'It may be an error to rely on speculation of what might happen in the future'
An Ontario employer’s closure after a fire didn’t frustrate the contracts of its employees because the employer planned to resume operations once repairs were completed, the Ontario Superior Court of Justice has ruled.
It goes to show that frustration of the employment contract is difficult to prove and may not apply even if a disaster shuts down operations, says Ted Flett, an employment lawyer at Zubas Flett Law in Toronto.
“The test with respect to frustration – already outlined by the Supreme Court – is that hardship or inconvenience is deficient for frustration of contract,” says Flett. “It may be an error to rely on speculation of what might happen in the future.”
Fire in early 2020
The Clarion Lakeside Inn and Conference Centre was a hotel in Kenora, Ont. On Jan. 17, 2020, the hotel had a bad fire that significantly damaged the building. The Clarion had to close its doors and lay off employees until it could repair the damage.
The hotel did not provide termination pay or severance pay to employees, so the union filed grievances seeking such pay.
The hotel argued that it was exempt from paying termination pay under the Ontario Employment Standards Act, 2000 (ESA), by a regulation that states employees are not entitled to termination pay where the “contract of employment has become impossible to perform or has been frustrated by a fortuitous or unforeseen event or circumstance.” It also said no severance pay was owing because there had been no “permanent discontinuance” of its business, as required by the ESA for severance pay.
Once the fire investigations were completed, the Clarion embarked on reconstructing the premises. The original estimate was for the rebuild to be completed in the late fall of 2020 or early spring of 2021, but delays shifted the projected completion to early summer 2022. As a result, the collective agreement between the hotel and its union was extended from its original expiry date of August 2020 to Aug. 31, 2022.
Termination pay in arbitration
An arbitrator ordered the Clarion to pay its employees termination pay, finding that there was no frustration because there was no substantial change in the nature of the business and the hotel planned to reopen in the future. The break in operations didn’t render future employment impossible, said the arbitrator. The union’s claim for severance pay was dismissed.
The Clarion appealed the order, arguing that the arbitrator used the wrong test for frustration, pointing out that the Supreme Court of Canada had established that frustration existed when the performance of a contract became “a thing radically different from that which was undertaken by the contract.”
The hotel also argued that frustration should not depend on “an unknown future event” such as the hotel’s reopening, but rather when the layoff of employees reached 35 weeks – the point at which a layoff becomes a termination under the ESA. Since the hotel hadn’t reopened after 35 weeks, the contracts of employment were frustrated, said the Clarion.
Read more: When circumstances exist that frustrate the terms of an employment contract, the contract is terminated warranting termination pay, the Ontario Superior Court of Justice ruled.
The court agreed with the arbitrator in that the nature of the Clarion’s business had not substantially changed because of the fire – the evidence indicated that when the hotel reopened, it would still be a hotel and not a different enterprise. This wasn’t something “radically different” than what employment at the hotel before the fire would be.
The court pointed to the extension of the collective agreement and the hotel’s acknowledgement that it fully intended to reopen, meaning there was no discontinuance of the business. The temporary break in operations did not cause the contract of employment and the collective agreement to become something radically different, said the court.
The fact that the hotel planned to reopen in the future with essentially the same business betrayed the Clarion’s argument that the performance of the contract had become radically different, says Flett.
“The decision outlines the intention, both at termination of employment and 35 weeks thereafter, of the Clarion to repair and eventually resume operations, and that simply doesn't meet the test of frustration of contract.”
No frustration at any point
The court also found that it wasn’t necessary to determine that frustration should set in at 35 weeks – or at any other point, such as the date of termination or the date of the fire – because there was “an immediate and ongoing intention for the employer to recommence operations.” With the hotel closure being temporary, there was no frustration at any point.
“[Announcing a] reopening in the same line of business in which the property closed probably isn't a great first step to arguing frustration of contracts,” says Flett.
“And then even if it was to reopen, I would speculate that the line of business and the purpose of the property would have to be a departure from a hotel, tourism, or hospitality services in some way, shape or form, such that those employees would not be able to find a home at the new business or the new operation.”
The court upheld the order for the Clarion to pay the laid-off employees termination pay and the finding that their employment contracts were not frustrated.
Read more: A federal adjudicator found that a truck driver’s inability to obtain new insurance frustrated his employment contract but didn’t provide just cause for dismissal without termination pay.
The decision reinforces that there is a high standard for proving frustration of the employment contract, something that is particularly important to remember in the wake of many employers shutting down temporarily during the pandemic, says Flett.
“In my practice, I've seen more [frustration claims] recently, given the impact of COVID on businesses,” he says. “And in the decisions or the matters that I've advocated for, I've yet to see frustration of contracts applied.”
“It's a really high standard and I think an employer needs to be really thoughtful about their condition, the employee’s position, and the purpose of litigation.”
See Clarion Lakeside Inn v. UFCW Local 175, 2022 ONSC 3850.
