Pandemic Did Not “Frustrate” Employment Contract Entitling Employee to Wrongful Dismissal Damages

Reasons for judgement were published today by the BC Supreme Court, Vancouver Registry, which could help shed some light on a situation many are facing following this pandemic.  Whether the pandemic amounted to a frustration in a specific employment relationship.

In the recent case (Verigen v. Ensemble Travel Ltd) the Plaintiff worked for the Defendant in a travel industry related job.  When Covid hit the Defendant terminated her position.  They acknowledged they had no cause for doing so but argued the pandemic amounted to a ‘frustration’ of the employment contract.  In disagreeing that the contract was frustrated and finding the Plaintiff was entitled to damages in the amount of five months notice Mr. Justice Milman provided the following reasons:

[53]         ETL contends that Ms. Verigen’s employment agreement was no longer binding on the parties by the time of her termination because it had been frustrated by the pandemic. In particular, ETL relies on the global collapse in consumer demand for travel and the associated loss of the market for the kind of work that she was hired to do. ETL also relies on the fact that Ms. Verigen’s job description called for her to spend “up to 50%” of her time travelling herself, something that, at least at times during the pandemic, she was precluded from doing due to public health orders.

[54]         In addition, ETL has adduced evidence suggesting that, with no retained earnings, its survival was in question in 2020. It says that the kind of work that Ms. Verigen was hired to do will not be available again for some time to come. Nevertheless, with the cost-saving measures it has taken, it now expects to survive the pandemic.

[55]         ETL cites two recent decisions of the British Columbia Civil Resolution Tribunal (the “CRT”) in which other kinds of contracts were found to have been frustrated in the context of the pandemic. In Sohi Vacations Ltd v. Waraich, 2021 BCCRT 218, a contract to provide a return flight from India was found to have been frustrated after all flights to and from India had been cancelled because of the pandemic. In Ward v. S.R.F. Holdings Ltd. dba Academy of Dance, 2020 BCCRT 1446, the claimants were awarded a refund of entrance fees they had paid to attend a dance competition that was cancelled because of the pandemic.

[56]         Ms. Verigen responds that the evidence before the Court in this case does not justify a finding that her employment agreement was frustrated. She relies on other authority holding that where performance under a contract has merely become more onerous, expensive or less remunerative, the test for frustration has not been met (see, for example, Smith v. Tamblyn (Alberta) Ltd., (1979) A.J. No. 594 (T.D.), at para. 14).

[57]         Ms. Verigen argues that there can have been no frustration here because performance by ETL has not been rendered impossible by the pandemic, citing a number of arbitral and administrative rulings made under s. 65(1)(d) of the ESA (see, for example, Labyrinth Lumber Ltd. (Re), [2000] B.C.E.S.T.D. No. 41). That provision stipulates that an employer’s obligation to provide pay in lieu of notice imposed under s. 63 does not apply to an employee who was, “employed under an employment contract that is impossible to perform due to an unforeseeable event or circumstance …”

[58]         I agree with ETL that it is the common law test for frustration (rather than the statutory test under s. 65(1)(d) of the ESA) that applies in this context. The leading authorities setting out that test were conveniently summarised by Warren J. in Wilkie v. Jeong, 2017 BCSC 2131, as follows:

[15]      The purpose of the doctrine of frustration is to relieve a contracting party from its bargain by bringing the contract to an end. The doctrine applies “when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract'”:  Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58 at para. 53, quoting Peter Kiewit Sons’ Co. v. Eakins Construction Ltd., [1960] S.C.R. 361, per Judson J., at 368, in turn quoting Davis Contractors Ltd. v. Fareham Urban District Council, [1956] A.C. 696 H.L. (Eng.), at 729.

[16]      In KBK No. 138 Ventures Ltd. v. Canada Safeway Limited, 2000 BCCA 295 at para. 13, Justice Braidwood for the Court referred to the test for frustration as the “radical change in the obligation” test articulated by the House of Lords in Davis Contractors where Lord Radcliffe stated at 728–29:

So perhaps it would be simpler to say at the outset that frustration occurs whenever the law recognizes that without the fault 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. Non haec in foedera veni. It was not this that I promised to do.

There is, however, no uncertainty as to the materials upon which the court must proceed. “The data for decision are, on the one hand, the terms and construction of the contract, read in the light of the then existing circumstances, and on the other hand the events which have occurred” … In the nature of things there is often no room for any elaborate inquiry. The court must act upon a general impression of what its rule requires. It is for that reason that special importance is necessarily attached to the occurrence of any unexpected event that, as it were, changes the face of things. But, even so, it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.

[17]      In KBK, at para. 14, Braidwood J.A. also expressly approved of Justice Sigurdson’s summary of the test for frustration in Folia v. Trelinski (1997), 14 R.P.R. (3d) 5 (B.C.S.C.) at para. 18:

In order to find that the contract at issue has been frustrated the following criteria would have to be satisfied. 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 take into account 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.

[59]         The issue in Wilkie was whether the imposition of additional purchase tax on a prospective purchaser of real property frustrated the contract of purchase and sale. In answering that question in the negative, Warren J. canvassed various authorities holding that a purchaser’s inability to perform due to a lack of adequate funds will not generally justify a finding of frustration. She summarised the relevant principles as follows:

[38]      That a lack of money to perform does not, generally, give rise to frustration is not surprising because, as noted, frustration arises from a supervening event that results in performance becoming a thing radically different from that which was undertaken. While a lack of money affects a party’s ability to perform an obligation, it does not normally alter the nature or purpose of the obligation itself.

[60]         So too here, the collapse in the travel market goes to ETL’s “ability to perform”, rather than “the nature of the obligation itself.” This case is unlike the CRT decisions relied upon by ETL, where the very subject matter of the contract had been lost due to discrete, pandemic-related events. Although much of the consumer demand driving the business on which ETL and its members depend has abated, at least for the time being, not all of it has, and then not permanently. Moreover, although ETL chose to terminate a large part of its work force in the summer of 2020, at least some positions have been preserved and a recently-opened vacancy has been filled. ETL chose to relinquish Ms. Verigen’s branch of the business with a view to cutting operating costs so that it could better weather an ongoing storm. The fact that the pandemic had admittedly not brought about a frustration of the contract as of July 2020 makes it implausible for ETL to maintain that the contract had become frustrated only a few weeks later.

[61]         For those reasons, I have concluded that Ms. Verigen’s employment contract was not frustrated by the pandemic and that she is therefore entitled to damages for wrongful dismissal.