Frustration of contract occurs when an employment relationship ends due to circumstances outside of the control of either party, and “there is no reasonable likelihood of the employee being able to return to work within a reasonable time.” As a result, the performance of the contract has been rendered impossible.
However, employers often incorrectly rely on frustration to avoid paying full compensation. In many cases, employees may still have a claim for wrongful dismissal. This may occur when an employee is injured in a car accident, has a debilitating illness, and is no longer physically capable of performing the requirements of any position of employment with the employer.
In cases where frustration of contract occurs due to employee injury or illness, the employer remains obligated to pay out Ontario minimum statutory entitlements to termination and severance pay, pursuant to Regulation 288/01 of the Employment Standards Act, 2000.
In some situations, employees may also have overlapping claims depending on how the termination was handled, including constructive dismissal or entitlement to additional severance.
Frustration of contract may also occur in instances of disasters like flood or fire, depending on whether the business operations will continue following the disaster. For example, an employee’s contract may be frustrated following a fire that destroys a whole business. If there is no likelihood of return, there will be no business to provide employment.
As neither party foresaw that risk at the outset of the employment relationship, generally neither employer nor employee owes notice or compensation related to the termination of employment, unless expressly provided for in the employment contract.
Alternatively, if the employer intends to reopen their business, the employment contract would not be frustrated, as the business operations were only paused, and not permanently stopped, as was the case in a recent decision in Clarion Lakeside Inn v. UFCW Local 175, 2022 ONSC 3850.
Foreseeable or Self-Induced Events Are Not Grounds for Frustration of Contract
Foreseeable or self-induced events that result in the employer’s inability to provide work generally do not support a defence of frustration. In these circumstances, the employee may have damages for wrongful dismissal.
For example, reasonably foreseeable risks have been found in circumstances of:
- Retirement or disability of the employer, where the employer is an individual (for example, the retirement of an orthodontist)
- An employer’s voluntary assignment in bankruptcy
- Voluntary closure of the business
In Fazone v. 516400 B.C. Ltd., 2022 CarswellBC 3933 (B.C. S.C.), the British Columbia Supreme Court determined that the employer’s decision to keep the business closed was not frustration of contract, as the government’s COVID-19 pandemic orders had lifted. The employer could have reopened for business, but voluntarily decided not to.
Generally, if a risk of non-performance could reasonably be foreseen by the employer at the outset of employment, it cannot be relied on by the employer as a basis to assert frustration.
Frustration of Contract Due to Illness or Injury in Ontario
Illness or injury may lead to frustration of contract in Ontario, and employees whose employment ends due to illness or injury are entitled to statutory termination entitlements under the Employment Standards Act, 2000.
An informative decision is the case of H. v Rehability Occupational Therapy Inc., 2019 ONSC 562 (CanLII), where the employee was awarded minimum termination entitlements, including severance and termination pay. The Court ruled that frustration of contract had occurred as there was no reasonable likelihood that the employee would be able to return to work within a reasonable period of time.
Employees dealing with termination due to illness or disability should also review their full entitlement to severance pay, as compensation may extend beyond minimum standards.
If you are on a medical leave, employers often rely on frustration of contract to justify termination. However, whether this is valid depends heavily on the specific facts, including the likelihood of your return to work and whether the employer has met its duty to accommodate.
For a more detailed analysis, see our guide on being terminated while on disability leave in Ontario.
Illegality or Change of Status
Changes in legislation that make an employee’s continued employment illegal can constitute frustration; for example, in Ontario there is a law requiring security guards to have clean criminal records. When this law was introduced, it resulted in frustration of contract for security guards with former criminal records.
Also, loss of professional registration or change in status that prevents an employee from performing key job functions may frustrate employment.
Key Takeaways for Employees
There is a high threshold that an employer must meet in order to establish that your employment agreement has become frustrated in Ontario. Many employers misapply this doctrine to limit what they pay employees.
If your employer has claimed frustration, you may still be entitled to compensation through a wrongful dismissal claim or additional severance.
Speak with an employment lawyer before accepting any offer.
If you are an employee who has recently been terminated, or you have developed an illness that requires you to be off work, and your employer has alleged frustration, contact Monkhouse Law Employment Lawyers for a free 30-minute consultation.