In the realm of employment law, parties enter into contracts with the expectation that each will fulfill their obligations as stipulated. However, unforeseen events can render the performance of those obligations impossible, or radically different from what was contemplated at the outset, such that the parties are discharged of their duties, including the employer’s duty to provide reasonable notice and severance.

This legal doctrine, named frustration of contract, serves as a mechanism to discharge parties from their obligations when circumstances fundamentally alter the nature of the agreement. A frustrated employment contract will occur when performance becomes “radically different” from what was agreed, as established in Davis Contractors v. Fareham, ‘non haec in foedera veni - it was not this that I promised to do.’

The doctrine and possibility of frustration of employment contracts will only apply to indefinite-term contracts and arise in circumstances beyond the parties’ control. This no-fault doctrine instantly terminates the contract, resulting in both employee and employer being relieved of their respective contractual obligations to provide notice of termination, removing the possibility of an employee seeking damages for failure to give notice or severance pay. Neither the employee nor the employer will be entitled to sue for breach of contract.

Frustration of an employment contract most often arises in instances of injury, disability, “Acts of God”, or changes in law, which have recently drawn attention due to the implementation of COVID-19-related requirements in the workplace. Frustration of contract may arise if 

1. a fire destroys a brick-and-mortar business such that it has no likelihood of continuing,
2. government laws and regulations imposing sanctions on a product that makes a business’ performance illegal, or
3. the incapacitation of an employee.

A finding of frustration of contract will not arise when an employee resigns, is terminated for just cause, or if the frustration is self-induced (voluntary termination). A worker who has been hired on a fixed-term or fixed-task contract that naturally ceases to exist will not be found to have a frustrated contract. Similarly, an employer who wishes to rely on frustration of contract is unable to do so if the alleged frustration arose from the business’ normal downturn, increase of costs, strike, or loss of clients, as these are normal events that occur within the ebb and flow of capitalist economies.

Frustration due to Illness or Disability

Case law pertaining to frustration of employment contracts in the face of employee illness or disability is emerging quickly. The existence of a short-term illness or disability, in and of itself, will not result in frustration of contract; however, when evidence indicates that the employee is permanently disabled and unable to perform any job for the foreseeable future, the contract can become frustrated.

In some instances, frustration may occur if the employee’s disability is permanent or long-term, making a return to work impossible or radically different. Once the disability’s permanence and length are established, the employer bears the burden to prove:

1. the employee’s return is unlikely in the foreseeable future,
2. the job cannot be accommodated or modified, and
3. no alternative roles are available.

In making this assessment, the court will decide each case on its own particular facts, utilizing a variety of factors to make this assessment.

Courts may integrate the duty to accommodate engrained in the Human Rights Act into the frustration analysis, as seen in Antonacci v. Great Atlantic. In discharging their burden, the employer must show they have attempted to accommodate, whether through modifying the job if possible or offering alternative roles, before claiming frustration. Per Milloy v. Complex Services Inc., if an employer fails to consider whether the employee’s disability could be accommodated in some job, they may be deemed to have engaged in self-induced frustration, and the doctrine will not apply.

Frustration of contract remains a narrow but significant doctrine within employment law, operating only in exceptional circumstances where performance of the employment agreement becomes impossible or fundamentally altered through no fault of either party. While rare, its implications are significant, automatically terminating the employment relationship and displacing the usual obligations related to notice and severance. Ontario Courts will carefully examine the surrounding circumstances, particularly in cases involving long-term disability or other extreme events, and will subsequently assess the employer’s duty to accommodate under human rights legislation. As such, employers should approach claims of frustration with caution, ensuring they have provided accommodation up to the point of undue hardship before attempting to rely on this doctrine. For both employers and employees, understanding the intricacies of frustration is essential to navigating employment relationships in the face of unforeseen and significant external events.