Court of Appeal for Ontario

Date: February 28, 2019 Docket: C65412

Judges: Pepall, Trotter and Harvison Young JJ.A.

Between

ACT Greenwood Ltd., c.o.b. as ACT Greenwood Office Management and Dr. Clement Sun Plaintiffs (Appellants)

and

Jocelin Desjardins-McLeod Defendant (Respondent)

Counsel

Robert Harrison and Zohar Levy, for the appellants

Justin Necpal and Anisah Hassan, for the respondent

Heard

February 6, 2019

On Appeal

On appeal from the judgment of Justice Bernadette Dietrich of the Superior Court of Justice, dated April 25, 2018, with reasons reported at 2018 ONSC 2545.

Harvison Young J.A.:

A. Overview

[1] This appeal arises from a breakdown in the contractual relationship between the appellants and the respondent. The appellants, ACT Greenwood Ltd. ("ACT") and its principal, Dr. Clement Sun, operate methadone treatment clinics, and hired the respondent, Dr. McLeod, to care for patients at some of those clinics. Their contract provided that Dr. McLeod would remit 45% of her OHIP billings to ACT. It also contained a non-competition provision.

[2] The appellants brought an action for damages against Dr. McLeod following the breakdown of their relationship. They alleged that she had repudiated the contract and was in breach of a number of the contractual terms. In particular, the appellants alleged the respondent had breached the non-competition provision. Dr. McLeod's defence was that, for reasons that will be detailed below, the contract had been frustrated and that the non-competition provision could not be interpreted as the appellants submitted.

[3] After a week-long trial, the appellants' action was dismissed in its entirety. At the heart of this appeal is the question of whether the trial judge erred in applying the doctrine of frustration and in interpreting the non-competition provision. The appellants also argue that the trial judge erred in failing to address their claim for an underpayment due to them in the amount of $8,194.59.

[4] For the reasons that follow, I reject the appellants' submissions that the trial judge erred in her conclusion that the contract had been frustrated and in her interpretation of the non-competition provision. However, I agree that the trial judge erred in not granting the appellants judgment for the amount of $8,194.59. I would therefore allow the appeal in part.

B. The Factual Background

[5] In April 2014, Dr. McLeod, then a recent medical graduate, entered into a contract with ACT in which she agreed to pay 45% of her OHIP billings to ACT. Either party could terminate the ten-year contract on 30 days' notice. On termination, Dr. McLeod was to reassign all patients whom she had registered with the College of Physicians and Surgeons of Ontario to another doctor in the clinic. For six months after the termination of the contract, she agreed not to work in a clinic or open a practice within ten miles of a clinic operated by ACT.

[6] Dr. McLeod was assigned by Dr. Sun to work in two clinics: one clinic in Hamilton (the "John Street Clinic") and one in Brantford (the "Darling Street Clinic"). She began to work at those clinics, and to acquire and treat patients.

[7] Unbeknownst to Dr. McLeod at the time she entered into the contract with ACT, ACT was jointly operating those two clinics, as well as two other clinics, with Toward Recovery Clinics ("TRC"). By early 2015 the ACT-TRC relationship was breaking down. In June 2015, TRC denied Dr. Sun access to the joint ACT-TRC clinics, including the John Street Clinic and Darling Street Clinic.

[8] After being barred from the John Street Clinic and Darling Street Clinic, Dr. Sun established temporary competing clinics in Hamilton and Brantford. He encouraged Dr. McLeod to join him there. He assured her that her patients at the John Street Clinic and Darling Street Clinic would follow her. She declined. On July 10, 2015, Dr. Sun alleged that Dr. McLeod had repudiated the contract.

[9] The arrangement between ACT and TRC was dissolved by court order, which specified July 17, 2015 as the latest possible date of dissolution. There is ongoing litigation relating to the dissolution of the ACT and TRC relationship.

[10] The appellants commenced an action against Dr. McLeod. They alleged that Dr. McLeod had repudiated their contract and sought damages arising from the alleged repudiation, primarily for breach of the non-competition provision as Dr. McLeod continued to see patients at both the John Street Clinic and Darling Street Clinic. Dr. McLeod's position was that the intervening events including the dissolution of the relationship between ACT and TRC and the attendant denial of access to the John Street Clinic and Darling Street Clinic had frustrated her contract with ACT. She entered into a contract with TRC in which she agreed to pay it 33% of her OHIP billings.

[11] The trial judge found that the contract between ACT and Dr. McLeod had been frustrated by the intervening events and, in particular, by the dissolution of the relationship between ACT and TRC. The trial judge also found that, even if the contract survived the dissolution of the ACT and TRC relationship, Dr. McLeod had not breached the terms of the contract. Further, and in any event, the appellants had not proved any damages. For those reasons, she dismissed the appellants' action.

