Mar 19, 2019

Ontario superior court confirms that frustration of contract is a two-way street

Hoekstra v Rehability Occupational Therapy Inc., 2019 ONSC 562 (CanLII)

The legal doctrine of frustration of contract is well known to employment lawyers but its application is not all that intuitive to the average employer or employee. In the recent case of Hoekstra v. Rehability Occupational Therapy Inc., 2019 ONSC 562, the Ontario Superior Court of Justice was asked to revisit this doctrine and opine as to whether an employee, as compared to an employer, can ever assert frustration to end an employment relationship.

What is frustration of contract?

Frustration of contract is a mechanism for severing an employment relationship in select circumstances with a minimum of liability. It is intended to address situations where the employment relationship has been rendered untenable by a change of circumstances beyond the control of the parties.

Take, for example, a fire that breaks out and destroys a small bakery, leaving its employees without work. Or a case where a labourer develops a severe disability that renders him or her unable to work in any capacity for the foreseeable future. These are both somewhat classic examples of where a frustration of contract may arise. Each involves an unknown, unpredicted event (e.g. a fire, onset of disability) which renders the relationship between the employee and the employer “frustrated” due circumstances beyond their control.

Frustration of contract therefore falls outside of the typical categories most people think of when they consider how an employment relationship might end (such as by resignation or dismissal). Likewise, frustration of contract comes with its own considerations with respect to resultant liability.

When a frustration of contract is deemed to have occurred, the employment relationship is considered to have ended without any obligations as between employer and employee. Thus, no ‘notice of frustration’ need be issued nor is any type of severance normally payable to the employee from the employer. There is, however, one small exception to this rule. Pursuant to the regulatory requirements of Employment Standards Act, 2000 (the “ESA”), in select cases where frustration of contract occurs (e.g. frustration due to employee injury or illness) an employer may still be required to pay out minimum statutory termination pay and/or severance pay to an employee upon frustration of the employment relationship.

Who gets to assert frustration of contract?

Most often frustration of contract is seen as an employer remedy. It is frequently used to address situations where an employee lingers on medical leave for years without prospect of return and the employer wants to bring the relationship to an end.

Frustration of contract can also be financially advantageous to an employer. Even if minimum statutory amounts need to be paid to a frustrated employee, this can still be much cheaper than any common-law notice requirements that might otherwise be payable an employee upon a more traditional without-cause dismissal.

It is for this reason that the decision in Hoekstra stands out. Here an employee who had been off work for four (4) consecutive years on disability leave got into a dispute with his employer about his employment status. Ultimately, the situation devolved into litigation.

Before the Court, the employee sought an order that his employment had been frustrated due to disability and asked that he be paid his statutory entitlement to termination and severance pay as required by the ESA. The employer, by contrast, took the position that frustration of contract “requires an act of an employer” and thereby cannot be triggered by an employee’s unilateral assertion of the same.

The Court sided with the employee and affirmed the idea that frustration of contract may be asserted by either employee or employer. No “act of an employer” is required. On this subject, Justice Mitchell noted:

Frustration of contract occurs as a matter of law. Once circumstances exist that have the effect of frustrating the terms of a contract, the contract is deemed terminated. In my view, neither party to the contract must take any steps to effect that result. This is particularly so in the case of frustration due to illness or injury which is presumptively beyond the control of both the employee and the employer.

A contract of employment is frustrated when “there is no reasonable likelihood of the employee being able to return to work within a reasonable time.” The fact that a party to the employment contract takes the position that the contract has been frustrated, whether in support or defence of a claim, does not have the effect of deeming a contract frustrated. [emphasis added]

Lessons Learned

Determining when a possible frustration of contract exists can be a complicated endeavour and legal assistance should always be sought before taking any position as to its application. Furthermore, in light of the decision in Hoekstra, employers must now also be prepared to face a possible increase in the number of employee-asserted frustration of contract claims. Often employees with such possible claims may linger on an employer’s books for years (subject to being off work on medical leave for an indeterminate period). Accordingly, employers would be well-advised to assess possible liabilities that may exist in this regard rather than assume any claims of frustration of contract are within the control of an employer-alone.

This article was originally published on March 15, 2019 on First Reference Talks.