Part 6: Restraint of Trade, Assignment, Novation & Frustration 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.

This 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.:

"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 and 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. 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.