Ontario Employment Law: Disability and Frustration of An Employment Contract

Frustration of an employment contract occurs when, through no fault of either party, an event occurs that makes the contract impossible to perform.

Under Ontario law, where an employee is suffering from a permanent disability with no reasonable prospect of returning to work in the reasonably foreseeable future, frustration may arise. Where frustration occurs, both the employee and the employer are relieved of their obligations, the employment contract has come to a lawful, albeit unfortunate, end and no damages may be awarded for wrongful dismissal.

If an employer can demonstrate that such disability has created a frustration of the employment contract, the employer may lawfully terminate the employment, simply by providing the employee with the required severance entitlements as spelled out in the Ontario Employment Standards Act.

But, unsurprisingly, it's not quite that simple. A number of factors will be canvassed by a court that is considering whether the doctrine of frustration applies.

Is a Disability Permanent ? - Employers' Due Diligence Obligation

In Naccarto v. Costco, decided June 15, 2010, the defendant employer, Costco, sought to rely on the doctrine of frustration in defending against a wrongful dismissal claim launched by a thirty-seven year (37) old Return-to-Vendor Clerk who had been terminated from his employment after seventeen (17) years of service.

In the case, the Plaintiff, Mr. Naccarto, commenced a medical leave arising from clinical depression. At the time of termination, Mr. Naccarto had been on a medical leave for over five years.

The Defendant employer relied on the following, in support of its decision that the employment contract had been frustrated, giving it the right to terminate the Plaintiff's employment:

1. The Plaintiff's long and continuing absence from work, which equated to a period of five years;


2. The Plaintiff had been in receipt of long-term benefits which require a finding of "total disability"; and


3. The statements of one of the Plaintiff's doctor that he did not know when the Plaintiff's medical condition would improve and did not know when he would be able to return to work

According to the Defendant, this demonstrated that the Plaintiff was "permanently disabled" and could not fulfill the basic obligations he owed as employee for the foreseeable future, justifying its decision to terminate him.

The Court underlined that the "burden" is squarely on the employer to prove frustration of contract, turning immediately to the medical evidence:

The law with respect to the burden of proof on an employer to establish a frustration of contract has been very well set out by Justice Perell in the case of Dragone v. Riva Plumbing Limited, 2007 CanLII 40543 (ON S.C.), 2007 CanLII 40543 (ON. S.C.). In that case, the employee had been absence from work due to illness for a period of approximately fourteen months. The evidence was that the employee did not know when she would get better, but that based on the evidence there was at least hope that she would eventually be able to return to work. The Court found that a permanent incapacity to return to work had not been proven. Justice Perell found that the onus was on the employer to prove that the contract had become frustrated and that it was not the employee’s onus to provide medical evidence with respect to her ultimate prognosis.

In this case, although the duration of the illness is significant, a period of five years, the medical evidence does not support a finding that there is no reasonable likelihood of the employee returning to work in reasonably foreseeable future. Rather, the evidence is that the employee is still being treated by his doctor as a new psychiatrist is being sought.

Costco could have followed up with the doctor to ask further questions with respect to the likelihood of a return to work in the foreseeable future, but it did not do so. Costco has not, in my opinion, provided this Court with the necessary medical evidence to support a finding that it is unlikely that Mr. Naccarato will be unable to work in the reasonably foreseeable future.

In other words, an employer has a "due diligence obligation." It must satisfy itself on a reasonable basis as at the time of termination that the medical documentation supports a finding that "there is no reasonable likelihood of the employee returning to work in the reasonably foreseeable future."

If the medical evidence is negative or equivocal on this crucial point - as in the case under discussion - then frustration may not have been proven by an employer.

The fact that the plaintiff employee was on long-term disability benefits which required "total disability" did not necessarily mean he was "permanently disabled" as defined by the common law, for the purpose of applying the doctrine of frustration.

Is the Absence Disruptive to the Employer's Operation?

Turning to another frustration of the employment case, Dragone v. Riva Plumbing Ltd. [1999] O.J. No. 1543 (Gen. Div.), Pollack J. considered another factor, namely whether the nature of the services performed by the plaintiff employee in the case were integral to the organization, straining against a very long-term of absence being required for a finding of frustration:

. . . To determine if a contract has been frustrated, regard must be had to the relationship of the term of the incapacity or absence from work to the duration of the contract, and to the nature of the services to be performed.

In this case, the plaintiff employee's minor role in the organization meant that his long absence had not been a disruption to the Defendant Costco's business. He was easily replaced in his period of absence and no direct or substantial losses accrued to the corporate Defendant as a result of such absence.

Given the two above factors, Justice Pollock found that "frustration" had not been established in the case. Nevertheless, the court considered a further argument put forward by the Plaintiff:

Mr. Naccarato further argues that there is a trend of our courts to refuse to apply the doctrine of frustration of contract in situations where the employee is entitled to receive short-term and long-term disability benefits due to illness. The submission is made that as such benefits are provided by the employer, it cannot be said that the event of the employee’s illness is something that was not reasonably contemplated by the parties. The frustration of contract must be delayed until the expiration of the period during which the benefits are provided for by the employer. Costco’s response to this argument is that what is not within the contemplation of the parties is the duration of the employee’s illness and not the fact that the employee may get ill.

Justice Perell, in the Dragone case, considers the effect of the presence of the long-term sick leave and disability benefits:

The presence of long-term sick leave and disability benefits indicates a greater tolerance for the duration of an employee’s absence before frustration occurs. Indeed, it has been suggested that contracting for these benefits may postpone the time of frustration because it may be inferred that the contracting parties anticipated that the employee might take leave for illness. See: Antonacci v. Great Atlantic & Pacific Co. of Canada, [1998] O.J. No. 876 (Gen. Div.), aff’d. In part [2000] O.J. No. 280 (C.A.); E.E. Mole and M.J. Stendon, Wrongful Dismissal Handbook (3^rd ed.) (Markham: LexisNexis Canada Ltd., 2004), chapter B-4.”

An Open Question: Implications of An Employer's Provision of Disability Coverage

Justice Pollock's reasons leave open the question (raised in the Plaintiff's submissions) of whether or not a Defendant employer who offers an employee both long-term and short-term disability is barred from relying on frustration of the employment contract, for reason that it has contemplated the possibility of the Plaintiff's illness leading to a long leave of absence and essentially has contracted for it. He also leaves the question (also raised in the Plaintiff's submissions) of whether frustration of contract can only arise at the end of the period of benefit receipt by a Plaintiff employee, like Mr. Naccarato, for another day.

As a result of his rejection of the employer's defence of frustration, Justice Pollock finds that Mr. Naccarato was wrongfully dismissed, awarding him ten (10) months of pay in lieu of reasonable notice in view of his relatively young age of thirty-seven.

If you believe you have been wrongfully dismissed, please contact a lawyer who can advise as to your rights and entitlements both under the Ontario Employment Standards Act and at common law.

- Robert Tanha, Toronto

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