Frustration Generally
In a broad perspective, a contract is said to be frustrated where an existing contractual obligation has become unable to be completed as there has been such an unexpected change in circumstances to render the contract radically different from the original expectations under the contract. 1
Frustration of Employment due to a Medical Disability
The cases which follow deal with the defence of frustration to a common law claim for wrongful dismissal. These cases must be read in conjunction with the duty to accommodate which is discussed subsequently. The question of accommodation is generally missing in the frustration cases. The law is not so simple as to allow for a termination, without repercussions, due to what is perceived at that time or proven to be later, a serious disability.
A secondary issue may arise if it has been the employer's conduct which caused the medical impairment. Such conduct may expose the employer to claims of intentional infliction of mental distress or negligence and also a human rights violation. These issues are reviewed in Exceptional Damage Claims.
The issue of accommodation is also reviewed in Employment Law Human Rights.
The question of frustration is a complicated one and the failure to understand the issues may lead to significant exposure.
Implied Term or the Intent of the Parties
The traditional test was to imply into the agreement a term that neither party to the contract should be forced to abide by a term which was not contemplated when the contract was originally formed. The Supreme Court in the 2001 Naylor case above concluded that this test was one based on “some fictional intention imputed to the parties”.
The test instead, this Court determined, should be one to examine the terms of the original agreement and determine if the supervening event has occurred without the fault of either party which would result in “new and changed circumstances” which would be “radically different” from the contract in question. This was referenced as “a radical change in the obligation”.
The British Columbia Court of Appeal in its 2006 decision 2 agreed with the above analysis.
This Court rejected the implied term approach to frustration. What the parties would have reasonably agreed, had they addressed the intervening event, was not the test. The correct approach, the Court determined, was to examine the actual contractual terms.
Thereafter followed an analysis of the terms of the LTD policy as one factor to determine the parties’ contractual intent at the time the employment contract was commenced. The question then posed was whether the terms of the contract were wide enough to permit permanent disability without termination. The court concluded that the policy terms contemplated the possibility that the insured could work for a different employer and the policy itself spoke to the prospect of employment ending, in which case coverage would continue.
It would appear surreal to expect that the parties actually read and relied upon the terms of an insurance policy to define their reasonable expectations, particularly given that it is well accepted that a policy of insurance, particularly one of group insurance, is a contract of adhesion. The parties could not have been realistically believed to have read and relied upon the wording of the policy terms to determine this issue. Oddly enough, a second decision referenced below, noted that the insurance policy could not be considered a contractual term as the employer was not a party to it.
The B.C. Court of Appeal decision substituted one fiction, one which was at least based on a rational objective test, for an absurd one, respectfully stated, that the insurance contract may reveal the true intent of the parties.
As a policy matter, the court also noted that had it found that the existence of an LTD insurance policy would defeat the frustration argument, such may be a future deterrent to the provision of such coverage. This may well have been the true motivator to this decision.
Mr. Justice Newbould of the Ontario Superior Court, 3 a 2010 decision, expressed a similar view. The court stated that the test of frustration should not be based on a fictional “implied term” theory, presupposing that the parties had not contemplated the unforeseen event at the time of entering into the agreement and that they would have reasonably concluded such event would end the relationship.
The reality, he said, is that the question should be “should the parties be released from their bargain due to an event which has occurred without either party being at fault”. This seems to be restating the same question, absent the timing as the beginning of the contract and adding hence a contextual analysis reflective of the real life experience of the contract. This decision was confirmed on appeal.
How much this approach revises the end result is highly debatable. The same concept is applied with respect to the supervening event. Did this result in such a radical change? Was this event foreseen in the contract between the parties ? On this last issue, the Supreme Court in Naylor, above, noted that the event was indeed one contemplated and considered by the parties:
The parties to Contract A specifically provided their own test to deal with supervening circumstances by means of a flexible exit option based on reasonableness. As a matter of construction, there is no need here to consider court-imposed remedies based on the allegation of a radical change to the significance of the contractual obligation.
