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Coronavirus and the Frustration of Employment Contracts by Mark Greaves

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Mark Greaves
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Employment Law
Mark Greaves

Mark Greaves

“‘Frustration” to lawyers can have a technical meaning (although they, too, are often ‘frustrated’ in the popular sense).”[1] The doctrine of discharge of a contract by frustration, although rarely relied upon in an employment context, has been the subject of renewed focus following the coming into force of The Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 (“the Coronavirus Regulations”) on 26 March 2020. Among other things, the Coronavirus Regulations require restaurants, cafes, bars and pubs to close during the “emergency period[2], raising the possibility of frustration due to the impossibility of performance of employment contracts.

This article considers the factors that Employment Tribunals are likely to consider in determining whether frustration applies. It then looks at a hypothetical example to illustrate the circumstances in which frustration is likely to apply in practice.

The thoughts offered in this post are of a general nature and aim to give some guidance on how employment tribunals might approach the question of frustration. This note does not constitute legal advice and should not substitute for the need to obtain such advice, as every case turns on its own facts.

General Legal Principles

The doctrine of frustration is a common law doctrine which began in relation to commercial contracts but also applies to contracts of employment. A modern statement of the test for frustration is set out in Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal, [3] per Lord Brandon who stated (emphasis added):

“There are two essential facts which must be present in order to frustrate a contract. The first essential factor is that there must be some outside or extraneous change of situation, not foreseen or provided for by the parties at the time of contracting, which either makes it impossible for the contract to be performed at all, or at least renders its performance something radically different from what the parties contemplated when they entered into it. The second essential factor is that the outside event or extraneous change of situation concerned, and the consequences of either in relation to the performance of the contract, must have occurred without the fault or the default of either party to the contract.”[4]

The requirement for performance to be “impossible” or “radically different” is a high bar. As explained in Davies Contractors Ltd v Fareham UDC, [5] mere “hardship or inconvenience or material loss” is insufficient to satisfy the test.

The effect of frustration is set out in the Law Reform (Frustrated Contracts) Act 1943, s1(1) which provides that, from the moment of frustration, “the parties thereto have for that reason been discharged from the further performance of the contract.[6] Thus, the effect is not merely to suspend the contract but to “kill” it.[7] Consequently, in relation to a contract of employment, termination by frustration does not qualify as a dismissal for unfair dismissal purposes and nor is an employee entitled to statutory notice or a payment in lieu.[8] However, in relation to a redundancy payment, an employee can rely on S.136(5)(b) of the Employment Rights Act 1996 (“ERA”) which provides that where a frustrating event affecting the employer operates to terminate the contract, it is deemed that there has been a dismissal by reason of redundancy.

The majority of the employment case law concerning frustration arises in situations where the employee has suffered a serious and prolonged illness or has been imprisoned. However, an employment contract may also be frustrated by a change in the law which came into force after the contract was agreed, and which makes performance of the contract impossible. For example, in R. v Reilly[9] the Privy Council held that the appellant’s contract as a member of statutory board in Canada was frustrated following the repeal of the statute establishing the board.[10]

However, the facts of R. v Reilly are distinguishable from the present situation – for there the legislative change made performance permanently impossible, whereas in the present situation businesses are only closed temporarily as a result of the Coronavirus Regulations. This is a crucial distinction since frustration is a blunt instrument which, as set out above, brings the whole of the contract to an end and thus is not particularly well suited to situations where an unforeseen event results in temporary non-performance.

Thus, Employment Tribunals are likely to derive considerable assistance, by analogy, from the line of case law concerning illness and imprisonment since, in these cases, performance is usually suspended for a limited period rather than rendered impossible indefinitely.

The likely approach of Employment Tribunals

In general, Employment Tribunals are likely to be slow to apply the doctrine of frustration. Because of its effect of bringing the contract to an end, even in a commercial context is has been held that “the doctrine is not to be lightly invoked, must be kept within very narrow limits and ought not to be extended.[11] Employment Tribunals are likely to be even more reluctant than commercial courts to find that frustration has occurred since it shuts out employees from many of the protections of their employment rights, including protection from unfair dismissal.

In Williams v Watsons Luxury Coaches[12], Wood J in the EAT set out 11 factors which may be helpful in determining whether frustration applied in a case of illness (adopting and adding to the nine factors set out by Phillips J in Egg Stores (Stamford Hill) Ltd v Leibovici[13]). Of these, as appropriately modified, I consider that the following are likely to be particularly relevant in deciding whether an employee or worker’s contract of employment has been frustrated by the Coronavirus Regulations:

  • The length of the previous employment;
  • How long it had been expected that the employment would continue;
  • The nature of the job;
  • The nature, length and effect of the Coronavirus Regulations;
  • The need of the employer for the work to be done, and the need for a replacement to do it;
  • The acts and the statements of the employer in relation to the employment, including the dismissal of, or failure to dismiss, the employee;
  • The availability of the Coronavirus Job Retention Scheme;
  • Whether in all the circumstances a reasonable employer could be expected to wait any longer;

However, this list of factors is indicative only. The factors that are relevant, and the weight to be given to each, is case-specific and for Employment Tribunals to determine in deciding whether there has been frustration of the contract as a question of fact[14].

The second part of the test, the question of fault, is not an issue where the business has been required to close by the Coronavirus Regulations. However, where, for example, a restaurant has chosen to continue to operate purely as a takeaway and has retained some, but not all, of its employees for this purpose, it will be very difficult for it to argue that the contracts of those it did not retain were frustrated. In that case, the court is likely to consider that those contracts were terminated as a result of the decision of the employer (albeit a difficult decision taken in light of the coronavirus outbreak), and therefore is the employer’s “fault” rather than the direct result of the coronavirus outbreak and/or the Coronavirus Regulations. Thus, in that situation, the court is likely to consider that the relevant employees were dismissed.

Analysis of a hypothetical example

Background Facts

The likely approach of Employment Tribunals, in practice, is best illustrated by the consideration of a hypothetical example.

The King’s Head Pub (“the Pub”) closed its doors on 26 March 2020 as a result of the Coronavirus Regulations, but with an intention to reopen whenever that was possible On 16 April 2020, following the announcement of Dominic Raab that the current measures would remain in place “at least” until 7 May 2020, the Pub told all its staff that their contracts had been frustrated and refused to pay any money to them other than their outstanding wages.

Claimant 1: Bartender on a short-term contract

Claimant 1 was employed by the Pub as a bartender on a three-month fixed term contract from 1 February 2019 to 1 May 2019. Claimant 1 was employed as temporary cover for a long-serving member of staff who had taken a period of unpaid leave to go traveling. Claimant’s 1 contract has no clause permitting early termination on notice. Claimant 1 has brought a claim for breach of contract, as well as for one week’s statutory notice under s86, ERA.

In my view, on a consideration of each of the eight factors set out above, it is more likely than not that an Employment Tribunal would conclude that Claimant 1’s contract has been frustrated.

Claimant 1 had been employed for less than two months before performance became unlawful and will not be able to provide any further performance prior to the conclusion of the contract. Performance after the contract end date is likely to be regarded as “radically different”, as his provision of temporary cover would no longer be required. The fact that there is no need for the Pub to arrange for a replacement whilst the business is closed is a factor that points away from frustration; so too is the fact that it is possible to furlough Claimant 1 under the Coronavirus Job Retention Scheme as he was on the employer’s PAYE payroll before or on 19 March 2020[15]. Had the contract permitted early termination, this would also affect the analysis since Employment Tribunals are reluctant to apply the doctrine of frustration where the contract is terminable on short notice.[16]   Nevertheless, as the remaining period of the contract is shorter than the period for which performance will be impossible, it is more likely than not that an Employment Tribunal would conclude that the contract had been frustrated and brought to an end.

