What happens if you’re buying / selling a practice or doing a corporate re-organization and you need to transfer an associate / staff agreement over to the new corporation? Is it binding and enforceable? Do you need the associate or staff’s consent to assign? Let’s look at the recent Alberta case of Goska J. Nowak Professional Corp. v. Robinson, [2016] A.W.L.D. 3752. There, the Alberta Court of Appeal had to determine whether a non-compete clause in a dentist associate agreement was binding in light of a series of transfers / transactions taking place.
Here’s what happened:
- Dr. Robbie Robinson practiced dentistry through his professional corporation (“PC“) , R. Robinson PC.
- Dr. Robbie Robinson wanted to retire, so in 2001, he sold his shares in R. Robinson PC to a younger dentist, Dr. Goska Nowak.
- Dr. Robbie Robinson created a new PC to use for associating at the practice after the sale.
- Dr. Robbie Robinson and R. Robinson PC signed an associate agreement that contained a non-compete that lasted for two (2) years and five (5) years after the termination of the agreement.
- In August / September 2002, Dr. Nowak sold her shares in R. Robinson PC to her new PC, Goska J. Nowak PC. This was done as part of a corporate restructuring. R. Robinson PC sells all of its property to Goska J. Nowak PC and R. Robinson PC is voluntarily dissolved and ceases to carry on business.
- Dr. Robbie Robinson is informed of the assignment of the Agreement to Goska J. Nowak PC and doesn’t consent to the assignment.
- Now, in 2008, Dr. Robbie Robinson’s services are terminated.
- Dr. James Reid, a long time friend of Dr. Robbie Robinson, has a dental practice in the same building as Dr. Goska J. Nowak. Dr. Reid offers Dr. Robbie Robinson the use of his office and equipment on Saturdays to that Dr. Robbie Robinson can keep practicing.
- Dr. Goska J. Nowak sues Dr. Robbie Robinson for breach of a non-compete.
Everybody with me so far? This is fairly standard stuff in the world of dental practice mergers and acquisitions… but I digress…
So at trial, the judge basically said that the associate agreement with the non-compete was particular to Dr. Robbie Robinson as a consequence of his skill. Thus, it could NOT be assigned without his consent and was unenforceable in the absent of that consent. So when R. Robinson PC transferred its assets and was dissolved in 2002, it disavowed all of its rights under the associate agreement and abandoned any rights to services under the agreement. Per the trial judge, the associate agreement was effectively unenforceable – even after Dr. Nowak revived R. Robinson PC to try to enforce the agreement.
On appeal, the Court of Appeal agreed with the trial judge:
19 Personal services contracts are not assignable without consent. The general principle is that if a person has agreed to serve a particular master, the services cannot be assigned to another without the person’s consent: Nokes v. Doncaster Amalgamated Collieries Ltd., [1940] A.C. 1014(U.K. H.L.) at 1018, 1020, 1030. The test is whether “it can make no difference to the person on whom the obligation lies to which of two persons he is to discharge it …”: Tolhurst v. Associated Portland Cement Manufacturers (1900) Ltd., [1902] 2 K.B. 660 (Eng. C.A.) at 668, affd [1903] A.C. 414 (U.K. H.L.); Fredrikson v. Insurance Corp. of British Columbia (1986), 28 D.L.R. (4th) 414 (B.C. C.A.) at 427, (1986), 3 B.C.L.R. (2d) 145 (B.C. C.A.).
20 The appellant argues that consent was not required and, in any event, it was not necessary because the assignment did not destroy any personal ties between the parties. The appellant asserts that the change resulting from the assignment was merely a change in the corporate legal name. The person to whom the obligation was really owed, namely Dr. Nowak, remained the same.
21 This argument mischaracterizes the Agreement. The parties agreed that Dr. Robinson would provide his personal services to a corporate entity, his former professional corporation, RRPC 1. That corporation retained the assets of the practice. Dr. Robinson was to perform his services using office facilities and staff provided by RRPC 1 and he was to be paid by RRPC 1. Obviously, the characteristics of RRPC 1 objectively mattered to Dr. Robinson and it made a difference to him to whom he was to discharge his obligations. For example, it would make a difference to him if his services were assigned to another dentist or to a shell company. Therefore, the Agreement was a personal services contract requiring Dr. Robinson’s consent to an assignment.
22 The trial judge did not err in concluding that the Agreement could not be assigned without Dr. Robinson’s consent. Therefore, the assignment fails.
On the issue of whether the associate agreement could be validly assigned once Dr. Nowak revived R. Robinson PC, the Court of Appeal once again agreed with the trial judge: because it was a personal services contract, once the R. Robinson PC was dissolved, it could no longer perform or accept performance under the contract and the contract terminated. This was in September 2002. It was from this time that the two (2) year and five (5) km non-compete clause started to run. And the breaches of the non-compete were alleged to have occurred in 2008. By that time, Dr. Robbie Robinson wasn’t bound by that clause; as such, the revival of R. Robinson PC had no impact on the case.
Moral of the story: yes, this is a recent Alberta Court of Appeal case (which means it won’t bind an Ontario court), but it’s still a very good case that could apply in Ontario. With respect to contracts of personal service, unless the contract itself has a provision in there that says otherwise, if you’re planning on transferring your practice to your own corporation or a third party purchaser, you may need to get the associate / employee’s consent to the assignment. Now this assignment should be in writing, but it may also end up being given after the fact by the associate / employee by their conduct after the assignment. The best thing to do is to avoid trying to figure out if the associate / employee consented to an assignment and get them to agree in the written contract from the beginning!
