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Frustration of Contract

August 26, 2021

Ontario

,

Canada

Issue

Can an employer defend a wrongful dismissal action by arguing that the employee failed to mitigate their damages or frustration of contract when the employee was completely disabled at the time of the termination?

Conclusion

Employees who have been dismissed have a legal obligation to take reasonable steps to mitigate their losses. The burden remains on the employer to show that they have failed in that regard. Making reasonable efforts to mitigate loss does not equate to doing everything possible to help the employer to limit its losses. Former employees are not required to seek employment when they would be prevented from working by a health condition. (Slater v. Halifax Herald Limited)

There can be no obligation to mitigate damages by finding alternate employment where the employee is totally incapable of working. (Brito v. Canac Kitchens)

In Brito v. Canac Kitchens, the employee cabinet maker had been dismissed without cause at age 55 after 15 years' work. The employee found other work at a lower rate, and 16 months after his dismissal underwent surgery for cancer. His action for wrongful dismissal was allowed and he was found to be entitled to 22 months' notice. The employer's appeal was dismissed except regarding punitive damages. Evidence existed that the employee was unable to work due to restrictions imposed by his treating physicians, his continuing condition, and his skills set. The Court of Appeal stated that there can be no obligation to mitigate damages by finding alternate employment where the employee is totally incapable of working.

The doctrine of frustration can apply to employment contracts. In cases where employees are unable to work due to a disabling illness, it has been held that the question is whether the disability prevents the performance of the essential functions of the employee's job for a period of time sufficient to say that, in a practical or business sense, the object of the employment has been frustrated. (Cowie v. Great Blue Heron Charity Casino)

Frustration of contract occurs when a permanently disabled employee cannot return to work because the disability makes it impossible for the employee to perform the contract. In such circumstances, the onus is on the employer to prove that the contract was frustrated. If there is no reasonable likelihood at the time of termination that the employee will be able to return to work within a reasonable period of time, then frustration of contract applies. Put another way, frustration of contract may occur when the contractual obligation is incapable of being performed through no fault of the parties. If the inability to perform the contract continues into the foreseeable future, frustration is made out. The onus is on the employer to prove frustration. (Lemesani v. Lowerys Inc.)

Where an employer pleads that an employee's illness has rendered the employee incapable of doing their job, the onus is on the employer to demonstrate that is the case. Therefore, while the initial onus is on the plaintiff to prove a fundamental breach of the employment contract, once that has been established, the onus shifts to the employer to demonstrate just cause or frustration of the contract by the employee. This shifting onus has been noted in cases involving both wrongful dismissal and constructive dismissal. For the former, the employer has the onus to demonstrate just cause. As for constructive dismissal, particularly in the case of an ill employee, there is little, if any, distinction between termination for just cause and frustration of the employment contract. Illness as a basis for the termination of an employment contract is dealt with under the headings of both frustration and just cause, although the principles are similar, if not the same. Whether a contract has been frustrated due to illness depends on a number of factors including, the terms of the contract, how long the employee is likely to remain sick, the nature of the employment, the nature of the illness, the availability of sick leave and pay, the period of past employment and how long the employer should reasonably be expected to await the employee's return. Generally, with a long-term employee, it is more difficult to prove frustration. Permanent disability does bring about frustration, but temporary sickness does not. Evidence of frustration or just cause is typically very well documented with doctor's reports or other credible evidence attesting to an employee's permanent disability and prognosis. (Irvine v. Gauthier (Jim) Chevrolet Oldsmobile Cadillac Ltd.)

A defendant employer may rely on any just cause or frustration due to disability discovered up to the time of trial, but unknown at the time of termination. (Ciszkowski v. Canac Kitchens)

In Lemesani v Lowerys Inc., the employee sued unsuccessfully for damages for wrongful dismissal, discrimination on the grounds of disability, and punitive damages. The Court stated that the employee had confirmed he was incapable of returning to work and that his statement exemplified the definition of frustration of contract. He could not return to work because his condition made it impossible for him to perform the contract. The claim for wrongful dismissal was therefore dismissed.

