In the Absence of Force Majeure Clauses, Frustration Pays Off

Last week we examined force majeure clauses within contracts that may relieve a party’s contractual obligations during unforeseen emergencies, often referred to as “Acts of God”. In this article, we will discuss what happens when a force majeure clause is not expressly provided in the contract.

Canadian courts have not implied a force majeure provision in the absence of one, despite the occurrence of a force majeure event. In such circumstances, the doctrine of frustration also known as the doctrine of discharge, may be relied upon to vacate a contract altogether. This equitable remedy accounts for unforeseen events which have irreparably altered the basis of the contract. The doctrine of frustration can be applied broadly to all types of contracts including commercial or employment disputes. The standard to prove frustration is higher than force majeure, and the implications are also different: a force majeure clause will freeze the contractual obligation as it relates to the unforeseen event, whereas, a finding of frustration will effectively end the contract.

Doctrine of Frustration

The Supreme Court of Canada in Naylor Group Inc. v Ellis-Don Construction Ltd., 2001 SCC 58, describes the appropriate use of frustration where: “a situation has arisen for which the parties made no provision in the contract and the performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract.’”

To establish frustration, the relying party must prove that an unforeseen event has radically changed or interrupted the performance of the agreement, making it impossible, or impractical to execute the contract as originally intended. The new event must have been beyond the reasonable contemplation of the parties when they were contracting, and therefore it would be unjust to hold the parties to the agreement under these altered circumstances.

Considerations when applying the doctrine of frustration

• Is there a Force Majeure clause in the contract?
  The doctrine of frustration operates as a last resort, only to be utilized in the absence of a force majeure clause. In other words, parties cannot double dip to rely on both a force majeure clause and the doctrine of frustration, it must be one or the other.

• Was there a supervening event that occurred?
  The event must not have been foreseeable or within the contemplation of either party when the contract was executed. There may also be cases where the non-performance of an integral party to the contract, frustrates the entirety of the agreement.
• Did the event cause a radically different performance of the contract?
  The event must have rendered the performance of the contract substantially different than what the parties initially anticipated. Courts will consider events: that have rendered the performance of the contract impossible; where performance is possible but the purpose of the contract has been undermined; or, where the temporary impossibility has frustrated the contract itself. The courts have established a threshold of a minimum level of radical difference, for example, a task that has simply become more onerous or expensive since it was originally contemplated will not activate the doctrine of frustration.

Successfully establishing frustration terminates the contract from the date of the supervening event. Additionally, Ontario’s Frustrated Contracts Act, R.S.O. 1990, c. F.34 provides for other recourses such as the recovery of past benefits conferred after a contract has been frustrated. The doctrine of frustration is particularly topical in these days of uncertainty when clients are confronting situations that were beyond their contemplation when finalizing their contracts. At this time, it is incumbent on lawyers to be well versed in these contractual defences so damages are well mitigated.

The post In the Absence of Force Majeure Clauses, Frustration Pays Off appeared first on FCL LLP.

Limits on an Employer’s Duty to Accommodate: Frustration of an Employment Contract

When an employee is on long-term disability leave, the employment law regime provides that the employer has a duty to accommodate their employees. One such duty compels employers to preserve the employee’s right to return to work. But, how does the law govern cases where an employee’s absence extends beyond 5 years and the employee has no prospects of returning? How long does the law protect their employment? The Ontario Divisional Court’s recent decision in Katz et al. v. Clark [1] provided insight into such questions. The answer: not indefinitely. The law now dictates that an employer can terminate an employee for frustration of contract, because it is “inherently impossible” to accommodate those who cannot return to work.

In this case, Mr. Clarke had been employed by Katz Group (“Katz”) for 13 years as a Front Store Manager. Due first to depression, and then to a leg injury, he had been on a leave of absence since 2008. In early 2013, when Katz learned that Mr. Clarke was unable to perform essential work duties, and there was no reasonable expectation that he would be capable of performing them in the foreseeable future, Katz advised Mr. Clarke that his employment had been frustrated.

In September 2013, Mr. Clarke’s counsel wrote to Katz that Mr. Clarke “has been working very hard to get well so that he can return to his former employment and perform the essential duties of his position.” In response, Katz requested updated medical information outlining Mr. Clarke’s estimated date of return and prognosis for recovery. Mr. Clarke failed to respond or provide the requested particulars. In December 2013, Katz requested these documents once again. In the absence of a response, Katz terminated Mr. Clarke’s employment. Mr. Clarke commenced an action for wrongful dismissal under the Ontario Human Right’s Code. Katz moved to have the claim dismissed summarily, and the judge dismissed the motion.

On appeal to the Divisional Court, the court found in favour of Katz and held that an employer’s duty to accommodate ends when the employee is no longer able to fulfil the basic obligations associated with the employment in the foreseeable future. If there is evidence that the employee’s disabling condition is permanent, the doctrine of frustration of contract applies.

While this case imposes limits on an employer’s duty to accommodate, those relying on this principle should be advised that there still remains a high threshold to demonstrate that a contract has been frustrated. Without proof that an employee will permanently be unable to discharge their duties, the court may well preserve the employee’s right to return to work despite a long absence.

[1] 2019 ONSC 2188

The post Limits on an Employer’s Duty to Accommodate: Frustration of an Employment Contract appeared first on FCL LLP.