Canada: Ontario Divisional Court Takes A Simple Approach To Frustration Of Employment Contracts Due To Illegality

The Ontario Divisional Court recently considered the issue of when an employment contract will be considered frustrated for illegality, thereby entitling an employer to terminate an employee without notice. In Cowie v. Great Blue Heron Charity Casino, the Court held that the employer was entitled to terminate an employee without notice because the employee could no longer legally perform his duties as a security guard. The illegality was caused by the enactment of new legislation. The decision is notable for the distinction the Court draws between frustration due to illegality and frustration due to long-term disability, providing employers with greater certainty as to when they can terminate for illegality.

At the time of his termination, Mr. Cowie had been employed by the Great Blue Heron Charity Casino (GBH) since January 2000 as a security officer, and eventually, a security team leader. His termination in 2008 was prompted by the enactment of the Private Security and Investigative Services Act (the PSISA) which came into effect in August 2007 and imposed licencing requirements on security guards. One of the pre-requisites to obtain a license was a "clean criminal record", which is defined in the PSISA as either never having been convicted of a listed offence, or having been convicted and pardoned. As Mr. Cowie had been convicted of breaking and entering (a listed offence under the PSISA), for which a pardon had not been obtained, his application for a license under the PSISA was rejected. Individuals who were already employed as security guards when the PSISA came into force were given a one year grace period in which to obtain the requisite license.

Mr. Cowie promptly notified GBH that his application for a license had been rejected. As Mr. Cowie could no longer perform the function of security team leader and there was no other position that he could fill, GBH terminated Mr. Cowie's employment on the grounds that the employment contract had been frustrated because the licence was a bona fide occupational requirement. He received no notice or severance pay and his benefits were terminated.

At the time of his termination, the relevant Government of Canada website indicated that it could take 12 to 24 months to obtain a pardon, although Mr. Cowie advised GBH that the period could potentially be shorter. In fact, Mr. Cowie was able to obtain a pardon 4 months after his termination, on December 17, 2008 and notified GBH of this. Interestingly, GBH did not fill Mr. Cowie's position until March 4, 2009.

Mr. Cowie sued for wrongful dismissal and was successful at trial. The trial judge held that the employment contract had not been frustrated, because the disruption due to the new licence requirement was temporary, not permanent. The trial judge held that there was a reasonable alternative to termination: had GBH suspended Mr. Cowie for 6 to 12 months, he would have been able to qualify for the position well before he was replaced on March 4, 2009, and would still be working there. She awarded damages based on eight months' notice plus benefits.

The Divisional Court's Decision

The Divisional Court allowed the employer's appeal and held that the employment contract had been frustrated. The Court's decision has three important aspects.

First, the Court reconfirmed the general principles regarding frustration of employment contracts in the context of illegality. An employment contract is frustrated if an unexpected disruption, not provided for in the contract, radically changes the parties' obligations. The disruption does not have to be permanent, but it must make the contract radically different. The employment contract relied on an implicit understanding that Mr. Cowie would be able to perform his job in accordance with the law, and made no provision for what would happen if this became impossible. The contract would become radically different if GBH had to keep employing Mr. Cowie when he was prohibited by law from continuing his work.

Second, the Court noted the distinction between establishing frustration in cases of disability or illness and cases due to illegality. In cases of disability or illness that may be temporary, frustration will be found where the disability prevents the performance of the employee's essential job functions for a long enough period of time that the object of employment is frustrated in a practical or business sense. In illegality cases, however, the contract is frustrated as soon as it becomes illegal for the employee to perform his job.

Third, the facts relevant in determining frustration are those available to the parties at the time of termination. Thus, it was inappropriate for the trial judge to examine events occurring after Mr. Cowie's termination. As of the end of the one year grace period, the parties only knew that it had become illegal for Mr. Cowie to work as a security guard, that obtaining a pardon could take up to two years, and that obtaining this pardon and the PSISA licence depended on the discretion of the relevant authorities. If and when the licence would be obtained was a matter of pure speculation.

Our Views

The Divisional Court has set out a clear and simple rule regarding the continued performance of employment contracts that have become illegal. So long as the illegality radically changes the contract, employers can terminate such contracts immediately without notice and without speculating as to when performance might become legal again. On a cautionary note, we might expect that an employer cannot terminate based on frustration if the illegality does not prevent the employee from performing their essential duties, or if the illegality is obviously short-lived or easily resolved.

This clarity is welcome in contrast to the approach Ontario courts have taken to frustration due to long-term disability. Employers face great uncertainty as to when an employment relationship with a disabled employee can be said to be frustrated. The relevant factors include: length of absence, which likely has to be at least 18 to 24 months; nature and importance of the employee's job; receipt of disability benefits; and most importantly, whether it is likely that the employee will be able to return to work in the foreseeable future. Just last year, the Superior Court of Justice held that an employer had wrongfully dismissed an employee who had been on disability leave for five years and still did not have a certain return-to-work date. In Cowie, the Divisional Court has drawn a line that will hopefully prevent the spread of this uncertainty to cases involving the frustration of employment contracts in general.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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