Illegality of employment frustrates contract, Canadian Employment Law Today, at 1, 6 (February 22, 2012)

Frustration of an employment contract occurs whenever the law recognizes that, without the fault of either party, a contractual obligation cannot be fulfilled. Physical disability, commercial impossibility, or changes in legislation are frustrating events, which may excuse a non-performance of contractual duties without liability. In considering the latter eventuality, the Ontario Divisional Court in Cowie v. Great Blue Heron Charity Casino resolved that an employment contract could be immediately frustrated if the frustration was induced by supervening changes in legislation that made an employee’s continued employment illegal. Cowie drew a bright line between frustrations caused by illness or disability and illegality, where the former entitles and the latter disentitles employees to severance.

In 2000, Great Blue Heron Charity Casino in Port Perry, Ont., hired George Cowie as a security guard. Cowie’s employment contract required him to be licensed by the Ontario Gaming Control Commission. On June 9, 2005, Cowie was promoted to the position of Security Training Officer and on April 4, 2007, his position was re-classified to Team Leader.

In August 2007, the Private Security and Investigative Services Act, 2005 (PSISA) came into effect, adding additional licensing requirements for security guards. Section 10(5) of the PSISA requires guards to have a “clean criminal record.” On Aug. 13, 2008, Cowie was informed that he was ineligible to hold a PSISA licence due a break and enter conviction in March 1983, for which he had yet to be pardoned. Since employing Cowie without a licence constituted an offence under the PSISA, the casino informed Cowie on August 21, 2008, that their employment contract had been frustrated. No wrongdoing on Cowie’s part was alleged nor any pay in lieu of notice was given. Predictably, Cowie sued for wrongful dismissal. He won at trial, but lost on appeal.

Suspension is a solution: Trial court

The trial court found that Cowie’s contract had not been frustrated and awarded him damages equal to eight months’ salary in lieu of notice. In the trial judge’s view, the absence of a PSISA licence was not a permanent, but rather a temporary, disruption of the employment contract. She found that there was a reasonable alternative to termination — suspension of at least six months to one year — which would have allowed Cowie to obtain a pardon. In fact, Cowie obtained the pardon 3.5 months after his dismissal.

Illegality frustrates contract: Appeal court

On appeal, the court reversed the trial judge’s decision, stating that the trial judge wrongfully treated the situation as akin to those involving illness or disability, rather than a situation where continued employment cannot be done legally. The court criticized the trial judge for placing too much emphasis on the notion that the disruption of the contract must be permanent in the sense of never being possible to resume in the future. In the appeal court’s view, the “real question” is whether the performance of the contract becomes a “thing radically different from that which was undertaken by the contract.” It found that to continue to bind an employer to an employment contract, when an employee by law is prohibited from performing any services under it, is imposing something radically different from what the parties originally agreed to. The legal principle that emerged from Cowie is that supervening illegality immediately frustrates an employment contract and disentitles an employee to severance.

In assessing whether a contract was frustrated, employers are only required to scrutinize circumstances that disrupted the contract, without regard to what could transpire after the contract ends. In the factual context of Cowie, the appeal court observed: “the focus is not on when, if ever, the provisions of those services will once again be legal.”

Employers beware

Cowie can be credited with clarifying the law of frustration. However, it also created uncertainty for employers. As a result, employers should beware of the following practical considerations:

Despite its justification that a “lengthy and open-ended period of time” during which an employee will be prohibited from performing any services under the contract can lead to the frustration of the contract, the appeal court did not provide any guidance for employers as to how they should conduct themselves if the illegality is transient in nature. Given this uncertainty, employers that prematurely invoke the bold doctrine of frustration do so at their peril.
Employers should: update their policies and contracts to reflect the change in legislation; advise their employees of the effect of the changes, and; clearly communicate their expectations in terms of compliance with statutory requirements. Failure to do so may facilitate an argument that an employee is entitled to compensation on dismissal.
Employers should be mindful that employees’ entitlement to notice or termination pay is only extinguished in situations where the contract is frustrated due to illegality. Section 9(2)(b) of the Ontario Regulation 288/01 makes it clear that severance is payable to employees whose contract was frustrated due to the “impossibility or … illness or injury suffered by the employee.”
Employers will always bear the onus of establishing frustration of a contract.
By integrating the supervening illegality concept into the employment law, the appeal court in Cowie relied on a dated commercial case from Alberta, Petrogas Processing Ltd. v. Westcoast Transmission Co. In my view, the supervening illegality brought about by a change in legislation should not have been accepted as a ground for frustration in the context of employment. Its acceptance contributes to employer-employee power imbalance and superficially ignores the reality that it was reasonably foreseeable at the time parties — especially those operating within a licence-required industry — entered into a contract that changes in legislation may occur. After all, any statute is a “living tree capable of growth and expansion within its natural limits.”