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Employment contracts: Frustration in the time of COVID-19

Employment contracts: Frustration in the time of COVID-19

By Nicholas Green QC and Gianluca Rossi

COVID-19 

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The Coronavirus pandemic raises the question of whether the lockdown constitutes the frustration of a contract of employment.

Snapshot
  • In each individual contract of employment, unless the contract is rendered impossible of performance (proof whereof lies on the party alleging frustration), the contract will not be considered frustrated.
  • The recently conferred stand down powers enable an employer to at least keep on foot a contract of employment which might otherwise be imperilled the pandemic.

Gillard J said in 2000 that “[i]t has been recognised that in contracts of employment, the contract can be frustrated by the failure of a party to provide personal services".1 This may be described as a generally accepted proposition as to frustration of contracts of employment. However, what if that party is unable to provide personal services as a result of the recent pandemic brought about by COVID-19? Would this amount to "failure” as characterised by Gillard J? This article will consider the law of frustration and how the COVID-19 pandemic may affect the jurisprudence of this area of law. In particular it will focus on contracts of employment and conclude that such a contract will not be frustrated, unless it is rendered impossible of performance.

Frustration of contracts generally

In Davis Contractors Ltd v Fareham Urban District Council (Davis)2 the House of Lords considered the early recognition of the doctrine of frustration. Their Lordships agreed that this doctrine stemmed from the English common law of contract. The House of Lords considered Bush v Whitehaven Port and Town Trustees3 as being one of the first authorities on the doctrine, where the following question was put to the jury: “were the conditions of the contract so completely changed . . . as to make the special provisions of the contract inapplicable?”.4 None of the speeches treated this as a binding authority on this principle of law, which then led Lord Radcliffe to articulate the statement of principle on the doctrine:

“[F]rustration occurs when the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract”.5

He went on to say that hardship, inconvenience or material loss is not enough to invoke the doctrine of frustration, but the "change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for”. The High Court of Australia has adopted this statement relating to frustration.6

When considering whether an “event” is necessary, Jane Swanston has proposed that the formulation espoused by Lord Radcliffe does not indicate that this is necessary in order for the doctrine to be enlivened.7 However, she noted that the House of Lords had difficulty in Davis in determining a point in time at which the contract was frustrated.8 Therefore, it may be implied that an "event” would need to be present in order for frustration to occur. Perhaps the COVID-19 pandemic is just such an event. Certainly, this pandemic was unforeseen, an essential element in order for frustration to occur.9

Frustration in contracts of employment

Having identified the fundamental requirements for frustration to occur, let us now consider how frustration operates in relation to contracts of employment. It is settled law that mere hardship or inconvenience is not enough to attract the doctrine of frustration. Many employees in Australia have experienced more than hardship or inconvenience as a consequence of the COVID-19 pandemic, and how it has affected their ability to work. How then do we ascertain whether the pandemic has frustrated a contract of employment?

Frustrating a contract of employment

In Walsh v Police Association (Walsh)10 Gillard J referred to Streatfeild J’s judgment in Morgan v Manser11 in which his Lordship said:

“If there is an event or change of circumstances which is so fundamental as to be regarded by the law as striking at the root of the contract as a whole, and as going beyond what was contemplated by the parties and such that to hold the parties to the contract would be to bind them to terms which they would not have made had they contemplated that event or those circumstances, then the contract is frustrated by that event immediately and irrespective of the volition or the intention of the parties, or their knowledge as to that particular event”.

In Walsh Mr Walsh, who was employed as the Secretary of the Police Association, sought an interlocutory injunction to restrain the Association from acting on a resolution to terminate his employment, suffered from chronic fatigue syndrome. The evidence was indeterminate as to the likely duration of his condition. In granting the injunction, it may be safely concluded that Gillard J did not consider that Mr Walsh’s illness frustrated his contract of employment.