C. The Issues on Appeal

[12] The appellants submit that the trial judge made three major errors which warrant the intervention of this court. First, they say that the trial judge erred in finding that that the relationship between ACT and TRC had brought about a radical change in the contractual arrangement between ACT and Dr. McLeod, thus frustrating their contract. In particular, they state that the trial judge's focus was misplaced and that the relevant legal question was whether the dissolution of the ACT and TRC relationship radically changed Dr. McLeod's obligation under the non-competition provision. The appellants argue it did not. Second, they submit that the trial judge erred in concluding that Dr. McLeod was not in breach of the non-competition provision. Third, they submit that the trial judge erred in finding that the appellants had failed to establish damages.

[13] For the reasons below, I reject those arguments. The trial judge's findings that the contract between ACT and Dr. McLeod had been frustrated, that Dr. McLeod had not breached the non-competition provision, and that ACT had failed to prove any damages were open to her on the record before her. I see no basis to interfere with those findings.

[14] However, I agree with the appellants that the trial judge erred in failing to address Dr. McLeod's alleged underpayment to them in the amount of $8,194.59 for the period prior to July 10, 2015 (when ACT took the position that Dr. McLeod had repudiated her contract). In my view, that amount (representing the difference between the 45% of her OHIP billings she agreed to remit to ACT, and the 33% she agreed to remit to TRC) is owed to ACT. I would allow the appeal on this narrow issue, but dismiss the remainder of the appeal.

D. Law and Analysis

(1) The Non-Competition Provision

[15] On the issue of frustration, the appellants argue that the trial judge committed an extricable legal error in failing to ask the right question. They submit that she should have asked whether the dissolution of the ACT-TRC arrangement frustrated Dr. McLeod's obligation under the non-competition provision by radically changing that obligation. The appellants argue that the trial judge mistakenly focused on the fact of the dissolution itself, and the corresponding relocation of the ACT clinics, without considering how that affected the respondent's non-competition obligation. In particular, they submit that she failed to consider the fact that the provision specifically provided that it would operate after termination "for whatever reason".

[16] I disagree. First, the trial judge found that Dr. Sun, by suggesting a new plan and by offering to substitute his own patients for patients that might not follow her to the new temporary clinics, had "implicitly accepted that the contract had been overtaken by radically changed events and that the existing agreement had been frustrated. Indeed, the parties were faced with a new and unforeseen reality": at para. 29. She continued, at para. 30, to explain that this effectively frustrated the non-competition provision:

[I]t was highly inappropriate for the [appellants] to take the position that the original contract continued even after Dr. Sun had left the John St. and Darling St. clinics and, in essence, had imposed a duty on Dr. McLeod to follow him and to encourage the patients she was treating at those clinics to do the same.

[17] Second, the law of frustration requires that there be a radical change in the nature of the parties' contractual obligations, arising from a situation which the parties had not contemplated in the formation of the contract: see Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, [2001] 2 S.C.R. 943, at paras. 53-56. In G.H.L. Fridman, The Law of Contract in Canada, 6th ed. (Toronto: Carswell, 2011), at p. 619, the author writes:

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. [Citations omitted, emphasis added.]

[18] This is precisely what the trial judge found had occurred here.

[19] Third, as will be discussed, the trial judge did effectively consider whether the dissolution of the ACT-TRC relationship "radically changed" Dr. McLeod's obligations under the non-competition provision. The trial judge found that the non-competition provision could not be interpreted in the manner propounded by the appellants, and that the performance of the non-competition provision was frustrated: at paras. 39, 48-51. The appellants concede that the trial judge did not misstate the test for frustration as set out in Naylor, at paras. 53-56. Thus, while the appellants disagree with the trial judge's interpretation of the non-competition provision, that is a question of mixed fact and law and I see no extricable error of law or palpable and overriding error of fact that could warrant this court's interference with her interpretation: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 51-53.

[20] The appellants emphasize that Dr. McLeod did express a concern about the potential negative financial impact that moving to the appellants' new clinic locations would have. They argue that a change that makes a contract less profitable, without more, does not constitute frustration: see e.g. Fridman, at pp. 618-619. However, the trial judge did not base her finding of frustration on economic grounds. Rather, she based it on her conclusion that the contract simply did not contemplate the dissolution of the ACT-TRC relationship, such that the contractual relationship between Dr. McLeod and ACT had been frustrated: see paras. 34, 39-41. Furthermore, the trial judge indicated that Dr. McLeod was constrained by her ethical obligations to her patients. She pointed to the physician's duty not to solicit patients, and also to the importance of continuity of care for these patients: see paras. 35-38.

[21] In interpreting the contractual provisions, the trial judge expressly considered and applied the correct law. In effect, the appellants are asking this court to reapply the same legal tests applied by the trial judge, but to consider the evidence differently so as to reach a different result. That is not the role of this court.

[22] The appellants' second argument also fails. The trial judge expressly considered the interpretation to be given to the non-competition provision. In interpreting the non-competition provision, the trial judge found that properly construed, it meant that Dr. McLeod was not to leave the Darling Street Clinic or John Street Clinic to compete with Dr. Sun within 10 miles for a six-month period: at para. 50. She expressly rejected the appellants' submission that it meant that Dr. McLeod was effectively forced to follow Dr. Sun when he left the clinics and set up new ones nearby, and to encourage the patients she was treating at those clinics to do the same, finding that such a broad interpretation of the non-competition provision would effectively render it a personal services contract: at paras. 47-49.

