Frustration of contract

Hard-and-fast rules don’t exist, and the prognosis for return to work — not how long the worker has been off — is a critical factor

Stuart Rudner

By Stuart Rudner

Employment lawyers are often asked about the concept of frustration of contract.

Usually, the question arises when an employee has been off work on disability leave for an extended period of time. Eventually, employers will start to wonder how long they must keep this individual on the payroll and at least notionally keep their job open for them.

Certain myths exist regarding specific fixed time periods. However, the reality is there are no hard-and-fast rules. Many employers are confused by the fact that, after two years of disability benefits, the eligibility requirements will typically change and, in many cases, an individual that was receiving benefits will be cut off.

Some employers assume this means the individual is able to return to work, and when they do not, the employer “deems” them to have abandoned their job. However, employers need to understand the test for eligibility for disability benefits is entirely separate from the assessment of whether an individual can return to work. In many cases, a worker will not be able to return to their job, but will also no longer be eligible for disability benefits. In that case, they remain an employee.

In any event, employers often ask if they have to keep an individual on the payroll after they have been off work for two, three or more years. They may have heard of the concept of frustration of contract and wonder whether it applies after a certain amount of time.

Courts have been clear in saying that there is no specific timeline. Rather, the test courts will apply is whether there is a reasonable likelihood the individual will be able to return to work in the reasonably foreseeable future.

Put another way, a contract of employment will usually only be considered to have been frustrated if it is entirely unlikely that the individual will be able to return to work in the foreseeable future. This will depend very much on the medical evidence and the prognosis provided by medical authorities. It does not matter how long the person has been away from work. Until the contract of employment has been frustrated, or the individual resigns, the employer cannot unilaterally end the relationship, except in very limited circumstances.

The concept of frustration of contract applies to many situations beyond disability — it’s not specific to employment contracts. The classic definition of frustration of contract is a situation where, through no fault of either party, the contract the parties entered into becomes impossible to fulfill. For example, if a party entered into a contract pursuant to which they were going to lease a house, but the house was destroyed by fire before they took possession, it would be impossible for the contract to be fulfilled. At that point the contract, and all associated obligations, would simply come to an end.

In the context of employment contracts, frustration can arise when the individual is no longer legally able to perform their duties. This can happen if, for example, the individual is not eligible to work in Canada. Another situation that has arisen in recent years relates to security guards. Amendments to the applicable legislation a few years ago meant security guards had to be licensed. As a result, an individual who had been working as a security guard could find himself in a situation where, if he did not obtain the licence, he would not be legally entitled to continue working in that position.

The question that arises in such circumstances is what the employer’s obligations would be. Obviously, they could not continue to employ the individual as a security guard. However, would they have to dismiss them on a without cause basis, and therefore provide pay in lieu of notice? In one case involving the Great Blue Heron Charity Casino in Port Perry, Ont., this situation played itself out and the individual sued for wrongful dismissal. At trial, the judge held the contract of employment had not been frustrated due to the employee’s failure to obtain the legally required licence, and the casino was obligated to provide pay in lieu of notice of dismissal.

However, the decision was appealed to the Divisional Court of Ontario, and the casino succeeded in its argument the doctrine of frustration of contract should have applied. This appeal decision was only rendered recently, and it remains to be seen whether it will be appealed further. However, the reasoning of the Divisional Court seems sound. The casino could not have continued to have this individual work in the role of security guard, and they had no obligation to find another position. Therefore, it would not seem fair to require the casino provide “severance pay” when the relationship ended through no fault of the employer.

Stuart Rudner is a partner with Miller Thomson LLP in Ontario, specializing in employment law. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is author of You’re Fired: Just Cause for Dismissal in Canada, published by Carswell. He can be reached at (905) 415-6767 or [email protected]. You can also follow him on Twitter @CanadianHRLaw, join his Canadian Employment Law Group on LinkedIn, and connect with him on Google+.

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