An illness of a temporary duration disabling an employee from working will not end a contract of employment, even though that employee is deprived of entitlements to be paid while on leave.12 It follows in our view that any employee who falls sick as a result of contracting COVID-19, should be safe from termination of their employment contract.13

Finch v Sayers (Finch)14 has been described as being "overwhelmingly persuasive” in terms of an Australian authority on the doctrine of frustration and employment contracts.15 In that case, Wootten J stated:

“[T]he usual understanding in many types of employment today is that prolonged incapacity of an employee does not automatically terminate the employment but, subject to sick leave rights, excuses the employee from work and the employer from the obligation to pay, and gives the employer (and perhaps also the employee) the right to terminate the employment”.16

According to the English authority of Marshall v Hardland & Wolff (Marshall),17 when considering the termination of a longstanding employee, the question that should be posed is whether "the employee's incapacity, looked at before the purported dismissal, is of such a nature, or did it appear likely to continue for such a period, that further performance of his obligations in the future would either be impossible or would be a thing radically different from that undertaken by him and accepted by the employer under the agreed terms of his employment?".18 Macken’s Law of Employment19 suggests that this same test ought also be applied to determine whether a contract of employment is frustrated. 

To ascertain the employee’s obligations as considered in Marshall, the terms of the contract need to be examined. This would then help one to discern whether the contract has been frustrated.20 Alternatively, the relevant award or legislation may also be considered. One should also pay regard to different types of contracts of employment. For example, a short illness may be capable of frustrating a short, fixed-term contract.21 If the commercial objective of the contract is frustrated, even a longer fixed-term contract can be frustrated as a result of the indefinite incapacity of the employee.22 The contract of employment will only be frustrated by illness in exceptional circumstances by asking the question posed above in Marshall

To ascertain whether an ongoing contract of employment has been frustrated, the court in Marshall23 said that the following factors should be taken into account (which was adopted in Finch):24

  • the terms of the contract, including the provisions concerning sick pay
  • how long the employment was likely to last in the absence of sickness
  • the nature of employment
  • the nature of the illness or injury and how long it has already continued and the prospects of recovery
  • the period of past employment.

The contract is less likely to be frustrated if it provides for ongoing employment and the employee’s incapacity can be overcome in a reasonably short period and that the employee had a longstanding employment relationship with the employer. In the end, one construes the contract as a whole to ascertain whether the COVID-19 pandemic has frustrated a particular contract of employment, paying regard to the factors we have identified.

Consequences of frustration

Where a contract has been frustrated, the parties’ rights and liabilities go with that frustration, and the contract will remain only to enforce accrued rights.25 Therefore, in the context of a contract of employment, frustration will bring the employee’s employment to an end.26 Finch considered that accrued benefits will be looked on favourably when considered in conjunction with continuity of service, so as to determine the rights of the employee in not immediately discharging the contract for frustration.27 Cachia v State Authorities Superannuation Board28 illustrates the importance of the application of this doctrine because it can affect the subsequent entitlements an employee may claim following the end of the employment contract. In this regard, it was noted that Finch developed the contemporary notion of attitudes towards employment law and the doctrine of frustration29 as it analysed the historical context in which the doctrine was used. 

Stand down

Section 524 of the Fair Work Act 2009 (Cth) (FWA) provides for the circumstances in which an employer may stand down an employee. One circumstance is where an employee cannot usefully be employed because of a stoppage of work for any cause that the employer cannot reasonably be held responsible.30 It is important to note that whether it be a contract of employment or an enterprise agreement, its terms and conditions will be taken into account when determining the circumstances to stand down an employee, as opposed to the conditions provided in the FWA.31

These measures, however, need to be compared with the new stand down measures available to employers if they qualify for the JobKeeper scheme provided for in the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020. These measures provide for a separate set of criteria that enable an employer to stand down an employee under s789GDC of the FWA during the COVID-19 pandemic JobKeeper scheme, which commenced on 30 March 2020 and ends on 27 September 2020.32 Under that provision, an employee may be stood down only if the employer has qualified for the JobKeeper scheme33 and the employee cannot usefully be employed for their normal days or hours during the JobKeeper enabling stand down period because of changes to the business that are attributable to:

  • the COVID-19 pandemic
  • government initiatives to slow the transmission of COVID-19.34

Under the new provision, to stand down an employee there no longer needs to be any stoppage of work. The employer’s business must only be affected by the COVID-19 pandemic directly or by a government initiative that would affect its business in an attempt to slow the transmission of COVID-19. Consequently, the power of an employer to stand down employees in that event is much wider. 

