Consultants and Contractors: Are they liable if they divert prospective clients to their own business?

The rise of the engagement and use of consultants has brought about greater ability for small and medium sized businesses to access experienced, specialised and very well skilled people. For larger businesses, consultants have the ability to provide a unique skill set for certain projects or for short term and medium term productivity gains.

A question that sometimes comes up for contractors and for which NB Lawyers have been asked to advise on in the past – is the extent of the liability for contractors especially if clients (or potential clients) are diverted to their own business or an associated business.

A recent case handed down by the Federal Court of Australia has reiterated that independent contractors are not immune from the same fiduciary obligations that commonly exist between employers and employees.

The Facts

In early 2000, Mr Wayne Hall was contracted by SBA Music Pty Ltd (SBA) to work as a consultant providing management services. Whilst undertaking this position, Mr Hall continued to run his independent business, Soundmark solutions.

Mr Hall’s management positions within SBA were very senior and included a number of obligations which were crucial to the operation of the business. From the commencement of his consultancy work on the 20 March 2000 until his termination in December 2012, Mr Hall spent four years as Strategic and Business Development Manager and eight years as General Manager.

Importantly, over the course of his working relationship with SBA, Mr Hall was authorised to negotiate contracts for the business and to do so with a substantial degree of autonomy.

In August 2013, SBA Music commenced legal action against Mr Hall alleging that he had breached his fiduciary obligations by diverting prospective clients towards his own business venture. These allegations were substantiated by evidence of five separate instances by Mr Hall over the duration of his consultancy period.

Can Independent Contractors Attract Fiduciary (legal or ethical) Duties?

Prior to assessing the overarching legal issue regarding these allegations, His Honour dealt with the formative question of whether or not fiduciary obligations can extend to independent contractors such as Mr Hall. Justice Wigney answered this question in the affirmative and, in doing so, provided some valuable clarification as to the types of working relationships that may give rise to such fiduciary duties.

Justice Wigney was clear in his analysis of fiduciary obligations, stating that they are not restricted to certain circumstances but rather, they are capable of arising in a multitude of working relationships. Importantly, His Honour identified that the crucial aspect of the fiduciary relationship was when “the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense.”

Justice Wigney then cited previous common law, making reference to the five factors which were relevant in ascertaining the existence of a fiduciary relationship, which were:

  1. Whether or not there is a relationship of confidence;
  2. Whether or not the undertakings of the contractor are indistinguishable from those of an employee;
  3. Whether or not the contractor had the capacity to exercise discretion in a way which would affect the interests of the contracting business;
  4. Whether or not the contracting business is dependent upon and vulnerable to the contractor; and
  5. Whether or not the contractor had access to confidential information within the business.

All of these factors existed in regards to the relationship between Mr Hall and SBA and as such, Justice Wigney found that Mr Hall did owe fiduciary duties to SBA Music. Having established this, His Honour went on to accept the allegations brought by SBA.

It was held that by failing to take the necessary steps to avoid conflicts, benefitting from their existence and failing to disclose information about such conflicts, Mr Hall had breached his fiduciary obligations. As a result of these breaches and in conjunction with separate breaches of contract and statute, Mr Hall was ordered to pay damages of more than $2 Million.

Further, Mr Hall was ordered to return all confidential information and intellectual property in his possession and information relating to customers and suppliers.

Lessons to learn

The SBA case should not deter businesses from engaging consultants to assist in growth or to utilise skills for compliance or advisory capacities.

However here are a few tips to follow:

  1. Ensure all parties understand what will be considered appropriate especially in the context of dealing with clients and the use (or misuse) of confidential information – a standard services agreement or contractor agreement would be sufficient;
  2. To avoid pitfalls or misuse – businesses should limit consultant authority, that is, although there may be autonomy there is an approval process or reporting process for work undertaken and this should be limited to key people in the company;
  3. For consultants, they should understand and be aware that there actions still attract legal and ethical duties (which they could hold personal liability for);
  4. For consultants, all conflicts of interest should be readily and constantly disclosed;
  5. If there is a potential situation where clients or prospective clients are being diverted to a consultants company – clear provisions dealing with conflict of interest are set out in the agreement and more importantly businesses should be aware that commercially viable legal action can be taken.

For further information or for a consultation to discuss any potential legal issue please contact Jonathan Mamaril, Principal & Director on 07 3876 5111 or email [email protected] or go to our website

Written by

Jonathan Mamaril, Principal & Director,
NB Lawyers – the Lawyers for Employers
07 3876 5111
[email protected]