Frustration – an uneasy existence
By Karen Spackman, partner, Minter Ellison Rudd Watts

It is not uncommon to hear about an employer who is exasperated or frustrated with an employee’s conduct or performance. However, it is relatively unusual for the legal doctrine of frustration of contract to apply in the employment context. The employment institutions have tended to treat the application of this doctrine carefully, so as to avoid other employment rights being circumvented.

The type of occasion when the ‘frustration’ of an employment agreement might occur is where unforeseen circumstances make the performance of the agreement either impossible or radically different from that which the parties had contemplated when they entered into it.

Clear instances of frustration include the death of an employee, and the liquidation or receivership of a company. It can also occur in situations where the employee becomes ill or injured to the extent that the performance of their role becomes impossible, although as illustrated below, there is a fine line between an act of dismissal by the employer and a true frustration of contract situation. Courts in other jurisdictions have noted that the frustration of an employment contract may occur in the context of an employee being imprisoned. 

When an employment agreement is frustrated, the employment relationship will terminate by operation of law, and the parties are discharged from their respective obligations.

Trouble staying awake
In a recent New Zealand case, the Employment Relations Authority held that the inability of a man to remain awake at work did not constitute a frustration of his employment agreement (Scragg v McAlpine Hussman Limited (9 December 2009, Employment Relations Authority, Auckland AA 440/09, Marija Urlich)).

In that case, Mr Scragg was employed by McAlpine Hussman in a computer software role. Employees began informing Scragg’s manager that he was closing his eyes at work. Scragg eventually informed his manager that he had a sleeping disorder, and an occupational therapist was engaged to recommend strategies to mitigate its effects. However, Scragg declined to adopt a number of these strategies, including lunchtime ‘power naps’. Scragg was then found asleep during work hours, and his employment was terminated on one month’s notice on the basis that his inability to stay awake was no longer tolerable to the company.  

Scragg brought a claim in the Authority, arguing the dismissal was unjustified. His employer’s defence was that because Scragg could not fulfil the terms of his employment agreement, the agreement had become frustrated. 

The Authority found there was no frustration of contract, as there was no supervening event which significantly changed the nature of the outstanding contractual obligations. The case was therefore one of a dismissal having occurred. 

The Authority concluded that the dismissal was unjustified, because the process had fallen short of the requirements in section 103A of the Employment Relations Act 2000. In terms of remedies, the claim for wages, offset against earnings-related compensation, was declined. However, the Authority ordered the employer to pay Scragg $5,000 as compensation for “the negative impact and distress caused by his dismissal”. That sum was then reduced by 20 per cent because the Authority found Scragg had contributed to the circumstances that gave rise to his dismissal, including not taking the recommended power naps.

This might seem a relatively straightforward case of misconduct (sleeping on the job), rather than a situation where the contract was frustrated. Other case law certainly demonstrates that circumstances of a relatively exceptional nature are required before the doctrine will apply.

It’s toxic
In Finlay v Healthcare of New Zealand Ltd (28 August 2008, Employment Relations Authority, Christchurch, CA129/08, H Doyle), an employee was given notice of termination when her relationships with a number of staff deteriorated to the extent that the work environment was described as “toxic”. Visits by a registered psychologist had failed to improve the situation. In addition, concerns existed about the employee’s performance, which had been proven to be of a lower standard than that of her fellow employees. The employee went on special leave for a period of time, claiming that the situation had rendered her too unwell to work.

A working plan was formulated in anticipation of her return, but five other staff indicated that they would leave if the employee was to return to work at the office. The employer considered it had little choice but to terminate her employment, and considered that its employment relationship had been frustrated by reason of incompatibility between employees.

Although the Authority did not investigate the issue in great depth, it was clear that it did not consider the agreement to have been frustrated. The Authority held that although a fair and reasonable employer might conclude that the employment relationship was irreparable, the employer in this case had contributed to the situation by failing to properly manage the environment, which had “led to a lack of confidence … about what would happen if Ms Finlay returned to Healthcare”. This meant that the doctrine of frustration was not available to the employer.

A loss of registration
In Al Khaiat v Canterbury Health Ltd (12 July 2001, Employment Relations Authority, Christchurch, CA29/01, P Cheyne), the employee was employed for 12 months as a registered psychiatrist. Fundamental to his employment was the retention of NZ Medical Council registration. The employee had previously worked out of the country, and was granted a temporary registration which required that he practise subject to supervision. However, concerns about the employee’s performance eventually led to the cancellation of his registration. 

The employer notified the employee that the loss of registration constituted a frustration of the employment agreement. The employee argued that this was an unjustified dismissal. 

The Authority found that the contract was not frustrated, as the employment agreement had foreseen and provided for the possibility that the Council might withdraw registration, by allowing the employer to terminate the contract by notice, without limiting the circumstances in which this power might be exercised. Although the employer could have dismissed the employee on notice, it terminated his employment almost summarily despite there being no act of serious misconduct to justify it doing so. As a result, the dismissal was unjustified.

Supervening event
In a case which did find frustration to have occurred, A Farmer v A Worker [2009] ERNZ 7, a man employed as a farm hand was required to leave both his employment and his accommodation after his employer’s young son made statements which alleged that the worker had indecently assaulted him. Although investigated by the Police, no criminal charges were laid. However, it became widely known in the area that the farm worker had been accused of indecent assault, and he was subjected to verbal and physical abuse as a result. 

The farm hand filed an employment claim, on the basis that his dismissal was unjustified. The employer argued that the allegations made by his son, whether or not they were true, had made it impossible for the farm hand to remain either employed or accommodated on the farm.  

The Employment Court found that the allegations raised by the young boy did result in a frustration of the employment agreement. This was on the basis that they were a supervening event, which was unable to be anticipated or controlled by either party, and had radically changed the existing situation. In particular, the relationship of the employer to the child (parent and son) made it intolerable for the employer to continue to have the farm hand working and living on the farm. 

The Court expressed regret that the decision meant that remedies to the farm hand would be denied, but considered that the employer ought not to be held responsible for the losses suffered by him in the circumstances.

In July 2009, the farm hand was granted leave to appeal the decision to the Court of Appeal, but no steps to pursue this appeal have apparently been taken.

Future of the doctrine
It seems clear that the elements of the doctrine of frustration have, and will continue to be, applied rigidly in the employment context. The concept of frustration only exists uneasily in employment relationships, with policy concerns about how it applies still to be resolved.

Indeed, the future of the doctrine has been questioned. The Court of Appeal indicated when granting leave to appeal in A Farmer v A Worker that there were a number of questions of law surrounding the doctrine that were of “public importance”. In particular, they pointed to arguments by counsel for the farm hand that the doctrine “can displace every prospective right afforded to an employee”, and is “entirely inconsistent with the development of employment law by Parliament” and should be overturned. Further potential arguments were noted in relation to the effect that section 103A of the Employment Relations Act has on the previous law on dismissal cases, including those in which the doctrine of frustration may be said to apply. However, as the appeal appears to have languished, such concerns may not now be explored on this occasion.

Regardless, the cases noted above serve as a reminder to employers dealing with what seem to be the most unusual situations that the doctrine of frustration cannot be easily invoked in order to end an employment relationship.