Under the new s489GJ of the FWA, employers may require employees to take paid annual leave, and the employee must consider and not unreasonably refuse that request if they qualify for the JobKeeper scheme and, in doing so, the employee will not have an annual leave balance of fewer than two weeks.35

Analysis

Whether a contract of employment is frustrated depends on the circumstances surrounding each contract of employment, that is, the nature of the job and the industry, and the extent to which supervening factors disable performance of the contract. The availability of a life-raft, such as JobKeeper, is directed to the economic survival of an employee during lockdown. It cannot throw any light on whether the contract of employment is frustrated, because that question turns on the nature and extent to which the work, and the subject of the contract, is rendered impossible of performance.

Conclusion

An employer who seeks to invoke the doctrine of frustration as a consequence of COVID-19 can expect strong judicial resistance to their successfully doing so. The newly minted stand down provisions, broader in scope than their stoppage-based predecessors, afford employers much greater facility to deal with the pandemic while at the same time keeping the contract of employment on foot. ■


Nicholas Green QC is a barrister who practises in the law of employment, administrative law and professional disciplinary matters. He is a member of Svenson Barristers.

Gianluca Rossi is a law (Honours) student at the Australian Catholic University and works as a research assistant at the Victorian Bar. 

  1. Walsh v Police Association [2000] VSC 292 at [46].
  2. Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696.
  3. (1888) 2 Hudson’s Building Contracts, 4th edn, 122.
  4. Note 3 above.
  5. Note 2 above, 729.
  6. Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 357 (Mason J).
  7. Jane Swanston, “Discharge of contracts by frustration: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales” (1983) 57 Australian Law Journal pp201–202.
  8. Note 7 above.
  9. Note 6 above, 359.
  10. Note 1 above, at [47].
  11. Morgan v Manser [1948] 1 KB 184, 191.
  12. FWA, ss352 and 772(1)(a).
  13. We note that as at the time of writing this article, there was a Bill in Parliament, the Fair Work Amendment (COVID-19) Bill 2020, which seeks to introduce a mandatory payment of up to 14 days of leave for an employee, if that employee is required to take leave as a result of COVID-19.
  14. Finch v Sayers [1976] NSWLR 540.
  15. Cachia v State Authorities Superannuation Board [1993] 47 IR 254, 273-274.
  16. Note 14 above, 548.
  17. Marshall v Harland & Wolff [1972] 1 WLR 899.
  18. Note 17 above, 904.
  19. Carolyn Sappideen, Paul O’Grady and Joellen Riley, Macken’s Law of Employment (Thomson Reuters, 8th edn, 2016) at [9.290].
  20. Note 14 above, 547.
  21. See Poussard v Spiers [1876] 1 QBD 410.
  22. See Whim Well Copper Mines Ltd v Pratt [1910] 12 WALR 166.
  23. Note 17 above, 903.
  24. Note 14 above, 557.
  25. Constantine (Joseph) Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154, 187.
  26. Badger v Commonwealth Bank of Australia [2007] AIRC 269 at [33]-[36].
  27. Note 14 above, 547 and 558.
  28. Note 15 above.
  29. See Hilton Hotels of Australia Limited v Pasovska [2003] NSWIRComm 17 at [38]-[49].
  30. FWA, s524(1)(c). 
  31. FWA, ss524(2)(a)-(b).
  32. Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth), r5.
  33. FWA, s789GDC(1)(b).
  34. FWA, s789GDC(1)(c).
  35. FWA, s489GJ(1).

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