DUHAIME'S CONTRACT LAW: Eight chapters of pure, unadulterated contract law love.

  1. Contract Law - The Introduction
  2. Privity, Consent and the Reasonable Man
  3. Consideration & Deeds
  4. Offer & Acceptance
  5. Mistake, Rectification & Misrepresentation
  6. Restraint of Trade, Assignment, Novation & Frustration
  7. Interpretation of Contracts
  8. Time Limits, Breach & Remedies

Restraint of Trade Contracts

In contemporary commercial environments, restraint of trade contracts are common.

These are contracts that state, for example, that a person selling a business agrees not to open a similar business within 50 miles of the business being sold and for a period of ten years.

On the face of it, such contracts, while not illegal, fly in the face of public policy as it is considered to be "good for the state" that men and women be free to ply their profession without restriction.

restraint of tradeThis is yet another area where the common law flip-flops and it is difficult to pin point the rule of law from one case to the next. Through it all, some general principles have prevailed, as aptly summarized in a 1894 case, Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co., a case so widely-accepted that it has becomne known as the Nordenfelt test:

"All interference with individual liberty of action in trading, and all restraints of trade themselves, if there is nothing more, are contrary to public policy and therefore void. That is the general rule. But there are exceptions: restraints of trade ... may be justified by the special circumstances of a special case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable - reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public."

Some of the factors that a court will look for to decide the "reasonableness" of the restraint of trade contracts will be situations where trade secrets were involved. But special skills learned by an ex-employee while on the job belong to that employee and the exercise of those skills alone cannot be curtailed. Nor should the restraint be for an inordinate amount of time or a geographical limit that is excessive or that exceeds the actual scope of the business at the time of sale.

In restraint of trade contracts pursuant to the sale of a business, the court's are more receptive but, again, only if the contract is reasonable in the circumstances. Each case will be decided on its own merits (see also cases such as Shatilla and H. F. Clarke in page 7, Interpretation of Contracts).

ASSIGNMENT & NOVATION

A person can transfer their rights, benefits and liabilities under a contract to another person. Where the original contract stays intact and party transfers rights, benefits and liabilities under a contract (the assignor) to a new party (the assignee), this is called an assignment.

An assignment must be absolute with no contractual strings to remain attached between the assignor and the other original contracting party. Nor does an assignment require the permission of the other original contracting party. An assignment is not possible where the services or the consideration was linked to the person of the party which wants to assign the contract. For example, if you hire a special performer, the performer cannot assign the contract to another performer. If an assignment creates a new or special burden to the other original contracting party, it may also be prohibited. Special provincial laws may exist to alter the common law with regards to assignments, such as "judicature acts" and readers are invited to consult these laws for further research.

Sometimes assignment operates under law such as in the case of a bankruptcy where a trustee comes in and takes over all the contracts between the bankrupt and the creditors. Another example of legal assignment is upon death, where the executor assumes the position of the deceased and to whom all contracts of the deceased are assigned.

Novation is the replacement of one contract between two parties with another contract, either between the same parties or others.lawnmower

For example, if I had a contract with you to cut my lawn and if John had a contract with me to cut his lawn, we could novate both contracts and replace it with a single contract wherein you agree to cut John's lawn.

Contrary to assignment, novation requires the consent of all parties. Consideration is still required for the new contract but it is usually assumed to be the discharge of the former contract.

The criteria for a successful novation is the complete acceptance of the liability by the new debtor, the acceptance of the new debtor by the creditor, and the acceptance by the outgoing creditor of the new contract as full performance of the old contract.

FRUSTRATION

"Where there is an agreement to sell specific goods, and subsequently the goods, without any fault on the part of the seller or buyer, perish before the risk passes to the buyer, the agreement is avoided." {Section 11 of B.C.'s Sale of Goods Act, 1996.}

No person can be held to a contract if, since acceptance, there has been a radical change which makes performance impossible or illegal. Under certain conditions, a person can be relieved of their duties under a contract under the common law heading of frustration (see Legal Definition of Frustration).

For example, an act of God may have destroyed the object of the contract (but see the Atlantic Paper Stock case below).

frustrationHowever, frustration cannot be invoked just because the contract has suddenly become more difficult or expensive for one of the parties, if the party was partly responsible for the intervening event which destroyed the object of the contract, or if the event was foreseeable.

Severe sickness of one of the parties is an example where frustration might apply to relieve one of the parties of their obligations under a contract.

In the body of the contract, the parties may specifically bar a defence of frustration and make their contract absolute.

Many provinces have short "frustrated contracts" legislation which sets out the allocation of reimbursements or "restitution" in the case of frustrated contracts. The thrust of most legislation is to allow recovery of benefits conferred before discharge of the contract.

Paradine v. Jane (1647)

Mr. Jane was unable to occupy land leased to him by Mr. Paradine because the territory was under military occupation for a considerable time. Too bad, said the court; rent is due.

"When the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract.... As the lessee is to have the advantage of casual profits, so he must run the hazard of casual losses.... Though the land be surrounded or gained by sea, or made barren by wildfire, yet the lessor shall have his whole rent."

Taylor v. Caldwell (1863)

A certain music hall was rented but burnt down just before the event. The court first stated the general principle to the effect that a party to a contract must either perform or if:

"... in consequence of unforseen accidents, the performance of his contract has become unexpectedly burdensome or even impossible", pay damages. But then the court excused both parties from their obligations because there was an "implied condition.... From the nature of the contract, we find that the parties contracted on the basis of the continued existence of the particular person or chattel."

