Frustration of contract, it’s not just about “time”.

July 14, 2015

An employment contract might be considered “frustrated” when an unforeseeable event occurs that makes it impossible to fulfill the terms of the contract.

This recent Ontario Superior Court of Justice case should give employer’s reason for pause and to take a second look at the doctrine of frustration of contract.[1] In this case, an employee of 17 years was diagnosed with terminal cancer and commenced a leave of absence on June 7, 2013.  Shortly thereafter, the employer encouraged the employee to make long term disability and critical illness claims through the company’s benefit provider.  The employer also advised the benefit provider that the claims were forthcoming. On August 29, 2013, the employer confirmed in writing to the employee that his employment would continue with the company until such time that he was well enough to return to work. The employee died on September 17, 2013.

The Court addressed two issues:

1.Whether an employee whose employment is severed by frustration on account of illness or injury is entitled to both termination pay and severance pay pursuant to the Employment Standards Act, 2000 (“ESA”)?

2.Whether the employee’s employment contract was frustrated by his illness, or whether his employment came to an end on account of his death?

Upon review of the ESA and O. Reg. 288/01, which fleshes out the termination and severance of employment provisions under the ESA, the Court concluded the statute provided a prima facie entitlement to termination pay and severance pay when a contract of employment is frustrated due to illness or injury.

With respect to the second issue, the employee’s estate argued that the employee’s contract had in fact been frustrated due to his critical illness. In short, given the serious nature of the employee’s illness, the employer should have known that the chance of the employee being able to fulfill the terms of the contract were near impossible. On this basis the employee’s estate argued that the contract had been frustrated due to illness prior to the employee’s death, and accordingly termination and severance pay under the ESA were owed.

The employer took the view that the employee’s contract came to an end upon his death and therefore under the ESA, the estate was not entitled to any statutory notice and severance payments.  The employer’s view was that termination under the ESA is a unilateral act by the employer, and in this case, the employer took no steps to terminate the contract but rather advised the employee that his position would be held until he was fit to return to work. Furthermore, the employer argued that the act of submitting disability claims amounted to an intention to continue his employment after his diagnosis.

The Court disagreed with the employer’s analysis and concluded that the employee’s contract had been frustrated as a result of his illness and therefore his estate was entitled to statutory notice and severance payments. The Court noted that it was impossible to precisely identify the point when the contract became frustrated. However, in its analysis, the Court focused on the severity of the employee’s illness, the fact that it was unlikely that he would ever return to his employment given that he has been diagnosed with terminal cancer, and that the employer was aware of the diagnosis at all material times.

The decision serves as a warning to employers that with frustration of contract the diagnosis may be more important than the duration of time an employee is away from work. Employers should not simply rely on the fact that an employee has been away for an extended absence, as frustration may occur at any point, and notably much earlier than previously thought. The likely distinguishing factor in this case from other cases is that the Court emphasized that the employer had knowledge of the employee’s condition and his inability to return to work.  As such, each situation must be assessed on its own merit.

[1] Estate of Cristian Drimba v. Dick Engineering Inc., 2015 ONSC 2843

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