Frustration of contract occurs when an employment relationship ends due to circumstances outside of 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. Generally, when the contract is frustrated the employer need not provide the employee with common law notice.
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.
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 the Employer to Claim Frustration of Contract
- 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 and Minimum Employment Standards 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 ESA. An informative decision is the case of Hoekstra v Rehability Occupational Therapy Inc., 2019 ONSC 562 (CanLII), where the employee was awarded minimum termination entitlements including severance and termination pay. The Judge ruled that frustration of contract had occurred as “there is no reasonable likelihood of the employee being able to return to work within a reasonable amount of time.”
Illegality or Change of Status Can Constitute Frustration of Contract
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 Take Aways 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. As a result, if your employer has sought to rely upon the doctrine of frustration in order to limit your entitlements, there is a good chance that you are entitled to additional compensation over what they have offered you.
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, and you have questions about your rights or entitlement to notice of termination, please contact Monkhouse Law Employment Lawyers.