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At what point is a contract “frustrated”, and what does that mean?


Stuart Rudner here with another Rudner Law employment law update.

Today I want to talk about frustration of contract, and to be clear, this doesn’t refer to when someone is frustrated. Frustration of contract occurs at law when the circumstances change and it becomes impossible to fulfill a contract due to no fault of either party. The classic example, which I learned way back in the first year of law school, was when someone signs a lease to rent an apartment but before they even move in, the building burns down. It’s impossible to complete the contract through no fault of either party and therefore the contract simply comes to an end with no other obligation from either side to the other.

In the HR law world, we often talk about frustration of contract in the context of disability. So if the employee becomes disabled, they’re unable to work, at some point the contract will be deemed to be frustrated. But just to be clear, there is no automatic timeline. It’s not after six months, or two years, or any specific period of time. The determining factor is not time, but prognosis. As the courts have said, if there is no reasonable likelihood that the individual will return to work in the foreseeable future, then the contract has been frustrated. That is a test; it’s based upon the existing and current medical evidence. So it could happen immediately after an accident, if the person is clearly never going to return, or someone could be on medical leave for years and years and still not have their contract frustrated. It is very fact specific.

If the contract is frustrated, the employee will get their employment standards act entitlements in Ontario. Every province is a little bit different, but they don’t get any additional severance. In other provinces they may get nothing at all because the contract simply ends.

When the pandemic started, just about exactly three years ago, many organizations put people on temporarily layoff due to the dramatic loss of revenue, and people started to ask, well could we say the contracts were frustrated? This was clearly unanticipated through no fault of either party, and as some of you may recall, our firm was quite vocal in warning employers that were putting people on temporary layoff that those temporary layoffs might be considered constructive dismissals, and in fact the effort to reduce labor costs might end up costing those companies a lot more money than they saved.

We’ve seen the first trickle of case law confirming our view that these were constructive dismissals, but at the same time, some people try to be a bit more creative and ask, what about frustration of contract, wouldn’t that apply when no one foresaw a pandemic that would shut down our economy so dramatically. Now, I have to admit I was initially intrigued by the idea, but after thinking about it I expressed my skepticism. I didn’t think it would apply, especially since the pandemic was temporary, although I have to admit, three years ago we certainly didn’t expect it to go on for as long as it has, but it was not the situation where the building is burned down, for example.

As is usually the case, it takes time for things to wind their way through the courts. We didn’t see any case law for some time, but the decisions that we have seen have confirmed my initial reaction. First one was Fanzone versus Shady Tree Neighborhood Pub, where the plaintiff was a general manager of the pub, this is in British Columbia, and in March of 2020, like a lot of other businesses, the pub was shut down in response to the onset of the COVID-19 pandemic. It didn’t reopen for about two years, interestingly though they were technically allowed to reopen, but with significant capacity restrictions and other operational restrictions. So the pub argued that those restrictions essentially made reopening functionally impossible and that because the general manager was put on a layoff, they said it was due to frustration of contract and they shouldn’t be on the hook for any severance at all. The owner of the pub also mentioned that he and his family were in isolation, so they could not reopen the pub in those circumstances. So they tried a frustration of contract argument; court didn’t buy it, court found that technically the pub was allowed to reopen, many other businesses did. The court also referred to prior case law that held that even when a business remains shut or shuts down completely for bonafide business reasons, that doesn’t amount to frustration of contract. So although the court did not criticize the pub for not reopening, they also found that there was no frustration of contract and this individual, the general manager, was entitled to a severance and the doctrine of frustration had no application.

This really continued a trend that we’ve seen which is that the courts have not been sympathetic to businesses or organizations that put people on temporary layoff due to the pandemic. We’ve seen a few cases now that have confirmed that they are constructive dismissal, although of course every case will be decided on its own facts.

That being said we’ve seen a very interesting successful COVID related frustration of contract argument recently. The case there, I hope I’m pronouncing the plaintiff’s name right, it’s c-r-o-k-e, I think it’s Croke versus VuPoint Systems, so VuPoint does the installations for Bell and as a result of COVID, Bell implemented a policy which required all their technicians to have two doses of the vaccine in order to continue doing installations. So in response, VuPoint put a policy in place which said that all of its employees who would be doing installations had to be vaccinated, however I should note the policy didn’t say that if someone was not vaccinated they would be terminated, but it did say that unvaccinated employees would be prohibited from working for Bell. So the employee in question failed to provide a proof of vaccination and as a result, VuPoint gave him two weeks notice of termination, and the employee responded by saying that he would not disclose his vaccination status due to privacy laws and confirmed that he had no intention of ever becoming vaccinated. So this went to court and the court found that the basis for frustration of contract had been made out, which I find somewhat interesting, but I think relying largely on the fact that this was imposed by a third party, the obligation of vaccination, and the fact that the employee had said he would never be vaccinated (this is not a decision made by VuPoint to say you must be vaccinated, this is one that was really imposed upon them by a third party), so the court found that there was a frustration of contract.

It was kind of like situations where someone is required to have a certain license in order to carry out their job, and if they don’t, or if they have it but they lose it, that can be frustration of contract. So the court made that analogy and eventually found that there was a frustration of contract here.

I have to say this is a bit surprising. I think the court could easily have achieved the same result with a just cause analysis and said that by refusing to be vaccinated there was just cause for termination. Perhaps the court in this case wanted to help the employee by not having a just cause dismissal on their record, but you could argue this was not due to circumstances beyond the party’s control, because being vaccinated was within this employee’s control, although clearly the pandemic was not, but anyways that’s what the courts decided in this case.

I think it’s very important to note the specific facts of the case and I think for anybody watching this, you have to remember that this was very fact specific, seems to have been driven by the court’s desire to reach the outcome of frustration, as opposed to dismissal for cause, but it does continue a trend which is that courts, although they’re not sympathetic to employers putting people on temporary layoff, they are very sympathetic when they have employees who refuse to follow safety requirements, like vaccination or masking requirements. And we’re seeing a lot of the cases where refusing to be vaccinated or refusing to follow masking requirements will be cause for termination.

Bottom line though is the case law related to COVID is just starting to develop. It’s not always easy to predict, many of these cases are very much fact specific, and I need everyone to remember the finding of cause or frustration in one case does not mean that all situations will be treated in the same way.

As always we encourage people to get legal advice before they make decisions. We encourage employers to consult us before they take action that they may pay for later, and we certainly encourage employees to consult us if their employer does something like put them on a temporary layoff, fire them for cause, or anything else. Many employees don’t; they assume that their employer knows what they’re doing and they often end up leaving a whole lot of money on the table. As we always say, if you think you might need an employment lawyer you probably do, so feel free to reach out to us.

Thanks, that’s all for today.

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