Does the “frustration of contract” doctrine allow employers the right to end employment without giving notice or severance amid a global pandemic?

As the pandemic continues to adversely affect business operations, there are several important considerations for both employees and employers, especially when the pandemic continues to threaten operations for the unforeseeable future. One of these considerations is the doctrine of frustration of contract.

What is Frustration of Contract?

Frustration of contract occurs when a contract is legally terminated due to unforeseen circumstances that are out of the control of the parties involved. For example, frustration of a contract will occur if, by no fault of the parties, a contract is rendered:

(a) impossible to perform;

(b) illegal if performed; or

(c) fundamentally different from its original intentions,

Generally, for an employer to use the doctrine of frustration to justify ending an employment relationship, it would have to prove that the employment contract was either impossible to perform, or would have been fundamentally different from its original intentions.

When an employer terminates an employee without cause, they are required to pay the employee severance pay or provide them with adequate notice under Section 64 of the Employment Standards Act (“ESA”). Before COVID-19, business downturns, closures, and loss of customers were not enough for employers to justify terminating their employees without notice or severance. However, Section 65(1)(d) of the ESA outlines an exception in which the employer will not have to pay severance or provide notice if the employment contract “is  impossible to perform due to an unforeseeable event or circumstance …”

Is COVID-19 an “unforeseeable event” that will render an employment contract “impossible to perform”?

The BC government has stated that determining whether Section 65(1)(d) applies to the termination of employment because of COVID-19 will require a close analysis of individual circumstances and decisions will be made on a case-by-case basis.

As stated, it is up to the employer to show that the contract was “impossible to perform”. The exception will only apply if the employer can prove that COVID-19 is an “unforeseen event” and the resulting business closure makes the contract “impossible”.

The employment contract is not impossible where employees can fulfill their work responsibilities away from the workplace, such as by working from home. Consequently, Section 65(1)(d) of the ESA will not likely apply in situations where a business is laying off employees to meet a lesser demand.

It will also not apply where the contract became impossible to perform because of the deliberate action of one of the parties, or, “self-induced frustration”, such as where an employer files for bankruptcy.

While the legal question of whether the effects of COVID-19 are sufficient to constitute frustration of contract remains outstanding, we encourage employers and employees to work collaboratively to create creative and flexible work arrangements.

You may wish to speak to an employment lawyer to discuss your circumstances and whether notice or pay in lieu of notice is required upon termination of employment in a situation where there is a potential argument that the employment relationship has been frustrated.

DISCLAIMER: The content of this article, and this website generally, is not intended as legal advice and cannot be relied upon as legal advice.  To provide legal advice on your problem, a lawyer must first understand your specific situation.

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