Mission impossible: COVID-19 and frustration of contract

The global pandemic is causing job losses and making workers fall ill – making it difficult to fulfil some employment contracts

Mission impossible: COVID-19 and frustration of contract

This is a frustrating time for small businesses. Many employers have been trying to figure out how to cut costs and keep their businesses afloat during the ongoing COVID-19 crisis. Employers are wondering how to manage their payroll when facing decreased revenue — some have been in the undesirable position of having to reduce employees’ hours or, in some cases, end employment contracts. Given the unprecedented and unforeseeable long-term effects of COVID-19 on business revenue, some employers may be wondering about “frustration” of employment contracts.

Frustration of a contract occurs when, through no fault of either party, the contract becomes impossible to fulfil. This might be, for example, because of a natural disaster — if a fire completely destroys a concert hall, the venue cannot fulfil a contract to have a band perform there. In other words, if an unforeseen event renders it impossible for the contract to be performed as initially agreed, the contract is frustrated and both parties are released from their contractual obligations.

This concept is important in employment law because, generally, employees are not entitled to notice of termination or termination pay under employment standards legislation. For example, Ontario’s Employment Standards Act, 2000 states that the employee’s “contract of employment has become impossible to perform or has been frustrated by a fortuitous or unforeseeable event or circumstance.”

This means that, under Ontario legislation, an employer can terminate a frustrated contract with no notice to the employee as long as the frustration is not the result of the employee’s illness or injury.

So, employers may be wondering, does a job loss caused by a global pandemic qualify as frustration of contract, waiving any requirement for the employer to give notice of termination?

The answer is: maybe, if the employee falls ill.

Employee illness
An employee’s incapacity to return to work due to illness or injury can render a contract frustrated and trigger the termination of the employment contract. However, illness on its own is not a frustrating event: The length of the illness in relation to the duration of the employment contract must be considered. See Nagpal v. IBM Canada Ltd.

Frustration of a contract occurs when an employee becomes ill to the point of being temporarily or permanently incapacitated and, therefore, unable to return to work to perform their regular duties or when the length of the employee’s illness means that it would be unreasonable for the employer to wait any longer for the employee to recover and return to work — as established by the Ontario Superior Court General Division in its 1999 decision Skopitz v. Intercorp Excelle Foods Inc. The onus rests on the employer to establish that the contract of employment has been frustrated.

Illness or injury is an exception to the general rule that an employee will not be entitled to any notice in the event their contract is terminated for frustration. In Ontario, for example, if the contract is frustrated due to an employee’s permanent illness or disability, that employee’s notice entitlement is limited to only the statutory minimum notice and the employee will not be entitled to common law notice. 

In the context of COVID-19, an employer could argue that an employment contract with an employee who has been deemed medically unable to ever return to work is frustrated. Whether an employer could argue that an employment contract is frustrated in the event an employee is absent from work for an extended — but ultimately unknown — amount of time due to COVID-19 has yet to be seen. 

A job loss caused by COVID-19 probably does not qualify as frustration of contract if the employer is facing a loss of revenue or economic downturn resulting in reduction of employees’ hours (or if the employer has put in place temporary layoffs).

Generally, poor or uncertain economic conditions do not justify dismissal of an employee without notice. The doctrine of frustration of contract is not likely to apply in a situation where an employer must lay off or downsize employees due to decreased revenue or a recession — see the Ontario Court of Appeal decision ACT Greenwood Ltd. v. Desjardins-McLeod — particularly if the layoff or economic disruption is not permanent. This is because economic downturns and fluctuation in revenue are generally seen as “reasonably foreseeable” future events when employers and employees are entering into an employment agreement. An employer’s decreased revenue over the course of several months would not be categorized as the same kind of “fortuitous or unforeseeable event” as a natural disaster or an employee’s sudden and permanent disability.

That being said, the current COVID-19 crisis is unique and may have economic consequences on a scale not seen in Canada since the Second World War. It’s possible that the pandemic might qualify as an unforeseeable event beyond the control of the parties similar to other “acts of God” such as tornados, fires or hurricanes that justify frustration of contracts. Employers may be able to argue that a national emergency on such a scale was not foreseeable, and any consequential terminations of employment contracts should be deemed the result of frustration of those contracts.

Considering the novelty of the situation, employers and employees will simply have to wait and see how courts will ultimately treat employment contracts terminated during the COVID-19 crisis. Court decisions will likely be made on a case-by-case basis, depending on the specific facts of each termination.

In the meantime, employers should keep in mind that the doctrine of frustration of contract is not likely to apply to temporary layoffs resulting from an economic downturn. Without a pre-existing contractual provision for temporary layoffs, employees can likely argue that a temporary or indefinite layoff amounts to constructive dismissal — recent pandemic-related changes to temporary layoff provisions notwithstanding — even if the employer considers the contract to be frustrated.

 

For more information, see:

  • Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58 (S.C.C.).
  • Nagpal v. IBM Canada Ltd., 2019 ONSC 4547 (Ont. S.C.J.).
  • Skopitz v. Intercorp Excelle Foods Inc., 1999 CanLII 14852 (Ont. Gen. Div.).
  • Damery v. Matchless Inc., 1996 CanLII 5518 (N.S. S.C.).
  • ACT Greenwood Ltd. v. Desjardins-McLeod, 2019 ONCA 158 (Ont. C.A.).

 

Zoë Roberts is an employment lawyer with Minken Employment Lawyers, an employment law boutique in Markham, Ont. She and her firm can be reached by visiting www.MinkenEmploymentLawyers.ca.

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