Law

In Slater v. Halifax Herald Limited, 2021 NSSC 210 (CanLII), the Court summarized an employee's obligation to mitigate their losses:

[32] Employees who have been dismissed have a legal obligation to take reasonable steps to mitigate their losses. The burden remains on the employer to show that they have failed in that regard. Making reasonable efforts to mitigate loss does not equate to doing everything possible to help the employer to limit its losses. Former employees are not required to seek employment when they would be prevented from working by a health condition. Brito v. Canac Kitchens, 2012 ONCA 61 (CanLII), [2012] O.J. No. 376 (CA).

Termination and Severance of Employment, O Reg 288/01 states when employees are not entitled to severance pay:

Employees not entitled to severance pay

9. (1) The following employees are prescribed for the purposes of subsection 64 (3) of the Act as employees who are not entitled to severance pay under section 64 of the Act:

1. An employee whose employment is severed as a result of a permanent discontinuance of all or part of the employer’s business that the employer establishes was caused by the economic consequences of a strike.
2. Subject to subsection (2), an employee whose contract of employment has become impossible to perform or has been frustrated.
3. An employee who, on having his or her employment severed, retires and receives an actuarially unreduced pension benefit that reflects any service credits which the employee, had the employment not been severed, would have been expected to have earned in the normal course of events for purposes of the pension plan.
4. An employee whose employment is severed after refusing an offer of reasonable alternative employment with the employer.
5. An employee whose employment is severed after refusing reasonable alternative employment made available through a seniority system.
6. An employee who has been guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.
7. A construction employee.
8. An employee engaged in the on-site maintenance of buildings, structures, roads, sewers, pipelines, mains, tunnels or other works.
9. Revoked: O. Reg. 397/09, s. 5.
O. Reg. 288/01, s. 9 (1); O. Reg. 492/06, s. 3; O. Reg. 397/09, s. 3, 5; O. Reg. 95/10, s. 2.

(2) Paragraph 2 of subsection (1) does not apply if,

(a) the impossibility or frustration is the result of,
(i) a permanent discontinuance of all or part of the employer’s business because of a fortuitous or unforeseen event,
(ii) the employer’s death, or
(iii) the employee’s death, if the employee received a notice of termination before his or her death; or

(b) the impossibility or frustration is the result of an illness or injury suffered by the employee. O. Reg. 288/01, s. 9 (2); O. Reg. 549/05, s. 2.

In Brito v. Canac Kitchens, 2012 ONCA 61 (CanLII), the employee cabinet maker had been dismissed without cause at age 55 after 15 years' work. The employee found other work at a lower rate, and 16 months after his dismissal underwent surgery for cancer. His action for wrongful dismissal was allowed and he was found to be entitled to 22 months' notice. The employer's appeal was dismissed except regarding punitive damages. Evidence existed that the employee was unable to work due to restrictions imposed by his treating physicians, his continuing condition, and his skills set. The Court of Appeal stated that there can be no obligation to mitigate damages by finding alternate employment where the employee is totally incapable of working:

(4) Alleged Mitigation Failure

[15] The appellant also argues that, contrary to the requirements of the Plan, the respondent failed to engage in job re-training efforts and to seek alternative employment following March 2005. As a result, the appellant says, the respondent failed to discharge his obligation to mitigate his loss of disability benefits.

[16] I disagree. As I have indicated, there was evidence at trial that the respondent was unable to work after March 2005 due to the restrictions imposed by his treating physicians on suitable work environments, his continuing condition, and his skills set. There can be no obligation to mitigate damages by finding alternate employment where the employee is totally incapable of working.

[17] Moreover, there was no evidence at trial that the respondent was requested and refused to submit to any examination or evaluation required or specified by the appellant or the Plan administrator. Nor was there any evidence that the respondent was ever requested and refused to participate in any vocational rehabilitation plan or that appropriate rehabilitative or vocational training courses were even available to, let alone rejected or ignored, by the respondent.

[18]
In these circumstances, I agree with the respondent that it does not lie in the appellant’s mouth to assert mitigation failure. I would not give effect to this ground of appeal.

In Cowie v. Great Blue Heron Charity Casino, 2011 CarswellOnt 13771, 2011 ONSC 6357 (Div Ct), the Court discussed the doctrine of frustration in the context of employment contracts:

It is not in dispute that the doctrine of frustration can apply to employment contracts: see Marks v. Dartmouth Ferry Commission (1904), 34 S.C.R. 366 (S.C.C.); Wightman Estate v. 2774046 Canada Inc., 2006 BCCA 424, 231 B.C.A.C. 75 (B.C. C.A.) [Wightman Estate]; S.M. Waddams, The Law of Contracts, 5th ed. (Toronto: Canada Law Book, 2005) at 259. In cases where employees are unable to work due to a disabling illness, it has been held that the question is “whether the disability prevents the performance of the essential functions of the employee's job for a period of time sufficient to say that, in a practical or business sense, the object of the employment has been frustrated”: see Wightman Estate, at para. 21; Marshall v. Harland & Wolff Ltd., [1972] 2 All E.R. 715, [1972] 1 W.L.R. 899 (N.I.R.C.); Yeager v. R.J. Hastings Agencies Ltd. (1984), [1985] 1 W.W.R. 218 (B.C. S.C.), at 240, (1984), 5 C.C.E.L. 266 (B.C. S.C.).

In Lemesani v Lowerys Inc., 2017 ONSC 1808 (CanLII), affirmed on appeal 2018 ONCA 270, the employee sued unsuccessfully for damages for wrongful dismissal, discrimination on the grounds of disability, and punitive damages. The Court stated that the employee had confirmed he was incapable of returning to work and that his statement exemplified the definition of frustration of contract. He could not return to work because his condition made it impossible for him to perform the contract. The claim for wrongful dismissal was therefore dismissed:

[137] Frustration of contract occurs when a permanently disabled employee cannot return to work because the disability makes it impossible for the employee to perform the contract. In such circumstances, the onus is on the employer to prove that the contract was frustrated. If there is no reasonable likelihood at the time of termination that the employee will be able to return to work within a reasonable period of time, then frustration of contract applies. See: Nason v. Thunder Bay Orthopaedic Inc., 2015 ONSC 8097, 2015 CarswellOnt 19874, at para. 180.

[138] Put another way, frustration of contract may occur when the contractual obligation is incapable of being performed through no fault of the parties. If the inability to perform the contract continues into the foreseeable future, frustration is made out: Duong v. Linamar Corp., 2010 ONSC 3159, [2010] O.J. No. 2314 at paras 33 – 35.

[139] In Fraser v. UBS Global Asset Management, 2011 ONSC 5448, [2011] O.J. No. 6167, at paras. 28, 29, and 34, the court held that the plaintiff’s employment contract had been frustrated in circumstances where her illness and disability pre-dated the termination of her employment and the disability was permanent, such that she would never be able to return to work. In Fraser, the plaintiff had not worked for three and a half years.
[...]

[178] Alternatively, was the contract frustrated? The onus is on the employer to prove frustration. In my view, the defendant has done so.

[179] The plaintiff submits that since the employer did not inquire about his intentions, the contract was not frustrated.

[180] I do not agree. In my view, the defendant is entitled to rely on periodic reports from the disability insurer as to the employee’s progress and his response to its offer to return to work. It is also entitled to rely on information conveyed by the plaintiff to the defendant’s comptroller that he is not ready to return to work.

[181] The plaintiff advised the defendant that he did not want contact from the managers, who respected his wish for privacy. It does not now lie in his mouth to complain that they did not contact him to ascertain his intentions.

[182] I conclude that the employment contract between the parties was frustrated as of June 30, 2013.

[183] As recently as the trial, Mr. Lemesani confirmed that he was incapable of returning to Lowerys. His statement exemplifies the definition of frustration of contract: Mr. Lemesani cannot return to work because his condition makes it impossible for him to perform the contract. Even his psychologist opined that, should he return to work, it would not have been “productive or long-lived” because of the plaintiff’s personality factors. At the time of termination, there was no reasonable likelihood that Mr. Lemesani would return to work within a reasonable time.

