Could the COVID-19 Pandemic Result in a Frustration of Contract?

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Many businesses have been forced to shut down due to Ontario’s Emergency Management and Civil Protection Act, which is an emergency declaration that has been extended until June 2, 2020.  These are uncertain times and the fact is that the pandemic may have significant, lasting and permanent impacts on business. In particular, the impact of this emergency could radically change the nature of existing employment relationships, and importantly, could even render some existing employment agreements impossible to perform. In such a case, the doctrine of frustration of contract may apply to relieve an employer from the contractual commitments.

The application of the doctrine of frustration is rare in employment circumstances. It typically arises in cases of a permanent disability that prevents an employee from ever returning to the workplace. In other words, the contract of employment becomes impossible to perform. If, by no fault of either party, an unexpected, radical or intervening event has occurred (such as a pandemic) and it becomes impossible to perform, an employment contract could be frustrated and both parties would be discharged from further performance of their obligations under the contract.

Here are some general considerations:

  • A significant drop in business on its own is likely not an adequate basis to result in a frustration of an employment contract. Employers are expected to endure economic slowdown and cannot rely on this doctrine to be relieved of contractual commitments because business has dropped;
  • If your business has remained opened during the pandemic, the doctrine of frustration will be significantly more difficult to assert. In order for the doctrine to apply, “impossibility” of performance is required. So, if your employees are able to work from home, the condition of impossibility is not present. In other words, if measures can be implemented to allow an employee to continue working, the doctrine of frustration will not likely apply; and
  • If the impact of COVID-19 is temporary in nature, the doctrine of frustration will not likely be successful. On the contrary, if the impact is permanent, lasting and radical changes to the business model that existed before the pandemic struck are necessary, the doctrine of frustration may apply.

Employers should consider whether the doctrine of frustration applies. Each employee relationship will need to be assessed on an individual basis. If the doctrine does apply, this may offer employers some relief from onerous contractual commitments, common law obligations such as reasonable notice of termination and/or relief from statutory termination pay as required by the Ontario Employment Standards Act, 2000.  It is important to seek legal advice before taking this position given the high onus that is required and the various exceptions that may apply. Please contact one of our lawyers if you have any questions about the doctrine of frustration.