Causing Further ‘Frustration’ To Employers: The Law of Frustration of Contract

Just when employers thought the law of frustration of contract was settled, the Ontario Superior Court of Justice decision, Naccarato v. Costco was released June 15, 2010.

The reason employers were starting to feel comfortable terminating employees for frustration of contract after long periods of absence due to illness, was because of the 2008 Supreme Court of Canada decision, Hydro-Québec v. Syndicat des employé-e-s de techniques professionnelles et de bureau d'Hydro-Québec, section locale 2000 (SCFP-FTQ). This decision essentially confirmed the long-standing principles related to frustration of contract.

In Hydro-Québec, the complainant was an employee who had a number of physical and psychological problems, and her record of absences indicated that she had missed 960 days of work during a seven and a half (7 ½) year period. At the time of her dismissal, the complainant had been absent from work for approximately five and a half (5 ½) months and her attending physician had recommended that she stop working for an indefinite period. The employer had a psychiatric assessment of the complainant, which concluded that the complainant would no longer be able to “work on a regular and continuous basis without continuing to have an absenteeism problem as in the past”.

The complainant filed a grievance, and the arbitrator dismissed the grievance on the basis that the employer had proven that, at the time it dismissed the complainant she was unable for the reasonably foreseeable future, to work steadily and regularly as provided for in the contract. Furthermore, the conditions for her return to work suggested by the union’s expert would constitute undue hardship. The Superior Court dismissed the motion for judicial review of the arbitrator’s decision. The Court of Appeal set aside the Superior Court’s judgment, holding that the employer had not proven that it was impossible to accommodate the complainant’s characteristics. The Supreme Court of Canada allowed the appeal of the Court of Appeal decision.

The Supreme Court held that, the Court of Appeal erred in the test it stated for undue hardship. The Supreme Court further held that, although the employer does not have a duty to change working conditions in a fundamental way, it does have a duty, if it can do so without undue hardship, to arrange the employee’s workplace or duties to enable the employee to do his or her work. If the characteristics of an illness are such that the proper operation of the business is hampered excessively or if an employee with such an illness remains unable to work for the reasonably foreseeable future even though the employer has tried to accommodate him or her, the employer will have satisfied the test.  The employer’s duty to accommodate ends where the employee is no longer able to fulfill the basic obligations associated with the employment relationship for the foreseeable future.  The arbitrator was found to not have erred in law, and there was no justification for interfering with his assessment of the facts.

The Naccarato decision was released two (2) years after Hydro-Québec and shakes up the once settled law in the area of frustration of contract.

Naccarato is a wrongful dismissal action brought by a 37 year old, 17 year employee who was terminated by Costco while on long-term disability. The employee worked as a Return-to-Vendor Clerk for Costco and was absent from work due to illness/injury for approximately four and a half (4 ½) years prior to being terminated for frustration of contract.

It was Costco’s position that:

  • Mr. Naccarato’s employment was terminated as a result of the frustration of his employment contract caused by his long and continuing absence;
  • There was no prognosis as to when Mr. Naccarato could return to employment;
  • Based on Mr. Naccarato’s continued absence from work for approximately five years and his ongoing inability to return to work due to his illness, (confirmed by his physician), his contract of employment had become frustrated; and
  • Mr. Naccarato had been in receipt of long-term disability benefits which required a total disability.

The Court in Naccarato referred to and distinguished the Hydro-Québec decision providing that in Hydro-Québec there was evidence that the doctors were not optimistic regarding the possibility of improved attendance.  In Naccarato, the doctor provided no opinion, with respect to the possibility of attendance in the reasonably foreseeable future.

It was the employee’s position that Costco had not established that there was “no reasonable likelihood of him being able to return to employment in the reasonably foreseeable future”.  Rather, the response of his doctor indicated that he was still attempting treatment through a referral to another psychiatrist, and he did not know when the employee would be able to return to work.

As the onus is on the employer to prove that the contract had become frustrated, the Court in Naccarato held that, although the duration of the illness was significant, a period of five (5) years, the medical evidence did not support a finding that there was no reasonable likelihood of the employee returning to work in the reasonably foreseeable future. The evidence was that the employee was still being treated by his doctor, as a new psychiatrist was being sought.

The Court went on to state in the decision that Costco could have followed up with the doctor to ask further questions with respect to the likelihood of the employee’s return to work in the foreseeable future but it did not do so. By not doing so, Costco did not provide the Court with the necessary medical evidence to support a finding that it is unlikely that the employee will be unable to work in the reasonably foreseeable future. Therefore, Costco did not meet its burden to establish that the employment contract has become frustrated.

What the Naccarato decision means for employers is that, employers often assume that an employee’s absence of a significant period of time must eventually lead to frustration of the employment contract. Although a lower court decision from that of Hydro-Québec, the Naccarato provides that the prognosis of the employee being able to return to work is more important than the period of time the employee has been off due to disability, illness, or injury. Prior to terminating an employee for frustration of contract due to disability, illness or injury, an employer should ensure that it has received medical evidence to support a finding that it is unlikely that the employee will be to work in the reasonably foreseeable future.

The basic principles of law with respect to frustration of contract at common law have essentially remained unchanged. However, the Naccarato decision reminds us that those principles can be used to justify surprising results.

As an aside, employers should also remember the amendments to the regulations under the Employment Standards Act, 2000 and the Ontario Court of Appeal decision, Ontario Nurses' Association v. Mount Sinai Hospital which changed the law of frustration of contract with respect to statutory obligations. An employer many not avoid paying statutory notice and severance pay to an employee who has been terminated in circumstances where the employee becomes unable to attend work due to disability, illness or injury and the contract is frustrated.

For any questions or for assistance in understanding the above referenced decisions please contact us.

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