In Aldergrove Duty Free Shop Ltd. v. MacCallum, 2024 BCCA 28, the Court of Appeal for British Columbia (BCCA) dismissed an employer’s appeal when it agreed with the lower court that the employer could not use the frustration defence against an employee’s claim that she was wrongfully dismissed in circumstances connected to COVID-19 when the employer laid her off without notice or severance. 

Background

In March 2020, the employer temporarily closed its doors and laid off its employees when, due to COVID-19, the land border between Canada and the United States was closed to all non-essential travellers.  The employer operates a duty-free shop on the Canadian side of the border that relies on holiday and vacation border travellers for its business and there was no work for employees. 

At the time of layoff, the employee was 78 years old and since 2010, she had been receiving an hourly wage in exchange for performing retail sales and janitorial work. 

The shop reopened in November 2021, when the land border reopened to fully vaccinated Canadians travelling to the United States for non-essential purposes.

Pursuant to s. 63(5) of the Employment Standards Act, R.S.B.C. 1996, c. 113 and s. 45.01 of the Employment Standards Regulation, B.C. Reg. 396/95, the employee’s layoff became permanent effective August 30, 2020.

The employer did not pay any severance.  The employee claimed damages for wrongful dismissal. The employer’s defence to the claim was that the employment contract had been frustrated by the border closure and, accordingly, the employer had no obligation to provide reasonable notice of termination or payment in lieu.

Lower Court Decision

The Supreme Court found that because “the collapse of the…business went more to the [employer's] ability to perform than to the nature of the contractual obligation itself,” the defence of frustration was unavailable to the employer.  Accordingly, it held that the employee had been wrongfully dismissed and awarded her damages equal to 10 months’ salary.

The employer appealed the lower court’s decision to the BCCA. 

BCCA Decision

After conducting a review of judicial decisions pertaining to the defence of frustration of contract, the BCCA determined:

…to prove frustration, a party must establish each of the following elements:

a) a qualifying supervening event that was not contemplated by the parties when they entered into the contract;

b) the supervening event is not the fault of either party; and

c) the supervening event rendered performance of the contract something radically different from that which was undertaken.

…

The party that asserts frustration bears the onus of proof…Determining whether the defence has been made out is fact dependent and requires an individualized assessment…

The court noted that on appeal the first two elements of the frustration defence were not in dispute.  The employee accepted that the shop’s closure was unanticipated, and that neither party was at fault for this “supervening event.” 

The appeal turned, therefore, on the third element of the frustration defence: whether the lower court judge erred when he found that the border closure did not render performance of the employment contract by one or both parties, “… a thing radically different from that which was undertaken …”  The BCCA dismissed the appeal because it found that, for the following reasons, the lower court judge did not err when he made his finding:

• He focused on whether the border closure transformed the nature of the parties’ contractual obligations, and asked whether compelling the contract’s performance once the border was closed would require the parties to do something radically different from what they undertook;
• He was aware that the customers of the employer’s duty-free shop are “predominantly” Canadians crossing into the United States; because the border was closed to “all but essential travellers,” the employer’s business was “virtually non‑existent” between March 2020 and November 2021; and due to the nature of the employer’s business, the employer had limited options in responding to the impact of the border closure; and
• He found that although these factual features affected the employer’s ability to live up to the contractual obligations contemplated by its employment agreement with the employee, they did not affect the nature of those obligations.

The BCCA acknowledged that compelling performance of the parties’ contractual obligations between March 2020 and November 2021 would put “significant financial pressure” on the employer given the extraordinary reduction in its customer base; however, the BCCA emphasized:

…the border closure did not alter the nature of the obligations under the contract and render those obligations radically different from what the parties contemplated when the [employee] was hired as an employee. The [employer]’s primary obligation under the employment contract was to provide an hourly wage in exchange for the [employee] attending the duty-free shop and performing retail sales and janitorial work, as required.

Finally, the BCCA stressed the following points:

• Since the employment agreement was not “explicitly dependent” on the existence of certain market conditions, a specific level of customers, a particular volume of sales, work, or business, or the employer’s profitability, the parties’ obligations under the agreement applied in the changed circumstances; 
• If the employer’s argument that the employment contract was “radically altered by the border closure” was taken to its logical conclusion, the frustration defence would arguably and improperly be available whenever a retail operation experiences “a substantial, non-fleeting reduction in its customer base due to an event beyond its control, on the basis that its employees had been left with less or, at times, nothing to do”; 
• “A generous application of the frustration defence in the employment context has significant implications for employees, potentially depriving them of critical entitlements through no fault of their own”;
• “…the difficult circumstances small business owners found themselves in during the COVID-19 pandemic…is an economic rationale for non‑performance of the [employer]’s contractual obligations, not evidence of a radical change to the contract itself that would have forced the parties to do something they had not promised to do”; and
• The border closure did not radically alter the employer’s obligation to pay a wage in exchange for the employee’s availability and work at the shop.

Accordingly, the BCCA concluded that the employer failed to establish palpable and overriding error and dismissed the appeal.

Bottom Line for Employers

Aldergrove suggests that courts will critically review the frustration defence in the employment context even when an employer experiences an extreme change in market conditions and a complete loss of business due to an event beyond its control.  Before a court is prepared to accept this defence from an employer, it may need to be convinced that the circumstances beyond the employer’s control radically altered its obligations under the employment contract. 

Employers contemplating laying off employees without notice or severance are always encouraged to seek the advice of experienced employment counsel, even when the layoff would be precipitated by the employer finding itself under extreme financial pressure.