COVID-19: Frustration of Employment Agreements

In the onset of COVID-19, Bryan & Company’s clients have requested information on frustration of contracts generally, and particularly its application to employment agreements.  The following exploration relates to employment agreements specifically but we would be happy to speak with you about frustration general as well.

As this is not client-specific, this document is merely information and not legal advice. Before taking any steps, we urge you to seek legal advice to confirm that those steps are appropriate at the current time and in light of your specific circumstances. Our main office contacts for Employment Law are at the bottom of this document.

Summary:

Canadian Courts may be more willing to entertain a frustration of contract application due to the current global crisis; however, unless the circumstances of the application provide robust and abundant evidence related to the Marshall Factors (discussed below), it is unlikely that the application will be successful.  This conclusion may change should the government mandates and economic downturn continue for an extended period of time. In any event, it will be tremendously important for any frustration application that the employer can show that all forms of mitigation and cooperation were attempted before the contract was considered frustrated.  No employer should deem an employment agreement frustrated before seeking the advice of a legal professional regarding their specific situation as the legal doctrine of frustration is extremely case specific.

Frustration of Contracts:

The legal doctrine of frustration has an exceptionally high threshold to be successfully invoked and Canadian Courts remain hesitant to grant frustration of contract without an abundance of evidence.  The doctrine, if successfully proven, relieves parties from their contractual obligations when an unforeseen and supervening event occurs, through no fault of the parties, and makes the further performance of the contract either impossible or radically different from the original bargain.  In the event of frustration, both parties are relieved of their duties and responsibilities under the contract. Frustration of contract will not be invoked in cases where performance of the contractual obligations has become onerous, inconvenient or prohibitively expensive.

Initially, the doctrine of frustration was only in the context of commercial contracts, but it has recently been expanded to employment contracts.  As in the commercial context, Courts are very hesitant to invoke frustration because of the potential consequences to the employee.  It is important to note that the common law doctrine of frustration of contract results in the contract being completely terminated and does not allow for relief from specific provisions or reworking of the contract’s language to reach a mutually agreeable solution.

Frustration of Employment Contracts:

It is a well-established law that the doctrine of frustration may apply to employment contracts where an employee is unable to work because of illness or disability.  The rationale in these circumstances is that the illness or disability makes the employment contract impossible to perform.  If the employment agreement has been frustrated rather than terminated by the employer, there is no requirement that the employer provides notice of termination or pay in lieu of notice of termination.  The risk of claiming frustration is that the employer deems the employment agreement to be frustrated in error, stops paying the employee and has constructively dismissed the employee – triggering the requirement of payment in lieu of notice of termination.

Whether an employment contract may be frustrated by illness or disability requires a factual analysis of the specifics of the employment agreement and the requirements of the employee’s position.  In Yeager v. R.J. Hastings Agencies Ltd., 1984 BCSC 533, the British Columbia Supreme Court laid out guidelines for frustration of an employment agreement based on illness or disability.  These are often referred to as the “Marshall Factors” from the English case where they were first implemented:

1. The terms of the contract, including the provisions as to sickness pay;
   1. The terms of the contract are important especially in cases where the contract specifically contemplates a long medical absence by an employee; it is unlikely that such an absence would amount to frustration (Dragone v. Riva Plumbing Ltd.);
2. How long the employment was likely to last in the absence of sickness;
   1. The longer the length of time the employment contract was expected to last absent the illness, the less likely that the contract will be deemed frustrated (Miller v. Fetterly & Associates Inc.).
3. The nature of the employment;
   1. The more nuanced or important the employee’s position is to the employer, the more likely that an illness or disability will amount to frustration as the employer will more quickly need to replace the important position that has been left vacant.  In a scenario where the employee is one of many employees completing the same task and the position does not need to be immediately filled, the likelihood of the contract being deemed frustrated is less (Burgess v. Central trust Co.);
4. The nature of the illness or injury and how long it has already continued and the prospect of recover;
   1. The greater the degree of illness or disability and the longer the employee would be unable to fulfill their contractual obligations, the more likely that the employment agreement will be deemed frustrated (Lippa v. Can-Cell Industries Inc.)
5. The period of past employment (para 86);
   1. The longer the employee’s employment history with the employer, the less likely the employment contract will be deemed frustrated due to illness or disability absence (White v. F.W. Woolworth Co.).

Mitigation:

It is important to note that frustration will likely not be applied unless parties can show that they have tried all available options to mitigate their losses and have cooperated fully with the other parties to try to fulfill their contractual obligations.  There must be no commercially reasonable alternatives that could have mitigated the effect of the event and its impacts on the other party.

COVID-19:

Generally, frustration of an employment contract would only happen due to an illness or disability, however, the global pandemic, COVID-19 introduces an interesting legal question; is COVID-19 an unforeseeable event which may frustrate an employment contract?

COVID-19 has temporarily closed hundreds of businesses due to either the economic downturn, government mandated closures or unavailability of employees due to health concerns or health issues.  This has made many employment contracts unnecessary and may have even fundamentally changed the purpose of the contract from when the parties entered into the agreement.  However, as outlined above, these are only a few of the requirements to reach the extremely high threshold of frustration.

Examples of potentially frustrating events include the destruction of property essential to the performance of the contract (for example, the warehouse where a product is produced) and the introduction of a government directive or law amendment that makes further performance illegal.  In regard to government mandated orders, mere guidance or advisory statements from the government are likely not sufficient to give rise to frustration – each case will depend on its own circumstances.

There is little Canadian caselaw on whether a global pandemic would frustrate an employment contract. The Hong Kong District Court dealt with this issue a number of years ago in the context of a landlord and tenant dispute (Li Ching Wing v. Xuan Yi Xiong, [2004] 1 HKLRD 754). Although Hong Kong caselaw is not binding in Canada, where Canadian caselaw is not available, the analogous facts of this case may be persuasive.  The Court found that the outbreak of severe acute respiratory syndrome (“SARS”) did not frustrate the contract. In that case, there was an outbreak of SARS in the tenant’s building. The tenant argued that the agreement was frustrated because of a 10-day isolation order mandated by the government against the premises. The Court found that the 10 day closure was an insignificant amount time in light of the tenant’s two-year term and that the interrupting event did not significantly change the contractual obligations of the parties. The Court stated that the outbreak of SARS may constitute an unforeseeable event, but did not examine this issue further due to its conclusion that SARS did not significantly change the contractual obligations of the parties.

In Krell v Henry, [1903] 2 KB 740, the defendant rented a hotel room in Pall Mall for the days which the procession for the coronation of King Edward VII was supposed to take place. He had rented the room specifically to see the procession, though this was not expressly stated in the contract. The rate of the room was drastically increased due to the procession and the excellent view the room had.  The contract was held frustrated when the procession was postponed because of the illness of the King. Even though performance was not physically impossible as the defendant could have used and paid for the room on the days in question, in the court’s opinion the defendant would have suffered “unacceptable hardship” if he had been held to the contract in the altered circumstances.

Krell v. Henry is one of the foundational cases for the legal doctrine of frustration of contract in Canada.  Although neither of these cases specifically reflects current Canadian law, they do show how difficult it can be to know which circumstances amount to frustration of contract.

For more information on these topics or any other matters please contact one of the below lawyers from Bryan & Company LLP or access our Employment Law group here and it would be our pleasure to assist.

This article was prepared with the assistance of: