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Frustrated employment contracts!

 

What is ‘frustration of contract’? The modern doctrine of frustration was stated in Davis Contractors Ltd v Fareham UDC [1956] where the court said: 

 

Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstance in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non hard in Foedera vein. It was not this that I promised to do. 

 

The above extract concerns the position of the parties to the contract, when without default of either party performance of the contract has been radically changed. When there is a radical change in the contract where it cannot be performed in its current state as a result of a severe consequence, this will be a frustrating event. A frustration event is hard to define as it depends on the situation at the time which creates the frustrating circumstance. 

 

A frustration event can occur to various types of contracts which include as example: construction, licences, employment, sale of goods, travel, trading agreements.

 

If a claim of frustration is raised by either party to a contract, the facts required to be assessed to determine if the situation is a frustrating event, is the terms and construction of the contract, and what where the events surrounding the claim of frustration, such as what the parties undertook to perform under the contract.

 

The High Court in Australia has long recognised the circumstance of frustration in relation to contracts, where the obligation under the agreement is incapable of being performed because of circumstances which is radically different from which is stated in the contract. 

 

Confusion sometimes occurs where there is a force majeure clause in a contract and frustration happens. Frustration is not force majeure, because frustration occurs where there us an unforeseen supervening event not caused by either party to the contract and makes performance of the agreement impossible. Where frustration occurs the contract is automatically terminated, whereas a force majeure clause will usually suspend performance so that parties can manage the future performance of the contract through and agreed process. Frustration is limited and unpredictable. The courts when they assess a claim of frustration take a narrow view that it only applies in limited circumstances. 

 

In Krell v Henry [1903] the parties entered into a contract to hire rooms on Pall Mall on two dates. The booking dates were related to the coronation process for King Edward VII. The coronation did not occur due to the Kings illness. The party hiring the rooms refused to pay. A claim was brought and the court held the contract was frustrated as a consequence of the Kings illness and that the rooms did not need to be paid by the defendant. 

 

In Brisbane CC v Group Projects Pty Ltd (1979) Group Projects had agreed with the local council to carry out certain works on other land, in return for land being held by them being rezoned residential. The council agreed and the land was rezoned residential. However, the State Government resumed the land held by Group Projects for a school. Group projects did not carry out the other agreed works requested by the council. The council then commenced proceedings against Group Projects to enforce the agreement to carry out works agreed upon that was not related to the land which was rezoned for them. The court held that as the State Government had resumed the land, frustration of contract had occurred and Group Projects did not have to carry out the works agreed to with the council. 

 

Frustration with employment contracts may be based on sickness, physical incapacity and imprisonment, which results in the employment contract not being able to be performed. The most obvious example of frustration with an employment contract is where the employee dies. In this situation the contract comes to and end immediately, as it can no longer be performed. In Morgan v Manser [1948] the court 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, and this event though they have continued for a time to treat the contract as still subsisting. In those circumstances the court would grant relief and pronounce that the contract has been frustrated either by implying a term to that effect or otherwise. Their own belief and their own knowledge and their own intention is evidence, and evidence only, upon which the court can form its own view whether the changed circumstances were so fundamental as to strike at the root of the contract and not to have been contemplated by the parties.  

 

The main question that needs to be considered with employment contracts is whether the employee’s sickness, physical incapacity or other event can bring the contract to an end. In such circumstances, the consideration of annual leave, sick leave and any other entitlement of the employee needs to be taken into account, as well as the length of absence by the employee. If the facts indicate that the employee cannot return to work within a reasonable time, the employment contract may be argued as frustrated because the other party to the contract is deprived of the benefit of the employee’s performance. Therefore, the contract can be brought to an end, without any action by the parties to terminate the agreement. 

 

An employer cannot terminate a contract by giving short notice and then calling it a frustration event. Nor can the employer invoke frustration where there is a downturn in the business and there is no work for the employee, or there is industrial action, or destruction of the workplace. However, in such circumstances the employer can make the employee redundant in accordance with the Fair Work Act 2009 (Cth). Understanding the employment contract is important for all employees, and it is prudent to take the time to review the agreement, and when uncertainty arises, get that legal advice to protect your legal rights and interests. 

 

The comments in the aforementioned do not constitute legal advice and are general in nature, and if legal advice is required please contact: John Melis at Legal AU Pty Ltd (03) 9999 7799 www.legalau.com 

 

Legal AU Pty Ltd Lawyers are “Liability limited by a Scheme approved under Professional Standards Legislation.”