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Frustration of Employment Contracts and Wrongful Dismissal

An interesting, though complicated issue is whether (and when) a contract of employment becomes frustrated by reason of a long-term and permanent disability. Such was the issue that recently confronted the Court in Fraser v. UBS. The case did not consider any human rights issues. The Background In this case, the plaintiff was a long-service employee of some 20.5 years service with the employer. She commenced employment with the employer at age 20. She became ill in 2005 and was off work for 6 months collecting short term disability benefits (STD) by which time, according to the Court, her illness had evolved". She returned to work for 4 months, and then went off again for 6 months on STD. Despite a somewhat positive prognosis regarding a further return to work from an independent medical assessment in 2007, the plaintiff was not able to return to work at the conclusion of the STD period and she applied for long-term disability (LTD) benefits, through RBC insurance. The RBC policy provided that LTD benefits were available for 24 months if a person was disabled, in the context of being unable to perform any of the material and substantial duties of regular employment. After 24 months, disability payments would be determined on the basis of an inability to perform the duties of any gainful occupation. RBC approved the LTD benefits from March 2007 until January 2009 and terminated these on January 31, 2009, according to the court: . on the basis that the plaintiff did not follow medically recommended treatment to assist in her recovery or at least did not provide proof of such as required under the policy. There is a separate lawsuit outstanding related to that decision by RBC insurance. The plaintiff, according to the court, did not advise UBS of any change in her medical prognosis. She did not return to work and did not indicate that she had ceased receiving medical treatment for disability. On June 5, 2009, the employer wrote to her advising that her employment was terminated. The letter provided as follows: UBS has been advised that your long-term disability insurance payments ceased on January 31, 2009. Our understanding is that this is as a result of a sufficient lack of medical evidence for continuing disability payments. Following this, you have had no communications with UBS about your return to work and have not advised that you are able to return to work.

Based on the above, the assumption of UBS is either that you do not wish to return to work and have effectively resigned or you believe that you continue to be totally disabled. In any event, UBS has no alternative but to confirm the termination of your employment, either as a result of your resignation or the fact that your contract of employment has become impossible to perform and has been frustrated. The effective date of your termination of employment will be today, that is, June 5, 2009. The employer, as required under the Employment Standards Act, 2000 (the Act), paid her entitlement to termination and severance pay. In addition, UBS continued her medical, dental and life insurance for an additional three months, in excess of the eight week requirement under the Act. It was acknowledged that the company complied fully with its obligations under the Act. The Issue The central issue was whether the dismissal was occasioned by frustration of the employment contract (as alleged by the employer) or whether it was a wrongful dismissal entitling the plaintiff to damages (as alleged by the employee). Although, as the court observed, this is a fact specific analysis, some helpful legal principles have developed over a long period of time. The court goes through a really nice review of the cases. According to the Court: In relation to employment contracts, where an employee is unable to work because of a disabling illness, the doctrine applies because the permanent disability renders performance of the employment contract impossible, such that the obligations of the parties are discharged without penalty. If there is frustration of contract, the termination is said to be by law, or automatic. Nothing need be done to terminate the contract. See Fazekas v. Ault Foods Ltd., [1989] O.J. No. 913 (S.C.). The trial judge in Duong v. Linamar Corporation (affirmed by the Court of Appeal) put the matter as follows: Frustration of a contract occurs whenever the law recognizes that without default 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. See Davis Contractors Ltd. v. Fareham Urban District Council, [1956] A.C. 696 at 728, per Lord Radcliffe. This decision was reviewed extensively in Fraser. The Court found that Ms. Fraser:

. was and continues to be permanently disabled. She has admitted in both this action and the action against the insurance company that her illness and disability pre-date the termination of her employment that her disability has been continuous and ongoing, that she is totally disabled and her disability is permanent such that she will never be able to work again. There was some dispute about the medical reports that ought to be relied upon and the timing: It is acknowledged that the only medical information that the employer UBS had at the time of the termination was the January 2007 report of Dr. Kerin. Counsel for the plaintiff termed this report very optimistic and suggested that the subsequent reports could not be taken into account in assessing UBS decision to terminate. However, it is clear that UBS was in possession of additional information at the time of termination. This included the reality that Ms Fraser had not worked for three and a half years, that there was no updated medical prognosis or reasonable prospect for being able to return to work, that she had taken no further steps to provide information to her employer to substantiate her illness, and that according to the insurer, she had not participated in or at least reported on her ongoing medical treatment. As well, in the months following the cessation of long-term disability benefits in January 2009, she had taken no steps to appeal the insurers decision. The Court went on: In my view, the plaintiff cannot simply rely on a medical report dated over two years prior to termination, and ignore the other facts known to her employer at the time of the dismissal. While additional medical reports were disclosed after termination, they relate to the time of termination, as well as to subsequent periods of time. The case law in any event supports the reliance on evidence subsequently disclosed: see Dartmouth, supra, at pp. 374-5, Trevitt v. Blanche Equipment Rentals Ltd.,2006 BCSC 94 (CanLII), [2006] B.C.S.C. 94 (S.C.) at para. 37; 2006 BCSC 94 and MacLellan v. H.B. Contracting Ltd., [1990] B.C.J. No. 935 (S.C.) at pp. 9-10; 32 C.C.E.L. 103. The Court found that, on the facts of this case, the contract of employment had become frustrated. As such, there was no obligation on the part of the employer to provide notice or pay in lieu of notice.