Apr 18

Frustration of contract “occurs as a matter of law” and does not require an act of the employer to trigger it, Toronto Employment Lawyer


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In a recent decision of the Ontario Superior Court of Justice in Hoekstra v Rehability Occupational Therapy Inc., 2019 ONSC 562 (CanLII) (“Hoekstra”) the Court was faced with an employee’s claim for frustration of contract as well as aggravated and punitive damages.

Under Regulation 288/01 of the Employment Standards Act, 2000 (“ESA”) when an employment contract is frustrated due to illness, the employer remains obligated to pay minimum termination pay and severance as of the date of frustration. The employee still accrues service for the purposes of calculating the minimum entitlement during a sick leave but would stop upon frustration. The employer in this instance would not be required to pay the longer reasonable common law notice.

In Hoekstra, the Plaintiff went on a medical leave of absence on October 15, 2012 and was intending to return to work on December 3, 2012 which then became March 5, 2013. Unfortunately, due to complications the Plaintiff was not able to return to work although he always intended to once able.

After over 3 years on a medical leave of absence, the employee’s doctor on January 26, 2016 wrote an opinion that the employee had not shown improvement where a return to work was viable and stated he was unlikely to return to work. On January 29, 2017 the same doctor stated the employee “will not return to work” based on his assessment of the employee conducted on October 19, 2016.

Around the same time, the employer changed benefit providers disentitling the employee to benefits, however he was covered under his wife’s benefits, who was also an employee of the employer. Upon the employee inquiring as to why he was ineligible for benefits, the employer took the position that the employment contract had been frustrated and no amount was payable to the employee.

The Plaintiff started a claim for constructive dismissal seeking reasonable common law notice, violation of human rights, punitive and aggravated damages.

By the time the claim reached the Court, the positions of the parties had switched. At the disposition of this matter, the employee was now seeking his minimum entitlements under the ESA and the employer was now denying the frustration of contract stating the it requires the employer to trigger frustration and there was insufficient medical evidence of frustration.

The Court’s Decision

The Court reiterated its past decisions on the topic and unequivocally held that it is not an action of the employer that entitles an employee to their minimum entitlements due to frustration. Instead frustration of contract occurs as a “matter of law” once the circumstances exist that frustrate the contract and ‘neither party to the contract must take steps to effect that result”.

As for when there is a frustration of contract the Court stated that is occurs  when “there is no reasonable likelihood of the employee being able to return to work within a reasonable amount of time.” Quoting Edmonton (City) v ATU, Local 569 at para 148 the Court wrote:

“A contextual analysis means that determining “permanent” or “non-permanent” is not a mere accounting exercise in order to determine   whether the length of an illness surpasses a particular numerical threshold.  It is interesting to note that in the common law employment world, the Ontario  Court of Justice found in Fraser v. UBS Global Asset Management, 2011 ONSC 5448 (CanLII)  that a three-and-a-half-year absence was sufficiently    permanent to frustrate a contract, whereas a five-year absence was found to be temporary in Naccarato v. Costco Wholesale Canada Ltd. 2000 ONSC 2651  (Ont. S.C.J.).”

Therefore it is clear that there is no hard and fast rule as to how much time has to lapse in order to meet the definition of frustration but rather the determination is more when the illness went from ‘non-permanent’ to ‘permanent’. The Court held in this instance that the contract was frustrated as of October 19, 2016.

As for the punitive and aggravated damages claim, the employee made a claim that he was entitled to punitive and/or aggravated damages due to the employer’s conduct particularly for withholding the minimum statutory benefits despite previously saying the contract had been frustrated, commencing a vexatious counter claim which it abandoned and extending an offer of employment during the litigation which was a ‘sham’.

The Court declined to provide an award of extraordinary damages.

In this bloggers opinion, the employer escaped liability by not having to pay punitive and/or aggravated damages and this decision should not be taken as a ‘greenlight’ to vigorously litigate statutory minimums, particularly since the employer seemed convinced, when it suited their narrative, that there was a frustration of contract and then switched positions throughout the litigation. Statutory minimums are very much seen as just that – the very basic minimum entitlements – and in most wrongful dismissals are paid while the parties negotiate and/or litigate something in excess of those minimums.

Asserting and/or defending a claim of frustration of contract should be done with great care and sensitivity. Undoubtedly the employee will be dealing with an illness and will have protections under employment and human rights legislation, which also may involve the employer’s duty to accommodate. The subject matter itself will also be very personal to the employee as it is not only the subject to litigation but also likely a transition they are having to face in their everyday life as well.

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