Frustration of Contract in the Age of COVID19

Written by Professor David Doory, York University

In my text The Law of Work, I included a chapter called Termination by Frustration. I wrestled with whether to do so. After all, frustration doesn’t arise all that often.  Maybe I could just drop in a quick summary in another chapter. In the end, I decided to include a short stand-alone chapter since the topic didn’t fit neatly into any other chapter. Now I’m glad I included that chapter.

The COVID19 crisis has unexpectedly raised some interesting questions about frustration that I want to touch on in this short post.  I’ve been given permission by my publisher to post my Termination by Frustration chapter.  It’s Chapter 11 in the Common Law Regime part of the book, although as we will see, frustration is also relevant in the Regulatory Standards Regime as well.

Here is the Chapter. 

The Requirement for Notice of Termination

 Let’s start with some basics.

In Canada, there is a presumption in the law of employment contracts that an employer must provide an employee with “notice of termination” when it wants to end the employment relationship.  The amount of notice is determined by the terms of the employment contract.  The contract might expressly state how much notice is required, or if the contract does not include a written notice of termination clause (or if the clause is unclear), then the courts imply a contract term (see Chapter 9 & 10 of the book) requiring the employer to provide “reasonable notice”.  

Reasonable notice is assessed applying a number of factors, the most of important of which is length of service, and especially for a long service employee, the period of notice can be quite lengthy, as much as 2 years (or, rarely, even more).  The notice can be “working notice” [keep working until the end of the notice period] or pay in lieu of notice [don’t come to work, but the employer keeps paying you and covering your benefits for the period of notice you would have worked].

Now we need to add a layer.  Employment standards (ES) legislation in Canada also requires employers to provide “at least” the minimum amount of notice stated in the legislation.  This “statutory notice” is usually much less than “reasonable notice”.  For example, in Ontario, in most cases, it maxes out at 8 weeks’ notice no matter how long the employee has worked for the employer.  

Employers can usually terminate an employee at any time, for any reason or no reason at all, as long as it provides notice first. There are exceptions to this general rule that the employer does not need a reason to terminate an employee (“just cause” requirements & various public policy exceptions), but we don’t need to worry about those now.  For the purposes of this post, we will assume that the employer has the legal right to terminate the employment contract.  What we are concerned about is whether the employer is required to provide the employee with notice first.

Exceptions to the Rule Requiring Notice of Termination

While usually the employer must give notice of termination, there 4 key exceptions:

1. The employee quits.
2. The contract was for a fixed term or fixed task and the term or task ends.
3. The employee commits a fundamental breach of the contract allowing for “summary dismissal” without notice.
4. When the contract is frustrated.

This is true both in the common law of contracts and under ES legislation, because Canadian governments have incorporated “frustration” into the list of the exceptions in which an employer is not required to provide statutory notice.  For example, s. 2(1)4 of Ontario Reg. 288/01says no notice is required when:

An employee whose contract of employment has become impossible to performor has been frustrated by a fortuitous or unforeseeable event or circumstance.

A similar (but curiously not identical) exception applies to severance pay.  The words “by a fortuitous or unforeseeable event or circumstance” have been dropped.

Therefore, the reason that “frustration” matters is that it permits the employer to terminate the employment contract with no notice to the employee.  This can be a devastating result for an employee, especially one with long service. Take an employee with 15-20 years’ employment.  That employee could be entitled to upwards of 14-20 months’ pay as notice of termination in the common law.  But if the contract ends due to frustration, she is entitled to nothing. 

What is Frustration of Contract? 

The question that arises in the case of COVID19 is whether a job loss caused by a global epidemic qualifies as frustration of contract, waiving any requirement for the employer to give notice of termination.

When I was taught about frustration of contract in law school, I was told that it was an obscure doctrine of contract law that applies when it becomes impossible to perform a contract as anticipated due to an “Act of God”.  The classic example was the British case of Taylor v. Caldwell from 1863 in which a music hall was destroyed by fire leading to the cancellation of performance contracts. The court ruled that the contract was not enforceable because it had become impossible to perform due to unforeseen circumstances that were the fault of neither party. The basic idea was that a contract comes to an end if an unforeseen event renders it impossible for the contract to be performed as initially agreed.  

