Frustration of Contract — When Illness Ends Your Job (And When It Doesn't)

What "Frustration of Contract" Actually Means

Frustration of contract is a legal doctrine that excuses both parties from their contractual obligations when an unforeseen event makes performance impossible. In employment law, employers sometimes invoke frustration when an employee has been absent from work due to illness or disability for an extended period. The argument is straightforward: if the employee cannot perform the fundamental terms of the contract — showing up and doing the work — the contract is frustrated, and the employer owes nothing beyond ESA minimums.

The doctrine exists. It's real. But in practice, it's extraordinarily difficult for employers to establish — and courts have made it progressively harder over the past two decades.

Naccarato v. Costco Wholesale: The High-Water Mark

The Ontario Court of Appeal's 2019 decision in Naccarato v. Costco Wholesale Canada Ltd., 2019 ONCA 965, is the most important frustration-of-contract case in recent Ontario employment law. Maria Naccarato worked as a bakery clerk at Costco for approximately 16 years. She suffered a workplace injury and was unable to return to work for an extended period. Costco eventually terminated her employment, claiming the contract had been frustrated.

The Court of Appeal rejected Costco's argument. Justice Huscroft, writing for the Court, held that the trial judge had correctly found that frustration of contract had not been established. The Court emphasized several critical points:

- **The test for frustration is demanding.** The employer must demonstrate that there was "no reasonable likelihood of the employee being able to return to work within a reasonable time." Uncertainty alone is not enough — the employer must prove that a return to work is essentially impossible, not merely uncertain or unlikely.

- **Medical evidence must be clear.** Vague prognoses or an inability to predict a return date do not establish frustration. The employer bears the burden of proving, on the medical evidence, that the employment relationship has become fundamentally different from what the parties originally contemplated.

- **The passage of time matters but is not dispositive.** A long absence is a necessary but not sufficient condition for frustration. Courts look at the nature of the illness, the prognosis, the employee's intentions, and whether accommodation was explored.

The Court awarded Naccarato common law damages for wrongful dismissal, confirming that when an employer incorrectly invokes frustration, the result is the same as any other termination without cause — the employee is entitled to reasonable notice.

The Interaction with Disability Accommodation

Here is where frustration of contract intersects with — and often collides with — the employer's duty to accommodate under the Ontario Human Rights Code. Section 5(1) of the Code prohibits discrimination in employment on the basis of disability. Section 11 addresses constructive discrimination — rules, standards, or practices that are not discriminatory on their face but that have a discriminatory effect on persons identified by a Code ground.

The duty to accommodate is not limitless. Under British Columbia (Public Service Employee Relations Commission) v. BCGSEU, [1999] 3 SCR 3 (the Meiorin decision), the Supreme Court established a three-part test for justifying a prima facie discriminatory standard: the standard must have been adopted for a purpose rationally connected to job performance; it must have been adopted in an honest and good faith belief that it was necessary to fulfil the work-related purpose; and it must be reasonably necessary to accomplish that purpose, with the employer demonstrating it cannot accommodate the individual without undue hardship.

The practical implication is that an employer cannot invoke frustration of contract without first demonstrating that it has fulfilled its duty to accommodate the employee's disability to the point of undue hardship. In Sandu v. BGIS Global Integrated Solutions Canada Limited, 2023 ONSC 373, the court found that an employer who terminated a disabled employee without exploring accommodation options could not rely on the frustration defence.

The ESA's Built-In Protection

The ESA provides an additional layer of protection. Section 56(6) of the ESA explicitly states that the frustration exemption to termination and severance pay does not apply when the frustration results from the employee's illness or injury. This means that even if a court were to find that an employment contract was frustrated due to the employee's illness, the employee would still be entitled to their ESA termination pay and severance pay (if eligible).

This statutory carve-out is a critical safety net. It reflects the legislature's recognition that employees who are already dealing with illness or disability should not also face the loss of their basic statutory entitlements. Combined with the common law's high bar for frustration, it creates a robust framework of protection for ill or disabled employees.

When Frustration Can (Rarely) Succeed

Frustration of contract is not impossible to establish. But the circumstances must be extreme. Courts have found frustration in cases where:

- The employee's medical evidence clearly indicates that there is **no possibility** of return to any form of work with the employer.

- The employer has thoroughly explored and offered all reasonable accommodation options, and none are viable.

- The absence has been prolonged — typically multiple years — with no medical basis for expecting a return.

- The employee's position has been fundamentally restructured or eliminated for legitimate business reasons unrelated to the disability.

In Dragone v. Stoneridge Manufacturing Co., 2019 ONSC 6704, the court found frustration where the employee had been absent for over two years, medical evidence indicated no prospect of return, and the employer had maintained the position for a considerable period before concluding that return was not feasible. But even in cases where frustration is found, the ESA entitlements survive — the employee still receives their statutory termination and severance pay.

The Employer's Dilemma

Invoking frustration of contract creates a significant strategic risk for employers. If the defence fails — and it fails more often than it succeeds — the employer is found to have wrongfully dismissed the employee and is liable for common law reasonable notice damages, which can be substantial for long-tenure employees. If the termination also constitutes disability discrimination under the Code, the employer faces additional exposure at the Human Rights Tribunal, including damages for injury to dignity, feelings, and self-respect.

In Coutinho v. Ocular Health Centre Ltd., 2021 ONSC 3076, the court awarded damages for wrongful dismissal after finding that the employer had improperly invoked frustration. The employer's aggressive approach to terminating a disabled employee — characterizing the illness as frustrating the contract rather than engaging in accommodation — was itself evidence of bad faith that the court considered in the damages analysis.

What to Do If Your Employer Claims Frustration

1. **Don't accept the characterization.** Frustration of contract is a legal conclusion, not a factual description. Your employer doesn't get to decide the contract is frustrated — a court does.

2. **Gather your medical evidence.** If your medical team has expressed any possibility of return to work — even with modifications — frustration is likely not established.

3. **Assess the accommodation effort.** Did your employer explore modified duties, reduced hours, a different role, or gradual return-to-work options? If not, they have not met their duty to accommodate.

4. **Claim your ESA entitlements.** Even if frustration is established, you are entitled to ESA termination pay and severance pay. The ESA explicitly preserves these entitlements when frustration arises from illness.

5. **Consider both avenues.** You may have a wrongful dismissal claim and a human rights complaint. These provide different remedies and are governed by different processes. Legal advice on which to pursue — or whether to pursue both — is essential.

The Bottom Line

Frustration of contract is the nuclear option of employment termination — rarely justified, easily misused, and fraught with legal risk for employers who deploy it without meeting the demanding legal test. If you're a long-term employee who has been ill or injured, and your employer tells you the contract is frustrated, treat that claim with deep skepticism. The law is overwhelmingly on your side, and the bar your employer must clear is one of the highest in Canadian employment law.