Court Does Not Accept COVID-19 as Justification for Frustration of Contract

Written on behalf of Peter McSherry

Following the COVID-19 pandemic, some businesses did not resume their operations, whether by choice or necessity. If an employee could not return to work for reasons related to COVID-19, they may have been offered a severance package. A recent decision from the Supreme Court of British Columbia, while not binding in Ontario, provides insight into how the courts might approach a claim for frustration of contract. British Columbia’s laws around frustration are very similar to those in Ontario. 

Pub does not re-open following COVID-19

In Fanzone v. 516400 B.C. Ltd., the employee had been employed as the general manager of a pub since 1997. The employee had recently renegotiated a salary increase before the COVID-19 pandemic hit. The employer subsequently laid off all the pub’s employees. 

The pub remained closed until the summer of 2022. Following the layoffs, the employer paid each of the employees any outstanding pay they were owed but did not make any severance payments. When the employee sought an appropriate severance package, the employer claimed that the employment contract was “frustrated” and, therefore the employer had no obligations to the employee. 

Was the employment contract frustrated?

The pub re-opened in the summer of 2022. However, restaurants were permitted to open for takeout and delivery just days after the government issued the original closure order in March 2020. The regulations governing how restaurants could operate and provide services changed frequently but the employer maintained that the pub could not re-open due to the size of the kitchen which did not allow for physical distancing. However, several other pubs and restaurants in the same town and of roughly the same size had re-opened. 

In the 2021 decision of Verigen v Ensemble Travel Ltd., a travel agency did not re-open following the initial closure and claimed that there was frustration of contract. In its decision, the Supreme Court of British Columbia highlighted the types of situations that can lead to the frustration of a contract. The Court stated that in order for this to happen, the event that caused the closure cannot be self-induced:

“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 consider 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.”

Employer made decision to close for two years, was not forced to

The Court analyzed the decision of the employer to close the business for over two years and determined that it was a choice and was not required by him. Rather than re-opening for delivery or take-out, the employer chose to keep its doors closed. 

The employer had told the Court that he and his family had isolated themselves for much of the pandemic to limit their exposure to the virus. The Court wrote that while it was sympathetic with this decision, it was not something that was required to be done. The Court contrasted the employer’s decision with other restaurants in the area that managed to abide by COVID-19 restrictions. The Court also discovered that other employees had initiated attempts to collect severance from the employer through the province’s Employment Standards Branch, which found the employer liable to pay severance to those employees amounting to over $10,000. 

Court rejects frustration of contract argument

The Court rejected the employer’s frustration of contract claim and ruled that the employee was entitled to severance. When calculating severance under common law, the Court considered that the employee was 56 years old, had worked for the employer for 23 years, and had made extensive efforts to attempt to find alternative employment. Ultimately, the employee was required to relocate to a different city with more employment options. The Court held that the employer was responsible for providing the employee with 24 months’ payment in lieu of notice.

While this decision does not have any binding impact on Ontario businesses, it does provide useful insight into how Ontario courts might interpret frustration of contract as it results in the closure of businesses, whether during or after COVID-19 pandemic restrictions, that were not out of the employer’s hands. 

Peter A. McSherry Helps Employees Obtain Fair Severance After Termination 

Peter A. McSherry has over 15 years of experience assisting clients in the Guelph area. As a dedicated employment law firm, our team frequently helps manage and resolve issues related to wrongful dismissal, constructive dismissal and severance packages. We regularly work with clients to review severance package offers and help them pursue other options when appropriate severance is not offered. If your employment has been terminated and you have questions about your severance package, reach us online or by phone at 519-821-5465 to speak with a member of our team.