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Mission Impossible: COVID-19 and Frustration of Contract

By Zoë Roberts

This is a frustrating time for small businesses. Many employers are trying to figure out how to cut costs and keep their businesses afloat during the on-going COVID-19 crisis. Employers are wondering how to manage their payroll when facing decreased revenue – some employers are 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 fulfill. This might be, for example, because of a natural disaster – if a fire completely destroys a concert hall, the venue cannot fulfill 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.[1]

This concept is important in employment law because, generally, employees are not entitled to notice of termination or termination pay under the Employment Standards Act, 2000 if the employee’s “contract of employment has become impossible to perform or has been frustrated by a fortuitous or unforeseeable event or circumstance”.[2]

This means, 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 epidemic qualify as frustration of contract, waiving any requirement for the employer to give notice of termination?

Maybe, if the employee falls ill.

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.[3]

Frustration of 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.[4] 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 discussed above that an employee will not be entitled to any notice in the event their contract is terminated for frustration. 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 notice provided in the Employment Standards Act, 2000 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 is 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 employee’s hours (or if the employer is putting in place ‘temporary layoffs’).

Generally, poor or uncertain economic conditions do not justify dismissal of an employee without notice.[5] The doctrine of frustration of contract is not likely to apply in a situation where an employer must layoff or downsize employees due to decreased revenue or a recession[6] – particularly if the ‘layoff’ or economic disruption is not permanent. This is because economic downturns and fluctuation in revenue are generally seen as a ‘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 exceptional, and may have economic consequences on a scale not seen in Canada since WWII. It’s possible that the COVID-19 crisis might qualify as an unforeseeable event beyond the control of the parties similar to other ‘acts of god’ like 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, even if the employer considers the contract to be ‘frustrated’.

Minken Employment Lawyers is your source for expert advice and advocacy on today’s employment law issues. If you have any questions on COVID-19 and your workplace or are considering a reduction of your workplace, please contact us today at contact@minken.com or call us at 905-477-7011. Go to our website and 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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[1] Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58.

[2] Employment Standards Act, 2000, S.O. 2000, c. 41, O. Reg. 288/01, s. 2(1).

[3] Nagpal v. IBM Canada Ltd., 2019 ONSC 4547 at para 48.

[4] Skopitz v. Intercorp Excelle Foods Inc., [1999] O.J. No. 1543 (Ont. Ct. Gen. Div.) at para 21.

[5] Damery v. Matchless Inc., [1996] N.S.J. No. 229.

[6] ACT Greenwood Ltd. v. Desjardins-McLeod, 2019 ONCA 158.

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