Over time, the doctrine of frustration has evolved. I was surprised to learn when I left law school and became a labour lawyer that frustration has been applied to cases of employee disability even when the contract itself included clear language describing what happens if the employee becomes disabled and unable to work. That did not seem to be a case of an “unforeseen event”. In the text, I reference a case called Wightman Estate v. 2774046 Canada Inc from the B.C. Court of Appeal that explains how frustration can apply to a disabled worker under a contract that includes long-term disability benefits.  

The courts have said that frustration occurs when a situation arises that is the fault of neither party and either makes it impossible to perform the contract at all, or the performance would be completely different from what the parties intended.^[1] In addition to the permanently disabled employee, other relatively common applications of frustration to employment include when an employee or individual employer dies^[2], and when an employee loses a licence required for the job.^[3]

However, frustration does NOT apply when a business shuts down or needs to terminate employees due to a business downturn of the sort that frequently occurs in capitalist economies. Sometimes businesses just go out of business. I put it this way in the text (citations are in the text):

Frustration does not occur when the reason the original contract cannot be performed is due to the voluntary actions of one of the parties. This is known as self-induced frustration. Thus, an employer’s filing for bankruptcy does not frustrate an employment contract. Nor does the doctrine of frustration apply to terminations or layoffs caused by a business downturn, loss of customers, or a strike by some of an employer’s employees. These are normal events that occur within the ebb and flow of capitalist economies.

D. Doorey, Law of Work, 2nd Ed, p. 171.

Frustration and COVID19

The COVID19 situation raises interesting issues. I think it is fairly clear that frustration would not apply in the case of a company that lays off or terminates employees due to a business downturn but continues to operate. That is just a common scenario of business downsizing that occurs regularly for all sorts of reasons, and it is not frustration.  The clearest example of a situation in which frustration could possibly apply involves a workplace that goes out of business entirely because of COVID19. If a business goes under because of COVID19, have the employment contracts become frustrated?

This is not a straightforward question in my opinion. On one hand, COVID19 might fit within the scope of what we call “Acts of God”. A company is doing fine, and then one day its over because a deadly virus wipes out its customer base and no one is allowed to come to work anyways. Maybe the government ordered the business to close temporarily and that was enough to kill the business. It could be argued that this is analogous to a fire or tornado destroying the workplace, the classic example of frustration involving an unforeseen event that is the fault of neither party.  

On the other hand, the shutdown due to COVID19 could be characterized as just another unfortunate business downturn that some employers won’t survive. If a business loses a major customer and as a result goes under, its contracts are not frustrated.  It has been killed by its customer market drying up. Frustration does not usually apply when a business goes under due to a loss of its market.  

I suspect we will see cases that argue these points percolating into the system months from now as employees claim notice entitlements.  Some employers who have stop operating will defend the claim by arguing frustration of contract.  Our courts and tribunals will be asked to decide whether a deadly global pandemic fits within the doctrine.  We will certainly describe any such cases on this blog if they come along.

I will conclude with an insight from the late, great employment law professor, Geoffrey England, who I quote in my Chapter: “the doctrine of frustration of contract is concerned with who should bear the risk of unforeseen events”.   A finding of frustration in the case of COVID19 would place the risk of economic harm from a pandemic on the shoulders of employees and also taxpayers since employees who do not receive pay from their employers will no doubt be looking to public funds for income. It is an interesting policy debate whether that is a fair distribution of risk in these terrible times. 

David Doorey, “Frustration of Contract in the Age of COVID19” Canadian Law of Work Forum (April 7 2020): https://lawofwork.ca/frustration-of-contract-in-the-age-of-covid19/

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^[1]See discussion in ACT Greenwood Ltd. v. Desjardins-McLeod,2019 ONCA 158 (CanLII), 

^[2]See e.g. McLean v. City of Miramichi,2011 NBCA 80 (CanLII), para. 25.

^[3]See e.g. Cowie v. Great Blue Heron Charity Casino (2011) O.J. No. 5573 [contract frustrated when security guard loses licence legally required to be a security guard]