[184] The claim for wrongful dismissal is therefore dismissed.

In Irvine v. Gauthier (Jim) Chevrolet Oldsmobile Cadillac Ltd., 2013 MBCA 93 (CanLII), leave to appeal refused 2014 CanLII 11027 (SCC), the Manitoba Court of Appeal explained the doctrine of frustration in the employment context on the basis of illness:

55 Where an employer pleads that an employee's illness has rendered the employee incapable of doing their job, the onus is on the employer to demonstrate that is the case. Therefore, while the initial onus is on the plaintiff to prove a fundamental breach of the employment contract, once that has been established, the onus shifts to the employer to demonstrate just cause or frustration of the contract by the employee.

56 This shifting onus has been noted in cases involving both wrongful dismissal and constructive dismissal. For the former, the employer has the onus to demonstrate just cause. See Convergys Customer Management Inc. v. Luba, 2005 MBCA 29, 192 Man. R. (2d) 129 (Man. C.A.), and Keays v. Honda Canada Inc., 2008 SCC 39 (S.C.C.) at para. 8, [2008] 2 S.C.R. 362 (S.C.C.). As for constructive dismissal, particularly in the case of an ill employee, there is little, if any, distinction between termination for just cause and frustration of the employment contract. See Gielen v. Ste. Anne (Town), 2009 MBQB 292, 247 Man. R. (2d) 105 (Man. Q.B.), in which Beard J. (as she then was), wrote (at para. 21):

Illness as a basis for the termination of an employment contract is dealt with under the headings of both frustration and just cause, although the principles are similar, if not the same. ...
See also Levitt text
4 at pp. 6-37 - 6-72, 6-89 - 6-91.

57 Whether a contract has been frustrated due to illness depends on a number of factors including, the terms of the contract, how long the employee is likely to remain sick, the nature of the employment, the nature of the illness, the availability of sick leave and pay, the period of past employment and how long the employer should reasonably be expected to await the employee's return. See Mole at para. 4.229. Generally, with a long-term employee, it is more difficult to prove frustration. See White v. F.W. Woolworth Co. (1996), 139 Nfld. & P.E.I.R. 324 (Nfld. C.A.) at para. 34. Permanent disability does bring about frustration, but temporary sickness does not. See McLean v. Miramichi (City), 2011 NBCA 80, 380 N.B.R. (2d) 398 (N.B. C.A.), and Wightman Estate v. 2774046 Canada Inc., 2006 BCCA 424, 231 B.C.A.C. 75 (B.C. C.A.).

58 Evidence of frustration or just cause is typically very well documented with doctor's reports or other credible evidence attesting to an employee's permanent disability and prognosis. In Gielen, Beard J. found that the employment contract was frustrated after noting that the employee's shoulder injury “according to [the] doctors, would never get better” (at para. 46).

In Ciszkowski v. Canac Kitchens, 2015 ONSC 73 (CanLII), the Court did not find that the plaintiff's contract of employment was frustrated at the point of his termination. It reviewed the jurisprudence to determine when an employee's disability could lead to frustration of an employment contract:

145 In Demuynck v. Agentis Information Services Inc., 2003 BCSC 96, [2003] B.C.J. No. 113 (B.C. S.C.), the Court held that “a defendant employer may rely on any ‘just cause’ or frustration due to disability discovered up to the time of trial, but unknown at the time of termination”: Demuynck at para. 24. The Court came to the same conclusion in Trevitt v. Blanche Equipment Rentals Ltd., 2006 BCSC 94 (B.C. S.C. [In Chambers]) at para. 37, [2006] B.C.J. No. 93 (B.C. S.C. [In Chambers]).

146 In Duong v. Linamar Corp., 2010 ONSC 3159, [2010] O.J. No. 2314 (Ont. S.C.J.) [Duong], the doctrine of frustration as it applied to employment contracts was canvassed. While citing Marshall v. Harland & Wolff Ltd., [1972] 2 All E.R. 715 (N.I.R.C.), the Court held that the question to be asked is: “was the employee's incapacity, looked at before the purported dismissal, of such a nature, or did it appear likely to continue for such a period, that further performance of his obligations in the future would either be impossible or would be a thing radically different from that undertaken by him and agreed to be accepted by the employer under the agreed terms of his employment?”: Duong at para. 35.

