My Frustration, Your Frustration

The long wait for guidance from the BC courts regarding the defense of "frustration of contract" is over.

Robert Smithson, whose employment law articles are some of the best and no-nonsense we’ve seen on the subject of COVID-19, provides his perspective. 

The original version of this article can be found on Smithson Employment Law Corporation. 

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When the COVID-19 pandemic rolled across North America last March, employment lawyers started to talk about the legal concept of “frustration of contract”.  It seemed like one of the more likely defences for employers against wrongful dismissal claims arising from shutdowns, layoffs, etc.

In that timeframe, however, we really didn’t have much to go on when mulling whether judges would buy into the concept that the pandemic has served to frustrate employment relationships.  We’re only now starting to receive guidance from the courts.

The B.C. Supreme Court has recently released the first decision in this province in which the “frustration” defence was tested.  Unfortunately for employers, the outcome was not positive.

Verigen v. Ensemble Travel Ltd. – The Facts

The plaintiff, Deidre Verigen, sued her former employer for damages for wrongful dismissal after a pandemic-induced layoff which ultimately became a termination.  Ensemble defended itself with the assertion that the pandemic had frustrated the employment relationship and, hence, Ms. Verigan was not owed any severance (pay in lieu of notice).

Ms. Verigan was initially laid off by way of a letter as of April 1, 2020. The letter stated that the layoff was temporary and that Ensemble expected a return to work date no later than June 29, 2020.  Ms. Verigan accepted the temporary layoff.

She was not recalled as expected, and was asked to sign a letter extending the temporary layoff period, which she did. By letter dated June 17, 2020, the period was extended from June 29, 2020 until July 17, 2020, with an anticipated return to work date of July 20, 2020.  The layoff was then extended, again, with an anticipated return to work date of August 31, 2020.

Ms. Verigen never did go back to work for Ensemble.  She was notified of her termination on August 24, 2020 and was paid two weeks’ salary in lieu of notice.

Ensemble contended that Ms. Verigen’s contract of employment had been frustrated by the pandemic.  It relied on the “global collapse in consumer demand for travel and the associated loss of the market for the kind of work that she was hired to do”, and on the fact that she was required to spend “up to 50%” of her time travelling, which she was precluded from doing due to public health orders.  Ensemble asserted that its very survival as an operating business had been in question.

Ms. Verigen opposed Ensemble’s “frustration” defence, asserting that where performance under a contract has merely become more onerous, expensive or less remunerative, the test for frustration has not been met.  She argued that there can have been no frustration here because performance by Ensemble “had not been rendered impossible by the pandemic”.

Frustration of Contract – The Law

The Court set out the leading authorities on the concept of “frustration of contract”.  In essence…

“[16]  … So perhaps it would be simpler to say at the outset that frustration occurs whenever the law recognizes that without the fault of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.

[17]  In KBK, at para. 14, Braidwood J.A. also expressly approved of Justice Sigurdson's summary of the test for frustration in Folia v. Trelinski (1997), 14 R.P.R. (3d) 5 (B.C.S.C.) at para. 18:

In order to find that the contract at issue has been frustrated the following criteria would have to be satisfied. The event in question must have occurred after the formation of the contract and cannot be self-induced. The contract must, as a result, be totally different from what the parties had intended. This difference must take into account the distinction between complete fruitlessness and mere inconvenience. The disruption must be permanent, not temporary or transient. The change must totally affect the nature, meaning, purpose, effect and consequences of the contract so far as concerns either or both parties. Finally, the act or event that brought about such radical change must not have been foreseeable.”

Verigen v. Ensemble Travel Ltd. – The Decision

The Court rejected the “frustration” defence advanced by Ensemble, concluding that Ensemble’s shortfall of funds did not meet the applicable test.  The Court stated (referring to Ensemble as ETL)…

“[60]         [T]he collapse in the travel market goes to ETL’s “ability to perform”, rather than “the nature of the obligation itself.” …  Although much of the consumer demand driving the business on which ETL and its members depend has abated, at least for the time being, not all of it has, and then not permanently. Moreover, although ETL chose to terminate a large part of its work force in the summer of 2020, at least some positions have been preserved and a recently-opened vacancy has been filled. ETL chose to relinquish Ms. Verigen’s branch of the business with a view to cutting operating costs so that it could better weather an ongoing storm.”

For those reasons, the Court concluded that Ms. Verigen’s employment contract was not frustrated by the pandemic and that she was entitled to damages for wrongful dismissal.

As a result, we have some useful (if unwelcome) guidance.  Businesses which made pandemic-driven decisions – affecting employees - due to an economic shortfall (albeit caused by the onset of the pandemic) won’t be able to rely on the “frustration” defence when its former employees sue for wrongful dismissal. 

The defence will only be available when the continuation of the relationship has effectively been rendered impossible or incapable of being performed.  It appears that bar will be a high one.

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This item is provided for general information purposes only and is not intended to be relied upon as legal advice. Informed legal advice should always be obtained about your specific circumstances.