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July 29, 2010

Frustration of Contract due to an Employee’s Illness

Authors Malcolm MacKillop and Hendrik Nieuwland

Frustration of contract occurs when, without the fault of either party, a situation that is not contemplated in the contract arises which makes performance of the contract “a thing radically different” from what the parties agreed. When a contract is frustrated, the parties will be relieved of their contractual obligations.

In an important decision for employers, the Ontario Superior Court of Justice has recently found that an employment contract may be frustrated by an employee’s long term illness or disability. This decision is also important in that it is one of the early decisions to apply the new summary judgment rules.

In Duong v. Linamar Corporation, the employee had been approved for long-term disability benefits by the insurer and was found permanently disabled from performing all occupations. The disability insurer was solely responsible for all decisions regarding eligibility for benefits, review of claims and payment of claims.

In September 2008, the insurer discontinued the employee’s LTD benefits for failing to adequately participate in a required rehabilitation program. Although the employee indicated he did not agree with the insurer’s decision and that he intended to appeal, he did not. The employee did not provide any further medical information to the employer justifying his absence from work. He did not make any attempt to return to work or indicate when he might be able to return to work. In February 2009, the employer dismissed the employee on the basis his employment contract had been frustrated due to his permanent illness. By this time, the employee had been absent from work for over three years. The employee was paid notice in accordance with his employment contract and in satisfaction of the Employment Standards Act. Several months after termination, the employee commenced a wrongful dismissal action against the employer. In his statement of claim, he admitted he continued to be “totally disabled” and that his illness was of a “continuous and ongoing nature”. On the same date, the employee commenced a separate action against the insurer for reinstatement of LTD benefits. In that statement of claim, the employee stated that his prognosis for return to work was “very poor” and that his illness was of a “continuous and ongoing nature”.

Summary Judgment 
The employer brought a motion for summary judgment. This motion can be brought at an early stage to have a case dismissed where there is “no issue requiring a trial”. In this case, the employer brought a summary judgment motion on the basis that the employee, by his own admission, continued to be totally disabled and unable to work. Consequently, it was the employer’s position that the employment contract was frustrated and at an end, and there was no issue requiring a trial.

In January 2010, the court’s rules for summary judgment were amended to make it easier for parties to bring motions for summary judgment in more circumstances. Judges now have wider powers on summary judgment motions – they can weigh evidence, make findings of credibility and draw reasonable inferences from the evidence. Also, where there used to be harsher cost penalties for a party who unsuccessfully brought a summary judgment motion, an unsuccessful party will now face the usual cost consequences.

The summary judgment motion was heard by Justice Newbould, who confirmed that matters may be heard by summary judgment “unless it is in the interests of justice for such powers only to be exercised at trial”. This is an important finding for employers. In cases such as this one, it can bring an end to a case before expensive litigation steps are taken, such as examinations for discovery and trial.

Frustration of Contract
Justice Newbould also confirmed that frustration of contract can occur in the employment context where the employee is absent from work due to illness. Each case must be decided on its own circumstances, but the court will consider factors including the term of the contract, how long the employment was likely to last in the absence of illness, the nature of the illness or injury, how long it has lasted and the prospects of recovery.

An argument arose as to whether an employment contract can be frustrated due to illness where the contract provides for LTD benefits. The employee argued that the parties contemplated long term disability at the time of hire and made provisions for these circumstances, and therefore the contract cannot be frustrated on this basis.

Where there is an LTD policy in place, the terms of the policy must be examined. In this case, the LTD policy provided that benefits would continue if employment was terminated as long as the employee continued to meet the definition of “totally disabled”. The court found that the existence of an LTD policy was not a bar to frustration because it was understood that employment could come to an end and benefits would continue. (This leaves open the question as to whether frustration of contract can occur if this were not the case.)

Based on all of the above, the court found that to require the continued employment of the employee in all of the circumstances would have required the employer to do something “radically different from that which was undertaken by the contract of employment”. The court agreed that the employment contract was frustrated by the employee’s ongoing illness and that the employment contract was at an end.

Important Points for Employers
These findings have a number of important and practical implications for employers:

1. Summary judgment has been confirmed as a viable way to have certain employment cases dismissed at an early stage, before significant amounts are spent on legal proceedings.
2. Employment contracts of employees absent from work on long term disability may be frustrated where, among other things:
a. The employee has been absent from work for a significant period of time;
b. The employee continues to be totally disabled and has no foreseeable return to work date; and
c. The LTD policy contemplates that LTD benefits will continue upon termination of employment, or the LTD policy otherwise contemplates termination of employment can occur while receiving benefits.

Because frustration of contract is very fact-dependent, it is recommended that you always seek legal advice to determine whether frustration has in fact occurred before taking any steps to terminate employment on this basis.

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