The need to examine the contract to determine its terms takes on added significance in the instance of long term disability insurance as noted below.
Otherwise, the revision to the test makes no significant difference.
The Substantive Test
No matter the theory of the test, the cases below reflect the analysis to determine whether the case shows a defence of permanent inability to perform the tasks of the position, generally considered as the goal no matter the theoretical approach.
The touchstone case for the defence of frustration is a 1903 Supreme Court of Canada decision. 4 Ironically, the case did not deal with a claim for wrongful dismissal but rather was an action brought by the estate of the late Captain Marks for lost wages due to what was asserted to be a short term medical leave. The case law at the time allowed for such a claim as an implied term of the employment relationship. 5
The Court found that the claim for such lost wages could not succeed as the disability was found to be permanent. The quoted passage which follows is one often referenced.
The Court did state its views on the test to show a termination of the relationship, which if effected, would have ended the claim for salary during the period of the disability. The late Captain, as noted by Davies J., writing for the Supreme Court, suffered from “occult internal problems”:
That truth is now admitted and is beyond controversy that on and after the l5th of December, when Captain Marks ceased working, he was permanently disabled from doing his work he had contracted to do. In law, this disablement is termed the act of God. It not only, in my opinion, justified the Commission in formally determining the contract, if they had chosen to take that course, but by rendering it impossible that he could ever afterwards discharge his duties under his contract, the permanent disablement determined and ended the contract.
Justice Wood of the British Columbia Supreme Court 6 considered and adopted the factors to be considered in assessing the defence of frustration as set out in “Marshall”. 7
On the facts of Marshall, the plaintiff had been employed in excess of 22 years and had been absent from work for 18 months when he was terminated. These four factors were found to answer the question of when frustration will be found. These factors, some of which are clearly stale dated, are as follows:
(a) The terms of the contract, including the provisions as to sickness pay – The whole basis of weekly employment may be destroyed more quickly than that of monthly employment and that in turn more quickly than annual employment. When the contract provides for sick pay, it is plain that the contract cannot be frustrated so long as the employee returns to work, or appears likely to return to work, within the period during which such sick pay is payable. But the converse is not necessarily true, for the right to sick pay may expire before the incapacity has gone on, or appears likely to go on, for so long as to make a return to work impossible or radically different from the obligations undertaken under the contract of employment.
(b) How long the employment was likely to last in the absence of sickness – The relationship is less likely to survive if the employment was inherently temporary in its nature or for the duration of a particular job, than if it was expected to be long term or even lifelong.
(c) The nature of the employment – Where the employee is one of many in the same category, the relationship is more likely to survive the period of incapacity than if he occupies a key post which must be filled and tilled on a permanent basis if his absence is prolonged.
(d) The nature of the illness or injury and how long it has already continued and the prospects of recovery – The greater the degree of incapacity and the longer the period over which it has persisted and is likely to persist, the more likely it is that the relationship has been destroyed.
(e) The period of past employment – A relationship which is of long standing is not so easily destroyed as one which has but a short history. This is good sense and, we think, no less good law, even if it involves some implied and scarcely detectable change in the contract of employment year by year as the duration of the relationship lengthens. The legal basis is that over a long period of service the parties must be assumed to have contemplated a longer period or periods of sickness than over a shorter period.
These factors are interrelated and cumulative, but are not necessarily exhaustive of those which have to be taken into account … Any other factors which bear upon this issue must also be considered.
Length of Medical Absence
The decision of Justice Sachs 8 provides a good review of the law relating to frustration and when it may be said that a medical disability may end the employment contract. Skopitz involved a promotions manager who had been off on disability for 15 months due to back problems. No frustration was found. Madam Justice Sachs found that the test was contextual and the question must be examined in each individual circumstance.
Mr. Justice Perell 9 found that the absence of an office clerk for 14 months due to breast cancer was not a frustrating event.
It is to be noted that in Dragone, supra, the court hypothesized that the allowable time period of absence may be less for senior management employees, given the impact on the corporation, and that of positions of lesser responsibility should be allowed longer absences, a view shared by the Marshall decision.