Davis Contractors Ltd. v. Fareham U.D.C. (1956)

A building, which was supposed to take 8 months to complete, took 22 because of unexpected labour shortages. The contractors claimed that their contract was partially frustrated but the court disagreed. The delay "was not any new state of things which the parties could not reasonably be thought to have foreseen." The court also stated that:

"... frustration is not to be lightly invoked as the dissolvent of a contract.... Frustration occurs whenever the law recognizes that without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.... It is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for."

Canadian Government Merchant Marine Ltd. v. Canadian Trading Company (1922)

Labour unrest delayed a ship building contract and prevented a contracted voyage. Canadian Trading said the contract was frustrated. The court said no. "No term should be implied when it is possible to hold that reasonable men could have contemplated the taking of the risk of the circumstances being what they in fact proved to be when the time for performance arrived." The events of labour unrest were not "due to any extraordinary occurrence, to anything outside the ordinary course of events. It could certainly have been foreseen that something might occur in the ship yard, especially in these days of labour trouble."

Capital Quality Homes Ltd. v. Colwyn Construction Ltd. (1975)

Between the date of a land purchase contract (including the condition that the lot would be conveyed subdivided into 26 separate building lots) and closing, legislation intervened and made subdivision impossible by the closing date. No arrangement had been made to deal with extending the date.

"There can be no frustration if the supervening event results from the voluntary act of one of the parties or if the possibility of such event arising during the term of the agreement was contemplated by the parties and provided for in the agreement."

But in this case, the intervening legislation "destroyed the very foundation of the agreement. The lack of ability to do so creates a situation not within the contemplation of the parties when they entered the agreement.... Both parties are discharged from performance." This case was also important in setting aside a rule that seemed to be in effect in England, that the doctrine of frustration not apply to land lease contracts.

Victoria Wood Development Corporation v. Ondrey (1977)

Planning legislation intervened and precluded the subdivision of land for which an offer had been accepted and for which closing was pending. Victoria Wood had made its intentions to subdivide clear to Ondrey. Relying on the Capital Quality Homes case (summarized above), the claim was based on frustration. But the court thought the facts were different in this case.

"In my view, in the present instance, the ... foundation of the agreement has not been destroyed.... The agreement is in no sense made conditional upon the ability of the purchaser to carry out its intention.... A developer, in purchasing land, is always conscious of the risk that zoning or similar changes may make the carrying out of his intention impossible, or may delay it."

Claude Neon General Advertising Ltd. v. Sing (1942)

The usefulness of a rented neon sign was suddenly diminished by a wartime night lighting restriction. The court:

"I do not think that I should say that the contract is for an illuminated sign.... No part of the contract between the parties became impossible. The defendant certainly gets very much less benefit from the sign, but it is not entirely useless as a daylight sign."

Kesmat Invt. Inc. v. Industrial Machinery Company & Canadian Indemnity Company (1986)

A rezoning undertaking by Industrial, of Kesmat's land, was unexpectedly subjected to a mandatory, and expensive, environmental assessment. The court concluded that this additional requirement did not operate to frustrate the contract.

"Hardship, inconvenience or material loss or the fact that the work has become more onerous than originally anticipated are not sufficient to amount to frustration. Courts have, however, interpreted impossibility of performance to encompass .. impossibility in the sense of impracticality of performance due to extreme and unreasonable difficulty, expense, injury or loss." But in this case "the requirement of an environmental impact report was not an unknown requirement" and it could not be said "that no man of common sense would incur the outlay."

Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp & Paper Company (1976)

GodSt. Anne promised to buy waste paper from Atlantic for ten years "unless, as a result of an act of God ... or the non-availability of markets for pulp or corrugating medium." Fourteen months into the contract, St-Anne tried to invoke the "non-availability of markets" clause to end the contract.

Canada's Supreme Court thought that the clause was a typical "act of God" clause and, as such, required "the unexpected, something beyond reasonable human foresight and skill.... an event over which the respondent exercises no control." But the evidence showed strong and competitive international demand for the product and that the difficulty of St-Anne in finding markets were the result of its poor marketing. "I do not think St. Anne can rely on a condition which it brought upon itself."

Maritime National Fish Ltd. v. Ocean Trawlers Ltd. (1935)

Maritime National rented a fishing trawler from Ocean Trawlers bringing their fleet to five vessels. The rented boat could only operate with a trawl. Then, the federal minister of fisheries allocated only three trawling licenses to Maritime. Maritime elected to use their licenses for the other boats in their fleet and then claimed their contract with Ocean was frustrated by the lack of an operating license. But the judge said:

"it was the act and election of (Maritime National) which prevented the (rented boat) from being licensed for fishing with an otter trawl.... The essence of frustration is that it should not be due to the act or election of the other party (or) without any default of either party."

• >>> continued  >>> Chapter 7 ...

DUHAIME'S CONTRACT LAW: Eight chapters of pure, unadulterated contract law love.

  1. Contract Law - The Introduction
  2. Privity, Consent and the Reasonable Man
  3. Consideration & Deeds
  4. Offer & Acceptance
  5. Mistake, Rectification & Misrepresentation
  6. Restraint of Trade, Assignment, Novation & Frustration
  7. Interpretation of Contracts
  8. Time Limits, Breach & Remedies

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