COVID-19 and Frustration of Contracts

Organizations  are suddenly facing economic uncertainty given the new and far reaching consequences of COVID-19.

Employers are scrambling to respond to changes, including the ban on gatherings of 50 or more people (that includes indoor and outdoor sporting events, conferences, meetings, and religious gatherings). There is no doubt this will have a huge impact on individuals, businesses and employers.

In some cases organizations may be unable to meet their commitments under contracts where supplies of raw material or labour become unavailable.

Many employers may face a sudden lack of work and/or a need  to socially isolate employees which might require reorganization of the workplace. In ordinary circumstances, under the Employment Standards Act (“ESA”), employees would be entitled to receive either written notice or pay in lieu of notice where long layoffs or terminations occur.

Section 65 of the ESA however establishes statutory exemptions to the usual rights of employees to receive either written notice or pay in lieu of notice. One exemption – which may assist employers – applies where an employee is employed under an employment contract that is impossible to perform due to an unforeseeable event or circumstance.

This exemption essentially codifies the common law doctrine of frustration. Under the doctrine of frustration, a contract is deemed at an end if an external event, beyond the control of either party, renders the continued performance of the agreement impossible. In the employment context, for an employer to be able to rely on this exemption, the employer has the burden of demonstrating that the event makes it both impossible to perform the employment and that the impossibility of the performance was due to an unforeseeable event or circumstance – such as an “act of God”.

Traditionally “Act of God” events have referred to natural disasters, such as earthquakes, floods or tornados. A long-standing definition of  an “Act of God” is as follows:

An Act of God, in the legal sense of the term, may be defined as an extraordinary occurrence or circumstance which could not have been foreseen … and which could not have been guarded against … The occurrence need not be unique, nor need it be one that happens for the first time; it is enough that it is extraordinary, and such as could not reasonably be anticipated.

COVID-19 may be an event which constitutes an “Act of God”. On March 11, 2020, the World Health Organization (WHO) assessed COVID-19 as a pandemic. The Director-General described the extraordinary status of COVID-19, “We have never before seen a pandemic sparked by a coronavirus. This is the first pandemic caused by a coronavirus. And we have never before seen a pandemic that can be controlled, at the same time.”

Whether COVID-19 constitutes an “Act of God” is still unknown. Ultimately organizations considering adjusting their work force or contemplating not performing contractual commitments to stay afloat in these unpredictable times, should contact a legal professional to consider their specific circumstances and whether the law of frustration applies.

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