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Contracts - Frustration

Ontario has a statute dealing with contracts that are frustrated by events [ie. "... become impossible of performance or been otherwise frustrated and to the parties which for that reason have been discharged": FCA 2(1)].

Frustrated Contracts Act

. Clarion Lakeside Inn v. UFCW Local 175

In Clarion Lakeside Inn v. UFCW Local 175 (Div Court, 2022) the Divisional Court considered when an employment contract is frustrated:
[5] The employer makes two principal arguments. First, it submits that the arbitrator applied the wrong test for frustration. Specifically, the arbitrator asked whether there had been a “substantial change in the nature of the business,” rather than whether the performance of the contract had become “a thing radically different from what which was undertaken by the contract,” which is the test articulated by the Supreme Court of Canada in Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, at para 53 [Naylor Group Inc.].[2]

[6] Second, according to the employer, the arbitrator erred in his understanding of when frustration should be determined. In the employer’s submission, frustration should not depend on the occurrence of an unknown future event, such as the reopening of the hotel. Instead, the question of frustration crystallized when the employees had been laid-off for 35 weeks. At that time, pursuant to s. 63(1)(c) of the ESA, their contracts of employment terminated. As the hotel was not yet reopened at that time, the employer submits the contracts of employment were frustrated.


Test for Frustration

[9] I do not agree that the arbitrator erred in his interpretation and application of the test for frustration in the Regulation. In applying the reasonableness standard, reviewing courts will take a deferential approach to the administrative decision-maker’s interpretation of the governing statute.[3] Here, in addressing s. 2(1.4), the arbitrator considered and applied the test relied on by the employer. That is, he applied the test for frustration articulated by the Supreme Court of Canada in Peter Kiewit Sons and more recently in Naylor Group Inc.

[10] Both cases ask whether to compel performance of the contract would be to order something radically different than what the parties agreed to. Peter Kiewit Sons goes on to further describe circumstances in which performance under a contract would become radically different. To that end, when summarizing the union’s submissions, the arbitrator reproduced a passage from Peter Kiewit Sons emphasizing that “hardship or inconvenience” is not enough. There must be “a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.”[4]

[11] The arbitrator reasonably concluded that this common law test was not met in the circumstances of this case. Specifically, he found that the contract between the parties was not “something radically different” because the nature of the employer’s business had not substantially changed as a result of the fire. He explained that there was no evidence the character of the hotel would change to any degree. The hotel would not become a different enterprise but instead would reopen as a hotel.

[12] In addition, he reasoned that the fire in this case had caused a temporary rather than permanent break in operations. The break in operations did not render future employment impossible. Indeed, the duration of the break in this case was “considerably less than could be considered to create an impossibility.” Although this statement arose in his discussion of whether the contract had become impossible to perform, the concept of impossibility may be employed in the frustration analysis.[5]

[13] The arbitrator’s conclusions were open to him on the record. The agreed facts did not support a finding that there was any intention to change the character of the hotel. Instead, there was an immediate and ongoing intention for the break in operations to be temporary and for the hotel to reopen as a hotel.

[14] In the agreed facts, the parties stated that hotel reconstruction started at the conclusion of the fire investigations. While it was originally estimated that the reconstruction of the hotel would be completed by the late fall of 2020 to the early spring of 2021, by the time of the arbitration hearing, according to the agreed statement of facts, it was anticipated that it would not be completed until the early spring to early summer 2022. The parties agreed that, at that time, “the Clarion will resume operations.”

[15] The agreed statement of facts further specified that although the parties’ collective agreement was originally due to expire in August 2020, they had extended it to August 31, 2022. Finally, in its submissions on the severance pay issue, the employer submitted that there would be no permanent discontinuance of the business because “the employer fully intended to re-open.” The arbitrator specifically found that “[i]n this case…the employer always intended to re-commence operations.”

[16] Given that, on the record, the employer intended from the outset and continuously to reopen its business, it was reasonable for the arbitrator to conclude that the nature of the operation was not changing and that the break in operations was temporary. On these findings, the fire did not cause the agreement between the parties to become something “radically different.”

When Frustration Crystallizes

[17] The arbitrator did not specifically address the employer’s second principal argument before this court -- that is, the question of when frustration crystallized. In the context of this case, I do not find this to be an error. The Supreme Court of Canada recognized in Vavilov that the reasons given for a decision will not necessarily address all arguments before the administrative decision-maker. The reviewing court is entitled to review the decisions in the context of the entire proceedings, including the evidence before the decision-maker.[6]

[18] Given the record before the arbitrator, in my view, he was not required to determine when frustration crystallized. Regardless of whether frustration was assessed at the date of the fire, at 35 weeks after the fire (the date connected to termination under s. 63(1)(c) of the ESA), or on the date of the arbitration, the parties agreed there was an immediate and ongoing intention for the employer to recommence operations. As set out above, at all moments in time, the hotel intended to reopen as a hotel and the break in operations was temporary. This made it unnecessary to specify the timing that frustration needed to be assessed. The outcome would be the same regardless of which moment was chosen for the assessment.

