Canada: Frustration of Contract Doctrine in Long-Term Disability Cases

When the frustration of contract doctrine is being misused in long-term disability cases, here's what permanent incapacity must actually prove The name says it all. Frustration of contract is, for many workers with disability in Canada, exactly that: frustrating. Employers reach for it when a worker goes on long-term disability (LTD), often hoping it will end the employment relationship cheaply. However, it rarely works as cleanly as they think. Frustration of contract is a common law doctrine that ends a contract automatically when an unforeseen event makes performance impossible or so different from what the parties agreed to that holding them to it would be unjust. In personal injury, this most often comes up when a worker develops a serious illness or injury and the employer concludes the job can no longer be performed. The Supreme Court of Canada set the test in Naylor Group Inc. v. Ellis-Don Construction Ltd. , 2001 SCC 58 : frustration occurs when a supervening event alters the nature of the other party’s obligation “to such an extent that to compel performance despite the new and changed circumstances would be to order [that party] to do something radically different from what the parties agreed to under the tendering contract.” In the LTD context, the supervening event is usually the disability itself. However, the doctrine does not kick in just because a worker is sick, off work, or collecting LTD benefits. For instance, courts in Ontario have been clear that the threshold is high: This is the test that came out of Roskaft v. RONA Inc. , 2018 ONSC 2934 , which remains one of the leading Ontario decisions on the point. Below is a video that explains frustration of contract under employment law: Check out our article on “ Personal injuries proceedings act: Limits, notices, and traps ” to learn about the factors that lawyers and litigants should not miss in these cases. Permanency must be grounded in objective medical evidence; it cannot rest on: In Naccarato v. Costco , 2010 ONSC 2651 , the employee had been absent for five years and the employer still could not prove frustration because it failed to show there was no reasonable prospect of return. There are five factors that courts use when assessing whether a disability has frustrated an employment contract : These factors came from Marshall v. Harland & Wolff Ltd. , [1972] 2 All E.R. 715, a 1972 decision of the English Court of Appeal, which have been applied consistently in several Canadian cases. When employers and LTD insurers each make their own determination about a worker’s capacity to work, those determinations are not the same thing. This is where practice and law collide in a very costly way. Policies for LTD benefits typically contain a “change of definition” date, which is usually at 24 months. After this date, the policy pays out only if the worker cannot perform any occupation for which they are reasonably suited by education, training, and experience. Many employers take that two-year mark as a green light to terminate, treating the insurance classification as a legal finding of contract frustration . However, it is not, according to common law. The court in Naccarato put it plainly. It held that the question is whether there is evidence of a permanent disability with no reasonable likelihood of return, not the amount of time the employee has been absent. As such, an employer who terminates simply because two years have passed on LTD, without a proper medical and accommodation analysis, may be terminating the employee wrongfully and owing full common law notice. Before invoking frustration of contract in a disability case, the employer is required to genuinely explore all reasonable accommodation options. For example, under the Ontario Human Rights Code, accommodation means: Notably, a firm line was drawn by the court in Katz v. Clarke , 2019 ONSC 2188. It was held that the duty to accommodate is tri