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B.C. employer learns that COVID-19 has not ‘frustrated’ all contracts

The COVID-19 pandemic has forced many employers to make difficult decisions regarding their business, workforce, and overall operations.

While no one could have foreseen the pandemic and the havoc it wreaked upon various industries and sectors, a recent decision from the Supreme Court of British Columbia illustrates that employers cannot rely on COVID-19 as a means of frustrating every employment contract.

What does it mean for a contract to be frustrated?

When frustration occurs, the parties to a contract are relieved from fulfilling their contractual duties, because an unforeseeable circumstance or event outside of either party’s control made performance of the contract impossible.

As well, the effect of the disruption must be permanent, as opposed to a temporary change in how the parties are able to perform the contract.

Frustration will not necessarily occur in cases where a contract has become simply more difficult or inconvenient to perform, or where carrying out the contract would result in a material loss. Rather, what matters is that there has been a change that “totally affects the nature, meaning, purpose, effect and consequences of the contract” for one or both parties.

Overview of the case

In Verigen v Ensemble Travel Ltd., the plaintiff sued her former employer for damages after she was terminated without receiving reasonable notice. The employer in question was an international travel agency cooperative that provided programs and services to various travel agencies within Canada and the United States.

The plaintiff began her role as business development director in February 2019. As part of her job duties, she was expected to build and maintain relationships with new and current client agencies. The plaintiff’s position also required her to spend up to 50 per cent of her time travelling.

In March 2020, the employer temporarily laid off half of its staff in response to the pandemic’s impact on the travel industry. The plaintiff was one of those employees.

Over the ensuing months, her temporary layoff was repeatedly extended, while she was provided with ever-changing return to work dates again and again. The plaintiff never did return to work, as she was informed in August 2020 that she had been terminated.

When the plaintiff brought her claim against the company for damages, her former employer took the position that the COVID-19 pandemic had frustrated her employment contract.

In arguing the contract was frustrated, the employer referred to the global collapse in travel, as well as the fact that the services provided by the plaintiff were not in demand.

Similarly, the employer argued that the plaintiff’s position required her to travel, a condition which could not be fulfilled during the pandemic because of public health orders. The employer also provided evidence suggesting that the company’s survival was uncertain in 2020.

Court conclusion

The Court agreed that the collapse of the travel industry certainly impacted the employer’s ability to perform its contract with the plaintiff.

However, the Court also found that the pandemic’s adverse effect on the travel market did not alter the obligations imposed upon the parties to the contract. In other words, this was not a case where the pandemic made the very subject matter of the contract impossible to perform.

Furthermore, while there was certainly less consumer demand for the services provided by travel agencies, this was not a permanent situation. Such companies were still being used by clients, albeit to a lesser extent.

The Court also found that when the employer terminated a significant portion of its workforce in the summer of 2020, some employees were able to maintain their positions with the company. The employer had also hired at least one new employee since the termination.

Ultimately, the Court found that the employer terminated the plaintiff in an effort to cut operating costs and improve its chances of surviving the COVID-19 pandemic.

For all these reasons, the Supreme Court of British Columbia concluded that the plaintiff’s contract had not been frustrated, and that she was entitled to wrongful dismissal damages.

The bottom line

The pandemic has not granted employers a licence to unilaterally change the terms of their employment agreements, despite the challenges faced by some industries.

Accordingly, employers should obtain expert legal advice and guidance concerning terminations and lay-offs resulting from COVID-19.

John Hyde is the managing partner at Hyde HR Law in Toronto. He advises management on all aspects of employment and labour law, including representation before administrative tribunals, collective agreement negotiation, arbitrations, wrongful dismissal defence and human rights.