Frustration of Contract: How are employment contracts affected during COVID-19?

An employment contract is frustrated when, through no fault of either party, it becomes impossible to fulfill the contract. For example, where a firefighter suffers an injury outside of the workplace, that renders him or her unable to ever again perform the physical activities demanded of the job, the contract can be considered frustrated. According to the Employment Standards Act (“ESA”), an employee is not entitled to notice of termination or termination pay when the employment contract “has become impossible to perform or has been frustrated by a fortuitous or unforeseeable event or circumstance”. However, employees whose contract has been frustrated continue to be entitled to termination and severance pay if the contract has been frustrated by reason of illness or injury, and to severance pay only, if the reason is the permanent closure of the business (see ESA, O. Reg. 288/01). Similarly, at common law, the concept of frustration applies to contracts that, through no fault of any party, become impossible to perform or radically different as a consequence of unforeseen circumstances.

The COVID pandemic has affected the workplace in various significant ways, causing mass layoffs, terminations and business closures. Because of this, the question has arisen as to whether employment contracts have been frustrated as a result of COVID-19. In theory, this could occur with regards to workplaces that have faced serious economic hardship during COVID, and employees who have become ill because of COVID. Where this takes place, employees will be entitled to statutory minimum termination and severance in accordance with the rules mentioned above, being, where a business has closed, the ESA provides only for severance, and where an employee has fallen ill, the entitlement to termination and severance pay is preserved. To address situations where businesses have suffered economic losses as a result of the pandemic, but did not permanently shut down operations, and have laid off employees, the Ministry of Labour has enacted legislation creating the new Infectious Disease Emergency Leave, guiding how employees may be entitled to termination and/or severance pay. For a detailed discussion regarding the Infectious Disease Emergency Leave, see our blog on Layoffs during COVID.

Under the common law, the right to reasonable notice or payment in lieu thereof operates separately from the provisions of the ESA. The Court in Hoekstra v Rehability Occupational Therapy Inc., stated that a contract is frustrated, in terms of an illness or injury, when there is no reasonable likelihood that the employee will ever return to work in a reasonable amount of time. The Court further indicated that an extended medical leave alone is not sufficient. Likewise, economic hardship is generally considered a reasonably foreseeable occurrence, making it difficult to meet the threshold for frustration of contract. At common law, the party attempting to claim that a contract has been frustrated faces an uphill battle as courts are often reluctant to liberate all parties from all contractual obligations absent a very strong reason for doing so.

It is possible that employers will argue that the COVID pandemic has frustrated employment contracts and that no notice should be required for terminations arising from COVID financial difficulties. Even though such difficulties are normally perceived as reasonably foreseeable, it remains to be determined how the courts will view them in the context of a world-wide pandemic and widespread economic lockdowns. With regards to illnesses caused by COVID, it is likely that the Courts will adhere to the view that the contract is not frustrated unless there is no reasonable expectation that the employee can ever return to work or that it would be unreasonable for the employer to wait the time it would take the employee to do so.


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