Supreme Court of Canada: High Threshold for Frustration of Contract in Long-Term Disability Cases

• 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.
• The Supreme Court of Canada has set a high threshold for frustration in long-term disability cases, requiring permanent incapacity with no reasonable likelihood of return.
• Employers must conduct a thorough medical and accommodation analysis before invoking frustration of contract in a disability case.
• Terminating an employee without proper medical and accommodation analysis may be wrongful and subject to common law notice.

In fact, the Supreme Court of Canada has set a high threshold for frustration, requiring that a supervening event alter the nature of the other party's obligation to such an extent that compelling performance would be unjust.

Employers often reach for frustration of contract as a way to end employment relationships cheaply, but this doctrine is rarely applied cleanly. In fact, the Supreme Court of Canada has set a high threshold for frustration, requiring that a supervening event alter the nature of the other party's obligation to such an extent that compelling performance would be unjust. This test was established in Naylor Group Inc. v. Ellis-Don Construction Ltd., where the court held that 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 long-term disability cases, this means that simply being sick or off work is not enough to trigger frustration of contract.

Courts have made it clear that the threshold for frustration in long-term disability cases is high. In Roskaft v. RONA Inc., the court held that permanency must be grounded in objective medical evidence and cannot rest on speculation or assumption. This means that employers cannot simply rely on LTD benefits or insurance classifications to determine whether a worker's contract has been frustrated. Instead, they must conduct a thorough medical and accommodation analysis to determine whether there is no reasonable likelihood of return to work. The court in Naccarato v. Costco emphasized this point, holding that the question is not how long an employee has been absent, but rather whether there is evidence of a permanent disability with no reasonable likelihood of return.

Before invoking frustration of contract in a disability case, employers are required to genuinely explore all reasonable accommodation options. This means considering not only medical evidence but also the worker's education, training, and experience. The Ontario Human Rights Code requires that employers provide accommodations to workers with disabilities, unless it would cause undue hardship. In Katz v. Clarke, the court held that the duty to accommodate is tripartite, involving the employer, the employee, and the human rights system. Employers who terminate employees without proper medical and accommodation analysis may be terminating wrongfully and owing full common law notice.

Lawyers and compliance officers should be cautious when employers invoke frustration of contract in long-term disability cases, as courts require a high threshold of permanent incapacity with no reasonable likelihood of return, and termination without proper medical and accommodation analysis may be wrongful and subject to common law notice.

Source: Original reporting via Briefly