Canada: BCCA Confirms Economic Conditions Alone May Not Establish Frustration Of Contract

In Aldergrove Duty Free Shop Ltd. v. MacCallum, the British Columbia Court of Appeal ("BCCA") dismissed an appeal of the trial judge's decision that found the defence of frustration was not established on the basis of the Federal Government's decision to close the border between Canada and the United States of America for non-essential travel during the COVID-19 pandemic.

BACKGROUND

Aldergrove Duty Free Shop Ltd. ("ADFS") operated a duty-free shop in Aldergrove, British Columbia near the border crossing with the United States of America. On or about March 17, 2020, ADFS closed its operations and laid off its employees when the Federal Government closed the land border for all non-essential travellers because of the COVID-19 pandemic. The respondent, Barbara MacCallum, was one of the employees who was laid off and sued her employer seeking damages for wrongful dismissal. The respondent's layoff became permanent effective August 30, 2020, pursuant to the applicable legislation. ADFS did not pay the respondent any severance. ADFS took the position that the respondent's employment was frustrated by the border closure and she was, therefore, not entitled to reasonable notice or payment in lieu.

The trial judge found that the contract was not frustrated. The closure of the border and resultant collapse in the travel business impacted ADFS' economic viability in remaining open and maintaining normal business operations, and the respondent's ability to attend work. However, it did not render it impossible for either party to perform their obligations under the contract. One of the employer's obligations was the requirement to provide reasonable notice or payment in lieu.

Frustration of contract is established where a situation arises through no fault of the parties that is not provided for in the contract and renders the performance of the contract something "radically different" from what was undertaken. The impact of the change on the nature of the contractual obligations themselves matters. Temporary or transient disruptions to the contract alone do not establish frustration.

COURT OF APPEAL

The BCCA held that it was open to the trial judge to hold that the defence of frustration had not been established. The BCCA confirmed that the border closure did not alter the nature of the parties' contractual obligations and render it radically different than what the parties had undertaken. Notably, ADFS did not present evidence in this case that the employment contract made the existence of certain economic conditions a term of the respondent's employment.

TAKEAWAYS FOR EMPLOYERS

This decision demonstrates that changes in economic conditions alone will not establish frustration of contract. However, the BCCA did not go as far as to conclude that an employer will never be able to establish frustration of contract on the basis of market conditions and related economic factors. It remains to be seen whether a court will uphold the defence of frustration where the evidence establishes the employer was undertaking to offer employment that was explicitly dependent on the existence of certain market conditions and other economic factors. It is also important to note that ADFS itself was not ordered to close by the government, but was allowed to remain open. For businesses that were ordered to close, a frustration of contract may arise by operation of law.

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