Claimant 2: Bar manager on a permanent contract

Claimant 2 was the bar manager at the Pub and was employed in this role under a permanent contract since January 2014. He was a valued member of staff and there is no dispute that, had the coronavirus outbreak not occurred, he would have stayed in the role indefinitely. Claimant 2’s undisputed evidence is that he would have agreed to be furloughed, had the Pub offered this. Claimant 2 has brought claims for unfair and wrongful dismissal (“Claimant B”).

In my view, in contrast to Claimant 1, I consider it is unlikely that an Employment Tribunal would conclude that Claimant B’s contract has been frustrated.

Claimant B had been employed, in a skilled management position, for over six years before the Coronavirus Regulations came into force and was expected to remain in the role indefinitely. Given the availability of the Coronavirus Job Retention Scheme, an Employment Tribunal would be likely to conclude that it was unreasonable for the Pub to conclude, on 16 April 2020, that it could not continue to employ him any longer. Rather, an Employment Tribunal would be likely to conclude a reasonable employer would have furloughed Claimant B and would have waited to see how long the Coronavirus Regulations remained in force. In Marshall v Harland & Wolff,[17] a sickness case, the fact that no wages were payable by the employer to Mr Marshall during his period of sickness was considered an important factor by the Employment Tribunal in determining how long it was reasonable for the employer to wait. By analogy, the  availability of the Coronavirus Job Retention Scheme is likely to be a particularly important factor in determining whether frustration applies in the current circumstances, given that it enables employers to retain their employees on the payroll without being obliged to pay their salary.

Conclusion

In conclusion, Employment Tribunals may be willing to apply the doctrine of frustration to certain contracts of employment as a result of the Coronavirus Regulations. Nevertheless, at least at this relatively early stage of “lockdown”, cases where is held to apply are likely to be rare. Where an employer plans to reopen their business when possible, seeking to rely on frustration in relation to permanent employees is likely to be both practically inadvisable and legally high risk, given the availability of the Coronavirus Job Retention Scheme.

Mark Greaves

17 April 2020

Mark Greaves is a barrister at Matrix specialising in Employment Law.

[1] Marshall v Harland & Wolff [1972] ICR 101 per Donaldson J at p.103.

[2] The Health Protection (Coronavirus, Restrictions) (England) Regulations 2020, regulation 4 and part 1 of schedule 2. Under regulation 3, the “emergency period” started on 26 March 2020 at 1pm and ends on the day the Secretary of State for Health terminates the requirement of any restriction.

[3] [1983] 1 AC 854.

[4] [1983] 1 AC 854 at p.909.

[5] [1956] AC 696, per Lord Radcliffe at p.728.

[6] There is some academic debate whether supervening illegality is an instance of frustration or a distinct doctrine. The preferable view is that “frustration” in s.1(1) of the Law Reform (Frustrated Contracts) Act 1943 includes cases where a contract is discharged by supervening illegality – see, Chitty on Contracts (33rd ed.), para 23-074 and Tarnesby v Kensington, Chelsea and Westminster Area Health Authority (Teaching) [1980] ICR 475  at p.490.

[7] J. Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep. 1, per Lord Bingham at p.8.

[8] See , for example, GF Sharp & Co Ltd v McMillan [1998] IRLR 632.

[9] [1934] AC 176, PC.

[10] See also Studholme v South Western Gas Board [1954] 1 W.L.R. 313 where a solicitor’s retainer with a gas corporation was held to be frustrated when the corporation was nationalised under The Gas Act 1948, s.17(3).

[11] J. Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep. 1, per Lord Bingham at p.8.

[12] [1990] IRLR 164.

[13] [1976] IRLR 376.

[14] See Pioneer Shipping v BTP Tioxide (1982) AC 724, at p.753.

[15] See the Coronavirus Act 2020 Functions of Her Majesty’s Revenue and Customs (Coronavirus Job Retention Scheme) Direction made on 15 April 2020, paras 3.1-3.2.

[16] See, for example, F C Shepherd v Jerrom [1986] IRLR 358.

[17] [1972] IRLR 90.