauses also have to be overlaid with a consideration of patient rights and the initial terms on which any patient information was obtained, any privacy policy for the practice and the terms of any consents that patients have provided. As a broad proposition, any issues between a Doctor and the practice should never involve a patient being unable to properly exert their own legal rights in respect of their data or result in a breach of any privacy laws.

In our experience, we have found that where practice undertake this process in consultation with their Doctors, they generally find that they end up with a set of clauses which:

  • Are more enforceable and provide more than adequate protection for the actual concerns of the practices;
  • Are consistent with their contractual relationships with the Doctors;
  • Are less likely to offend tax rules principles and other considerations; and
  • Are far more likely to be respected and complied with by the Doctors as they have been involved in the process and have a more personal connection to the covenants they have given than a clause stuck in the back of an agreement that they might not even be aware of.

When a practice takes the time to properly consider and draft their restraint and confidentiality clauses, they genuinely improve their practices protections and often improve the relationships they have with their Doctors, both during and after their contractual relationship.

If you have any questions, please reach out to Craig Hong. We are here to help.

 

Should you have further questions or would like to discuss your individual requirements for your practice, please get in touch with Craig Hong on 07 3220 1144.

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.