The Ontario Court of Appeal (“ONCA”) recently dealt with a contractual dispute between a medical graduate and her medical clinic owner in Greenwood Ltd. V. Desjardins-McLeod. The primary issue was whether the physician was still bound to the contractual terms or excused based on the contractual doctrine of frustration. The basis of frustration is the impossibility of performance. The doctrine, if established, terminates a contract at the point of frustration as to future, but not past, performance obligations.

The Facts

A recent medical graduate (“MG”) began her career working for a medical clinic (“MC”). She did so pursuant to a ten-year contract terminable by either party on thirty (30) days notice. In exchange for the use of MC’s facilities, she agreed to remit forty-five percent (45%) of her OHIP billings to MC.

The contract also required that on termination, for whatever reason, MG was to transfer all patients registered as hers with the College of Physicians & Surgeons of Ontario (“CPSO”) to another doctor then in contract with MC. Further, she contracted to not work for another clinic, or open her own practice, within ten miles of any clinic operated by MC.

She was assigned to work in two clinics operated by MC. MG was not aware that the two clinics were operated by MC and another owner. After building her practice, she suddenly became aware that the relationship between the two owners of the clinics had broken down to such an extent that MC was barred from their use. MC then opened two nearby competing clinics and encouraged MG to join him. MC declined and chose to remain with her patients at the two clinics now run by the other owner. This required that she enter into a contract with the other owner. That contract only required MG to remit thirty-three percent (33%) of her OHIP billings.

The Lawsuit

MC sued MG on the basis that she had repudiated her contract. MC sought damages based on the non-competition clause. MG’s position was that the breakdown of the relationship between the owners and being barred from access to her places of work under the contract with MC meant that the contract had been frustrated.

Trial Decision

At trial, the judge found that the contract had been frustrated and was therefore at an end. Further, the trial judge held that even if the contract survived, that MG had not breached its terms and MC had not proven any damages. MC appealed.

Court of Appeal

The Frustration of Contract Issue:

The ONCA dismissed the appeal. The law of frustration had been laid down by the Supreme Court of Canada (“SCC”) in Naylor Group Inc. v. Don Construction Ltd. The law requires that there be a radical change in the nature of the parties’ contractual obligations arising from a development that the parties had not contemplated at the time of the formation of the contract.

First, the ONCA agreed with the trial judge that even MC had recognized the frustration when it created new clinic locations and asked MG to move to the new locations from the existing clinics.

Secondly, the ONCA relied on Naylor where the SCC quoted, with approval, from G.H.L. Fridman, The Law of Contract in Canada 6th ed. as follows:

From the decided cases to which reference has been made it is deducible that the basis of frustration is impossibility. By this is meant physical impossibility and impossibility resulting from a legal development that has rendered the contract no longer a lawful one. However, frustration goes further, and comprehends situations where the contract may be both physically and legally capable of being performed but would be totally different from what the parties intended were it performed after the change that has occurred. [emphasis added by the court.]

Thirdly, the ONCA again agreed with the trial judge in her analysis that the dissolution of the ownership partnership frustrated the contract as it prevented MG from attending to her patients at their existing clinic. The non-competition obligation necessarily fell as well.

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