[19] There is support for the proposition that frustration should be determined on the date of dismissal. In Ciszkowski v. Canac Kitchens, 2015 ONSC 73, for example, the question was whether an employee’s long-term disability rendered the employment contract frustrated at the time of dismissal. The Court found that it would be unfair for an employer to dismiss an employee and rely on subsequently-disclosed evidence about the post-termination extent of an employee’s disability if that evidence was not relevant to the dismissal date. However, in determining that the employer had not shown frustration, the Court looked primarily at the parties’ knowledge of the disability as of the date of dismissal. As the employee was not known to be totally disabled and unable to return to work, frustration was not made out. By analogy, here, the parties never considered the closure of the hotel to be permanent. On the contrary, they had agreed it would reopen.

[20] That said, it may be an error to rely on a speculative future occurrence to avoid a finding of frustration. In Cowie, the employee was dismissed as a result of new legislation requiring employees to have a “clean criminal record” in order to retain a position as a casino security guard.[7] This Court found that the trial judge erred in considering subsequent evidence that the employee obtained a pardon to conclude that the circumstance disrupting the contract was a temporary inconvenience.[8]

[21] That case was very different. The circumstances that might have rendered the interruption in employment temporary – the pardon and renewed licence – were entirely discretionary and outside of either party’s control. The Court stated at para. 31 that it was “pure speculation” to predict if and when either the pardon or licence would be granted. By contrast, in the current case, the arbitrator was entitled to proceed on the understanding that the reopening of the hotel was not speculative. Indeed, the employer, who was in the best position to predict the hotel’s reopening, not only agreed that it intended to reopen but specifically urged this position on the arbitrator.

[22] In these circumstances, it did not matter whether frustration was assessed at the date of the fire, at 35 weeks, or at the date of the arbitration. At each point in time, the employer had a steadfast intention to reopen.
. Fram Elgin Mills 90 Inc. v. Romandale Farms Limited

In Fram Elgin Mills 90 Inc. v. Romandale Farms Limited (Ont CA, 2021) the Court of Appeal sets out the doctrine of frustration:
B. Governing Legal Principles

[229] A contract is frustrated when – without the fault of either party – a supervening event alters the nature of a party’s obligations under the contract “to such an extent that to compel performance despite the new and changed circumstances would be to order [the party] to do something radically different from what the parties agreed to under [their] contract”: Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, [2001] 2 S.C.R. 943, at para. 55; Perkins v. Sheikhtavi, 2019 ONCA 925, 16 R.P.R. (6th) 42, at para. 15.

[230] However, a contract is not frustrated if the supervening event results from a voluntary act of one of the parties or if the parties contemplated the supervening event at the time of contracting and provided for, or deliberately chose not to provide for, the event in the contract: Perkins, at para. 16; Capital Quality Homes, at p. 626.

[231] The party claiming frustration bears the burden of proving the constituent elements necessary to establish frustration: Perkins, at para. 17.
. ACT Greenwood Ltd. v. Desjardins-McLeod

In ACT Greenwood Ltd. v. Desjardins-McLeod (Ont CA, 2019) the Court of Appeal commented on the law of frustration as follows:
[17] Second, the law of frustration requires that there be a radical change in the nature of the parties’ contractual obligations, arising from a situation which the parties had not contemplated in the formation of the contract: see Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, [2001] 2 S.C.R. 943, at paras. 53-56. In G.H.L. Fridman, The Law of Contract in Canada, 6th ed. (Toronto: Carswell, 2011), at p. 619, the author writes:
From the decided cases to which reference has been made it is deducible that the basis of frustration is impossibility. By this is meant physical impossibility and impossibility resulting from a legal development that has rendered the contract no longer a lawful one. However, frustration goes further, and comprehends situations where the contract may be both physically and legally capable of being performed but would be totally different from what the parties intended were it performed after the change that has occurred. [Citations omitted, emphasis added.]
. Perkins v. Sheikhtavi

In Perkins v. Sheikhtavi (Ont CA, 2019) the Court of Appeal commented as follows on frustration of contract, here in a real estate context:
[15] Frustration applies to contracts including real estate transactions, when a supervening event alters the nature of the appellant’s obligation to contract with the respondent to such an extent that to compel performance despite the new and changed circumstances would be to order the appellant to do something radically different from what the parties agree to under their contract: Naylor, at para. 55.

[16] A contract is not frustrated if the supervening event was contemplated by the parties at the time of contracting and was provided for or deliberately chosen not to be provided for in the contract: Capital Quality Homes Ltd. v. Colwyn Construction Ltd. (1975), 1975 CanLII 726 (ON CA), 9 O.R. (2d) 617 (C.A.), at p. 626.

[17] A party claiming that a contract has been frustrated has the onus of proving the constituent elements necessary to establish frustration: Bang v. Sebastian, 2018 ONSC 6226 (CanLII), at para. 30; Gerstel v. Kelman, 2015 ONSC 978 (CanLII), 40 B.L.R. (5th) 314.


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Last modified: 01-01-23
By: admin