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Can an employer claim frustration because of COVID-19?

5 minute read

A frustration occurs when the terms of the employment contract become impossible to perform through no fault of the employer or the employee. Most employers encounter the term “frustration” in the context of an employee’s medical disability. For example, when an employee, because of a medical condition, has been absent from work and cannot return in the reasonably foreseeable future, a frustration of contract may occur. A finding of frustration, generally speaking, would relieve the employer of their obligation to provide the employee with reasonable notice upon termination. Furthermore, because of a regulation under the Employment Standards Act, 2000 (hereinafter referred to as the “ESA”), an employer may not have to provide termination pay or statutory severance pay owed under the ESA if the employment contract becomes “impossible to perform or frustrated” (see ss. 2(1)4 and 9(1)2 of O. Reg. 288/01). There are exceptions to this general rule, some of which are discussed below, and the employer should always seek out legal advice before trying to claim a frustration for any reason.

The issue of frustration is particularly germane in the context of the COVID-19 pandemic. The pandemic has had a profound impact on the ability of many businesses to remain open; of course, others have been mandated to shut down. The situation is unprecedented. In the circumstances, the question arises: would an employer be able to claim a frustration of contract, and thereby be relieved their obligation to provide reasonable notice and/or termination pay and statutory severance pay under the ESA? The short answer is, we will have to wait and see. The matter will no doubt be litigated in the near future, and the court will have to decide whether it wishes employers to bear the costs resulting from government mandated shut downs and business closures. In our opinion, there is simply no good precedent for this situation. With that said, it is worth returning to first principles in an attempt to provide some insight on how the court may respond.

The first thing to note is that, even where there is a frustration of contract as a result of the COVID-19 pandemic, the employer may still be required to provide the employee with statutory severance pay under the ESA (if the employee is otherwise entitled to it). The reason is that the regulations under ESA provide for an explicit exception to the operation of the doctrine of frustration. Section 9(2)(a)(i) of O. Reg. 288/01 states that the doctrine of frustration will not relieve the employer of their obligation to provide statutory severance pay because of “a permanent discontinuance of all or part of the employer’s business because of a fortuitous or unforeseen event”. Interestingly, the same type of exception does not exist for termination pay owed under the ESA. As a result, even if the court found that the employer was relieved of their obligation under the common law and the ESA to provide notice of termination (or pay in lieu thereof), the employer would still be obligated to provide the employee with their statutory severance pay if their employment was frustrated because the employer had to permanently discontinue all or part of its business due to the COVID-19 pandemic. Therefore, the discussion that follows will generally be limited to the employer’s obligation to provide common law reasonable notice or termination pay under the ESA.

There are some general principles that would help us determine whether or not a frustration has occurred in the circumstances. For example, it is probably not enough that the COVID-19 pandemic has made employing the employee a more expensive proposition for some employers. The court generally expects businesses to have contemplated difficult (even grave) financial circumstances at the time that the contract was agreed upon. Cases have found that a thirty percent drop in business, for example, would not be enough for an employer to claim a frustration of contract (see Smith v. Tamblyn (Alberta) Limited, 1979 CanLII 1036 (AB QB)). Indeed, the jurisprudence on this issue generally supports the proposition that any difficult economic circumstances, no matter how bad it is, would not, in and of itself, justify a finding of frustration. If the court follows this line of cases in the future, it will likely be difficult – for some employers at least – to claim a frustration. For example, the Ontario government has indicated that there are numerous businesses that are an essential service and may remain open during the pandemic. While these businesses may be experiencing serious financial strain, a court may conclude that a frustration has not occurred because it is not impossible for the parties to perform their obligations under the contract.

However, those businesses that have been ordered to shut down, may be in a better position to claim a frustration of contract because they are legally required to close. With that said, the government mandated shut down is only set to last for 14 days, though it may be extended for a longer period of time. If it is not extended past that time, then the question would be whether a 14 day interruption in business would constitute a frustration. In our view, that is unlikely; however, if the closures last longer than 14 days (or are extended indefinitely), which appears to be where we are headed, then it would be more evidence in favour of a frustration of contract.

As is clear from the discussion above, the determination of whether or not a frustration of contract has occurred will be highly circumstantial. It is extremely important that employers receive legal advice before they claim a frustration of contract. At Lerners LLP, we are ready, willing, and able, to provide you with the advice you need to make an informed decision in these difficult times.

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George A. Hamzo

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