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What is Frustration of Contract?

Contract frustration occurs when a contractual obligation can no longer be performed, with no fault to either party. This occurs when a situation arises, causing the contract’s performance to become “a thing radically different from that which was undertaken by the contract”. In a recent case, discussed below, the Court ruled that the pandemic cannot cause frustration of contract.

The factors determining contract frustration include:

  • An event in question (which cannot be self-induced) has occurred after the formation of the contract;
  • Due to the event in question, the contract must be totally different from what the parties had intended upon agreeing to the contract;
  • The disruption must be permanent, not temporary or transient.
  • The change must totally affect the nature, meaning, purpose, effect, and consequences of the contract for either or both parties; and
  • The event must not have been foreseeable.

In the employment context, contract frustration usually occurs when an employee has been on leave due to a prolonged illness or disability.

What is the Effect of Contract Frustration?

When contract frustration occurs, the employer and employee are relieved from further performance of the contract. This means that employers must only provide the employee with their notice entitlements under the Employment Standards Act (1 week per year up to 8 weeks) and not the common law entitlements, which are far greater termination entitlements.

Can a Pandemic Trigger Contract Frustration?

Lawyers practicing in the employment law world have long wondered if the COVID-19 pandemic could trigger the frustration of an employment contract. Finally, the British Columbia Superior Court has addressed the question head on and ruled, “no”.

In Verigen v. Ensemble Travel Ltd, 2021 BCSC 1934, the employer’s travel agency was impacted by the pandemic, forcing them to lay-off a group of employees. After five (5) months of lay-off, the employer terminated the Plaintiff, Ms. Verigen. Ms. Verigen sued for wrongful dismissal damages, at which point the employer defended itself by relying on contract frustration.

The Court rejected the employer’s defence, ruling that the:

  • Travel market’s collapse spoke to the employer’s “ability to perform” the employment contract, and was not a permanent event;
  • Employer was able to retain some staff and had recently hired a new employee, demonstrating the event’s temporary nature; and,
  • Employer terminated the Plaintiff’s division in to weather the pandemic’s financial storm—the contract therefore, was not frustrated by the pandemic.

Although a British Columbia case, we can assume a court in Ontario would rule in a similar manner. If you are an employer considering frustration of contract, it is important to speak to a lawyer.

If your employer has claimed your employment contract has been frustrated, contact one of our lawyers right away.   

Author(s)

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2021 Nelligan O’Brien Payne LLP.

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