147 In Duong, at para. 41, the proposition that the existence of LTD benefits disentitled the employer from relying on frustration to put an end to the contract of employment was rejected:

Mr. Wright contended that if an employee is permanently disabled, the fact that there was an LTD policy available as part of the employment terms means the employer cannot rely on frustration. I do not accept such a broad statement. In this case, the parties did not provide that the contractual relationship would continue in spite of permanent disability. The fact that there is long term disability coverage made available to the employees of Eston, and paid for by them, does not mean that Eston agreed to employ someone with long term disability indefinitely in spite of the employee's inability to work. The policy itself contemplated LTD benefits after severance. It certainly did not provide that employment would continue throughout long term disability, nor could it as it was a policy between employees and Co-operators and Eston was not a party to it.

148 Finally, Mr. McKechnie relied on Fraser v. UBS Global Asset Management, 2011 ONSC 5448, [2011] O.J. No. 6167 (Ont. S.C.J.) [Fraser].9In that case, it was held that frustration, once established, terminated a contract by operation of law and that nothing more need be done: Fraser at para. 15. The Court held that an employer is entitled to rely on evidence disclosed subsequent to the termination to establish frustration of the employment contract at the time of termination: Fraser at para. 30.

149 Mr. Fletcher relied on Dragone v. Riva Plumbing Ltd., [2007] O.J. No. 3710 (Ont. S.C.J.), 2007 CanLII 40543 [Dragone]. At paras. 22–25, the relationship between frustration of an employment contract and the existence of LTD benefits was addressed:

22 The presence of long-term sick leave and disability benefits indicates a greater tolerance for the duration of an employee's absence before frustration occurs. Indeed, it has been suggested that contracting for these benefits may postpone the time of frustration because it may be inferred that the contracting parties anticipated that the employee might take leave for illness. See: Antonacci v. Great Atlantic & Pacific Co. of Canada, [1998] O.J. No. 876 (Gen. Div.), affd. in part [2000] O.J. No. 280 (C.A.); E.E. Mole and M.J. Stendon, Wrongful Dismissal Handbook (3rd ed.) (Markham: LexisNexis Canada Ltd., 2004), chapter B-4.
23 In this regard, Geoff England, Employment Law in Canada (4th ed.) (Markham: LexisNexis Canada Ltd., loose leaf), at para. 18.22 states: It is strongly arguable that if the employee is entitled to and is in receipt of long term disability benefits under his or her employment contract which covers his or her sickness or disability, the doctrine of frustration is inapplicable because the parties will have foreseen the alleged frustrating event and will have allocated its risk accordingly. Indeed, it would appear to fly in the face of the parties' factual intentions if the employer could release a sick or disabled employee and deprive him or her of those very benefits by arguing that the employment contract has been frustrated.

24 Riva Plumbing argued that enough time had passed that Ms. Dragone's contract was frustrated, and Ms. Dragone's counsel conceded that there might come a time when her contract of employment could be frustrated, but he argued that the time had not yet arrived. There was a debate during the argument about whether it would be appropriate for the Court to declare how long Ms. Dragone might have to return to work. However, upon reflection, I think that approach is neither possible nor appropriate.

25 At the present time, it cannot now be said that the contract of employment has been frustrated. Although there has been 14 months of absence from work, there is no evidence that Ms. Dragone's protracted absence is harmful to the company and the presence of long-term disability insurance suggests, at least, that a much longer period than 14 months was anticipated before it could be said that frustration had occurred, and it is arguable that given the long-term disability arrangements, frustration may never occur. I conclude that in the circumstances of the immediate case that Ms. Dragone's contract of employment has not yet been frustrated.

150 Additionally, Plaintiff's counsel relied on Altman, at para. 65, for the proposition that an employee's disability and its effect on frustration must be assessed at the time of dismissal.

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