[23] As noted by the trial judge, a practical common sense reading of the non-competition provision would have it apply to a situation in which Dr. McLeod was working at an ACT clinic and then left that ACT clinic to work at another competing clinic, or if she opened a practice (other than a family practice), within ten miles of an ACT clinic. That is not what happened. In fact, it was Dr. Sun who was legally barred from the Darling Street Clinic and John Street Clinic owned by TRC in which Dr. McLeod had been assigned to work: at para. 49.

[24] Again, absent an extricable error of law, the trial judge's contractual interpretation is a matter of mixed fact and law and is entitled to deference on appeal: Sattva, at paras. 51-53. There is no basis upon which to interfere with the trial judge's interpretation of the non-competition provision.

[25] As for the issue of damages, I agree with the appellants that they were not required to lead evidence to establish mitigation of damages. In this regard, the trial judge was incorrect in suggesting at para. 56 that the appellants had an onus to lead evidence of mitigation, and in drawing an adverse inference from their failure to do so: see Barber v. Molson Sport & Entertainment Inc., 2010 ONCA 570, 269 O.A.C. 108, at para. 94 and Belton et al. v. Liberty Insurance Company of Canada, 72 O.R. (3d) 81 (C.A.), at paras. 33-34.

[26] This does not, however, impair the trial judge's finding that, based on the evidence advanced by the appellants, she was unable to assess any damages. The trial judge determined that the evidence on damages was speculative and not persuasively proven: at para. 55. There is a difference between damages that are difficult to quantify due to their inherent nature and those that elude quantification due to the party's failure to lead adequate evidence: see Martin v. Goldfarb, 41 O.R. (3d) 161 (C.A.), at para. 75. Furthermore, it is not for the appellant to now advance a new theory of damages untethered from any submissions made at trial, including reliance on the Frustrated Contracts Act, R.S.O. 1990, c. F.34, a claim neither pleaded nor argued at trial. I would not give effect to this ground of appeal.

(2) The Appellants' Claim for $8,194.59

[27] The appellants also submit that the trial judge erred in failing to address Dr. McLeod's alleged underpayment to them in the amount of $8,194.59 for the period prior to July 10, 2015.

[28] Pursuant to an interpleader order issued in the action between ACT and TRC (on the consent of all parties), Dr. McLeod paid into court $22,535.12 less costs fixed at $500 (i.e. $22,035.12). ACT and TRC's respective entitlement to this money is one of the issues in the ongoing litigation between them. The order was silent on what this sum represented. It also provided that nothing in the order would prejudice the appellants' position regarding all other amounts alleged to be owing by Dr. McLeod in the action.

[29] The appellants argue that this amount represents 33% of Dr. McLeod's OHIP billings during the relevant period, as invoiced by TRC pursuant to their agreement with Dr. McLeod. However, ACT's contract with Dr. McLeod entitled them to 45% of her OHIP billings. Thus, they say they are entitled to an additional $8,194.59 (representing 12% of Dr. McLeod's OHIP billings over the relevant period), no matter what the outcome of the ACT-TRC litigation.

[30] Dr. McLeod in response submits that the $22,535.12 paid into court was a negotiated amount intended to include all amounts she owed both ACT and TRC during the relevant period. Dr. McLeod argues that since the amount paid into court constituted revenue from the "combined business" of ACT and TRC, any claim by ACT for additional monies as against Dr. McLeod is properly dealt with in the ongoing ACT-TRC proceedings.

[31] The record before this court supports the appellants' position on this issue. The amount paid into court ($22,535.12) closely approximates 33% of Dr. McLeod's billings ($22,452.93) during the relevant period. On the other hand, if the amount paid into court included the 12% now claimed by ACT, one would expect that amount to be closer to approximately $30,617.63.

[32] The appellants' claim to this sum was raised before the trial judge but not addressed. Based on the record before her, I agree with the appellants' submission that the $22,535.12 paid into court was intended only to reflect 33% of Dr. McLeod's OHIP billings during the relevant period, as invoiced by TRC pursuant to their contract with Dr. McLeod, not all amounts invoiced by TRC and ACT. The appellants are therefore entitled to the additional amount of $8,194.59. If the $8,194.59 amount to be paid by Dr. McLeod to ACT becomes an issue in the related litigation between ACT and TRC, the appropriate remedy would be for TRC to seek to recover this amount from ACT.

(3) Disposition and Costs

[33] For these reasons, I would allow the appeal in part. As the respondent was largely successful, I would also order the appellants to pay the respondent costs of the appeal on a partial indemnity scale fixed in the amount of $10,000 inclusive of disbursements and applicable tax.

Released: February 28, 2019

"S.P."

"A. Harvison Young J.A."

"I agree S.E. Pepall J.A."

"I agree G.T. Trotter J.A."