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Divisional Court Confirms That Employment Contracts Can Be Frustrated Due To Illegality

On November 7, 2011, the Ontario Divisional Court considered the issue of whether an employer is able to argue frustration of contract when an employee’s continued employment is made illegal by unforeseen legislative licencing requirement changes enacted by the Ontario government.  In addressing this issue, the Court provided well-needed guidance to employers when it distinguished the test to be applied for frustration due to “illegality” and frustration due to long-term disability.  A frustration of contract for illegality allows an employer to end the employment relationship without payment of common law or statutory notice and/or severance.

In Cowie v. Great Blue Heron Charity Casino, [2011] O.J. No. 5573, the plaintiff worked at a casino as a security guard, and was required to be licenced by the Gaming Control Act, 1992.  In August 2007, the Ontario government enacted the Private Security and Investigative Services Act, 2005 (PSISA).  The PSISA required, among other things, that no person could act as a security guard without the appropriate PSISA licence, which could only be obtained if the person possessed a clean criminal record.

Employees such as the plaintiff who were already performing security functions were provided a one year grace period to obtain the licence by August 23, 2008.  On or around June of 2008, the plaintiff applied for the licence but was rejected on the basis that he had a criminal conviction for which he had not received a pardon.

The defendant terminated the plaintiff’s employment without notice or pay, taking the position that the contract of employment was frustrated due to the plaintiff’s inability to perform his duties as a team leader in security.   The defendant did, however, advise the plaintiff that if he received a pardon and a security licence under the PSISA, he would be eligible for re-employment in a security position if a position was available at the time. At the time of the plaintiff’s dismissal, it was understood by the parties that it could take up to two years to obtain a pardon.  However, the plaintiff was able to get a pardon approximately four months after his termination.  Instead of applying for his PSISA licence, the plaintiff commenced an action against the defendant for damages for wrongful dismissal.

The trial court found that the plaintiff was wrongfully dismissed and was entitled to eight months’ pay in lieu of notice.  Although the trial judge concluded that a licence was necessary in order to perform the scope of his duties, she found that the employer was under an obligation to do the following:

Considering the fact that the pardon was granted within four months, the trial judge found that the proper course of action the defendant should have taken was to suspend the plaintiff.

The decision of the trial judge was appealed by the employer and the court allowed the appeal on the basis that the contract of employment was indeed frustrated.  Of central importance to employers is the court’s finding that an employment contract can become frustrated if an unexpected disruption, not provided for or contemplated in the employment contract, radically changes the parties’ obligations.  The court further confirmed that the disruption does not have to be permanent, but it must make the contract of employment “radically different”.

Applying this principle to the facts at hand, the court found that the employment contract would become radically different if the defendant was required to keep employing the plaintiff when he was prohibited by law from continuing his work.  The court, however, did not address the issue of whether an employer would be entitled to terminate on the basis of illegality in circumstances where the issue of illegality could be resolved or accommodated within a short period of time.

Another noteworthy feature of this decision is the distinction the court draws between establishing frustration in cases of disability or illness and cases due to illegality.  In the context of disability or illness that may be temporary, the court confirmed that frustration will be found where the disability prevents the performance of the employee’s essential job functions for a significant length of time.  In contrast, in illegality cases, the contract may be frustrated as soon as it becomes illegal for the employee to perform his or her job.

Of further importance is the court’s finding that the question of whether a contract of employment is frustrated requires an assessment of the circumstances at the time of termination, rather than considering information available post-termination.

This decision provides well-needed guidance to employers by clarifying the appropriate tests to apply for cases involving frustration due to long-term disability or illness and frustration due to illegality.  The lawyers at CCP can assist employers in determining whether it is appropriate to take a frustration position with an employee as a result of unexpected and significant changes in the employment relationship.

Please Note: This blog has been prepared as an informational service for our clients and other interested parties. It is not intended to constitute legal advice, a complete statement of the law or opinion on any subject. Although we endeavour to ensure the accuracy of the content, no one should act upon the information provided without a thorough examination of the law after the facts of a specific situation are fully considered.