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Frustration of contract

frustration-of-contractThe concept of frustration of contract continues to frustrate employers as we enter the year 2016. Unfortunately, many employers confuse their own frustration with absent employees with frustration at law.

To add to the confusion, there are many myths regarding how long an employer has to wait before they can deem the contract to be “frustrated” and terminate the relationship. The first myth is that there is any such time limit at all. The most common myth is that the employer must wait two years. This seems to have its genesis in the fact that most disability insurance policies provide that benefits will be paid during the first two years if an individual is unable to perform their current job. However, after two years, most policies change and will only pay benefits if the individual is unable to perform any job. What often happens is that the employer learns that the individual on leave has had their disability benefits cut off. The employer then concludes that they are entitled to terminate the employment relationship or, alternatively, to insist that the employee is no longer disabled and must therefore return work. If they do not, the employer then threatens to terminate the employment relationship or “deem the individual to have abandoned their employment”. Either way, they are mistaken.

It is important for employers to understand that eligibility for disability benefits and entitlement to medical leave are two very different concepts. It is entirely possible that an employee will not be entitled to disability benefits, but will still be disabled in the sense that they cannot return to work. As we all know, employers have a duty to accommodate the disabled worker to the point of undue hardship. This can include allowing them to remain on medical leave.

So when can an employer deem the employment contract to have been frustrated by the employee’s inability to work? There is no set amount of time,
and there are many cases in which employees have been off work for years and the courts have said that the contract had not yet been frustrated. The courts will assess whether there is any reasonable likelihood that the individual will be able to return to work in the foreseeable future. If there is, then it is unlikely that the court will conclude that the contract of employment had been frustrated.

This was an issue faced by Costco a few years ago. The employee, Mr. Naccarato, had been off work for approximately five years. Costco terminated Mr. Naccarato’s employment based primarily on his family doctor’s report, which indicated that it would not be possible to state when Mr. Naccarato could return to work. Not surprisingly, Mr. Naccarato sued for wrongful dismissal. Costco lost, primarily because there was no medical evidence to support a conclusion that there was no reasonable likelihood that Mr. Naccarato could return to work in the reasonably foreseeable future. Furthermore, in light of the large-scale operation of Costco, there was no basis upon which to conclude that his ongoing absence hurt the company in any meaningful way. As a result, continuing to accommodate him by allowing him to remain on leave did not constitute undue hardship.

The concept of frustration of contract does not only apply to employment contracts; in fact, its genesis relates to contracts generally. Simply put, a contract is frustrated when the contract cannot be completed through no fault of either party. A classic example is where two parties enter into a property rental agreement. If there is a fire and the property burns down, it will be impossible to complete the contract, but this will not be the fault of either party. In that case, both parties will be relieved of their obligations going forward.

In the context of employment, the fundamental basis of an employment contract is that the individual will work, and the employer will pay them for their labour. If the individual is unable to work, through no fault of their own, then the contract may be frustrated. In that case, the employer is not terminating the employee’s employment, and the employee is not resigning. Rather, the contract simply comes to an end. Historically, that would mean that the individual is not entitled to any compensation arising out of the end of their employment. However, employment standards legislation, including Ontario’s Employment Standards Act, 2000, have been amended to provide for Termination Pay and Severance Pay in the event of frustration of the employment contract. However, no common law notice, or pay in lieu thereof, will be required.

Typically, it is the employer arguing that the contract has been frustrated, as they seek to end the employment relationship. However, in a somewhat unusual case before the Ontario courts last year, the estate of a deceased employee was the party arguing that the contract of employment had been frustrated. In The Estate of Christian Drimba v. Dick Engineering Inc., Mr. Drimba was diagnosed with terminal cancer, took a leave of absence and died a few months later. The issue facing the court was whether Mr. Drimba was entitled to termination or severance pay pursuant. The company took the position that he was not, since his employment ended when he died. However, the employee’s estate took the position that when he was diagnosed with terminal cancer, it was clear that there was no reasonable likelihood that he would return to work, and the contract of employment was therefore frustrated at that time. As a result, he was entitled to termination and severance pay. The court agreed with the estate, finding that the contract of employment had been frustrated by Mr. Drimba’s illness.

Usually, it will be the employer dealing with a long-term absence and questioning whether the contract of employment has been frustrated. It is critical that employers and their counsel remember that there are no hard and fast rules for determining when a contract of employment has been frustrated, and no specific amount of time that the employer must wait. Rather, each case will be decided based upon its own particular facts and, in particular, the medical information available. Unless it is clear that there is no reasonable likelihood of a return to work in the foreseeable future, it is unlikely that a court will find that the contract of employment was frustrated.

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Stuart Rudner

Employment Lawyer at Rudner MacDonald LLP
Stuart Rudner is a leading HR Lawyer and a founding partner of Rudner MacDonald LLP, a firm specializing in Canadian Employment Law. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is the author of You’re Fired! Just Cause for Dismissal in Canada, a textbook and database of summary dismissal cases published by Carswell. Read more
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