Influence of LTD Policy
The essence of the submission made by the plaintiff is that the policy shows the event of a long term illness was one contemplated by the parties. No matter the theoretical approach, the argument then follows that the event was not unforeseen or one which was a “radical change”.
The court found no frustration on the facts before it, having reviewed the length of the period of disability of 14 months and other factors. The LTD policy arguably, the court stated, could lead to the conclusion that a period of longer than 14 months was anticipated and “and it is arguable that given the long-term disability arrangements, frustration may never occur”. 11 came to a similar conclusion, confirming that the existence of the disability policy demonstrated that the event was foreseeable and further showed that the employer contemplated a long period of absence. This was not the ratio of the decision as the court found that on the facts the plaintiff was not permanently disabled. The trial judge stated:
This is not a case in which it is appropriate to find that the contract of employment was frustrated, if only because the defendant offered its employees sick leave and long term disability plans. This is consistent with the conclusion that the contract of employment contemplated a lengthy period of absence by an employee, especially one with long service and who was injured on the job. Leaving aside the statutory protections for disabled workers in Ontario, the employer could not have justified dismissing Mr. Antonacci in October of 1994 because of his medical condition, as the contract of employment gave him an entitlement to a period of sick leave.
The British Columbia Court of Appeal 12 also considered this same issue.
The trial judge dismissed the action for wrongful dismissal, finding that the plaintiff was totally disabled from working on the date of termination. The argument advanced by the plaintiff that the doctrine of frustration could not apply was not accepted by the Court of Appeal. This Court stated that the fact the parties had predicted the possibility of the event occurring did not preclude the defence of frustration. How this could be a remarkable event under either approach, respectfully, makes no sense:
For the reasons that follow, I do not agree. That the parties have foreseen the possibility of a particular supervening event and have made some provision for it in their contract does not necessarily preclude frustration of the contract upon the happening of the event. The critical question is whether the parties have provided that their contractual relationship will continue despite the radical change in circumstances brought about by the event.
Mr. Justice Newbould in the same 13 May 2010 decision also was of the view that the existence of the long-term disability policy was not reflective of the event as foreseen. 14 He also noted, in applying the test to analyze the contract terms, that the employer was not a party to the disability insurance contract.
This was followed by Weins J. of the Ontario Superior Court, 15 a November 2011 decision in which the same submission was made by the plaintiff. Reliance was placed upon the decision above. This case then reviewed the terms of the insurance policy to determine the intent of the parties and also marched in line with the Doung decision to conclude that the employer was not a party to the agreement.
Each of these latter two decisions is missing the essential argument, namely, that the policy shows the event is not a “radical change” or that it was unforeseen.
The reality is that the existence of a policy of long term disability insurance speaks to the contemplation of the very event pleaded as frustration. The court’s dissection of the terms of the policy is a fictitious exercise of an interpretative process which makes little sense. Employees are given the policy terms on a take it or leave it basis as in any contract of adhesion. There is no logical rationale to frame the argument on the minutiae of the policy.
Justice Newbould’s proposition in Doung that the employer was not a party to the contract ignores the reality of its contribution. Ironically, this case determined that the employer was not a party to the policy, yet the B.C. Court of Appeal concluded it could use the policy to find the contractual intent of the parties. Neither one, it is submitted, makes sense.
It is clear that the argument of the existence of the policy as reflective of the event as a predicted possibility has fallen from favour. The unspoken motivator may well be that such a contrary conclusion in law may cause employers to discard LTD policies altogether, which from a broad policy perspective makes perfect sense, as was boldly noted by the British Columbia Court of Appeal. 16
Duty to Accommodate
The above should be read in conjunction with the duty to accommodate which appears below. Many of the earlier cases said nothing about the duty to accommodate. A finding of frustration, or more acutely, a serious medical impairment, may well give rise to the duty to accommodate.
Statutory Payment
The Ontario Court of Appeal determined that the statute denying the severance sum due to a disability was contrary to the Charter and hence unenforceable, as reviewed here. This case deals with the Ontario severance payment as distinguished from notice.