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Frustration of Contract “Occurs as a Matter of Law” and Does Not Require the Employer to Trigger it

Written by on July 14, 2020 in Employment Law Blog, Focus on Canadian Cases

In Hoekstra v. Rehability Occupational Therapy Inc., the Ontario Superior Court confirms that frustration of contract “occurs as a matter of law” and does not require an act of the employer to trigger it.

Last year, the Ontario Superior Court of Justice was asked to revisit the doctrine of frustration of contract.

The Law

Frustration of contract is a mechanism for severing an employment relationship with minimum liability. It generally applies to situations where the employment relationship has become untenable due to a change of circumstances beyond the control of the parties. When a frustration of contract is deemed to have occurred, the employment relationship is considered to have ended without any obligations between employer and employee. The employer need not provide the employee with notice or severance.

There is one important exception to this rule, however.

Pursuant to Regulation 288/01 of the Employment Standards Act, 2000, in cases where frustration of contract occurs due to employee injury or illness, the employer remains obligated to pay out minimum statutory termination pay and/or severance pay to an employee upon frustration of the employment relationship.

This provision has been a useful – and financially advantageous – remedy for employers faced with the situation where an employee has lingered on medical leave for years with no prospect of return, as employers would not be required to pay reasonable common law notice.

The court’s decision in Hoekstra v. Rehability Occupational Therapy Inc. is significant for clarifying the doctrine of frustration of contract.

The Case

Ronald Hoekstra worked as a medical social worker for Rehability Occupational Therapy. In December 2008, he went on medical leave due to symptoms related to severe esophageal and stomach conditions. He returned to work in September 2009. In May 2012, he again went on medical leave. Although Hoekstra wished and intended to return to work when he was able, his health did not improve. On January 26, 2016, after more than three years on a medical leave of absence, Hoekstra’s doctor wrote an opinion that he had not shown improvement where a return to work was viable, and stated that he was unlikely to return to work. A year later, the same doctor stated that Hoekstra “will not return to work” based on his assessment of his patient on October 19, 2016.

Around this time, Rehability changed benefit providers, and disentitled Hoekstra to benefits, taking the position that the employment contract had been frustrated.

Hoekstra brought a claim for constructive dismissal seeking reasonable common law notice, as well as aggravated and punitive damages.

By the time the matter reached the court, Hoekstra had changed his position, seeking an order that his employment had been frustrated and that he be paid his minimum entitlements under the Employment Standards Act. Rehability denied that the contract had been frustrated, stating that frustration of contract is only triggered by an act of the employer.

The court held that it is not an action of the employer that triggers frustration of contract. Rather, it occurs as “a matter of law” once the circumstances exist that frustrate the contract. When circumstances exist that have the effect of frustrating the terms of a contract, it is deemed terminated. Neither party to the contract need take any steps to effect that result. The court noted that this is particularly true in the case of frustration due to illness or injury which is beyond the control of both the employer and the employee. In a case like this one, where “there is no reasonable likelihood of the employee being able to return to work within a reasonable time”, frustration has occurred. The court further noted that the fact that a party to an employment contract takes the position that the contract has been frustrated does not have the effect of deeming a contract frustrated.

The court held that Hoekstra was entitled to termination pay under the ESA based on his salary.

Hoekstra’s claim for punitive and aggravated damages was denied as the court did not find any evidence that Rehability’s conduct was malicious or egregious enough to warrant these remedies. The court noted that the company maintained a positive relationship with Hoekstra the entire time he was on medical leave, and treated him as a valuable employee, even offering him his job back if he was capable of returning after he had filed the lawsuit.

Key Takeaways

Determining when a possible frustration of contract exists can be tricky. Although the court confirmed that frustration of contract is not triggered by an act or statement of a party to the contract, it is less clear when circumstances exist such that the contract is frustrated. In this case, the court found that the contract was frustrated as of October 19, 2016, when Hoekstra’s illness went from “non-permanent” to “permanent”.

Legal assistance should always be sought by an employer or employee in these situations.

Minken Employment Lawyers is your source for expert advice and advocacy on today’s employment law issues. If you have any questions on frustration of contract or any other matter relating to your workplace, please contact us today at contact@minken.com or call us at 905-477-7011. Sign up for our newsletter to receive up-to-date COVID-19 information, including new legislation and Court decisions impacting your workplace.

Please note that this article is for informational purposes only and does not constitute legal advice.

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