COVID-19 and Frustration of Contract

Update by Parmvir Padda, Lawyer and Erin Brandt, Cofounder

In Verigen v Ensemble Travel Ltd, 2021 BCSC 1934 (“Verigen”), the BC Supreme Court considered whether the COVID-19 pandemic impacts an employee’s right to severance following their dismissal.

Background

In this case, Ms. Verigen was laid off then ultimately dismissed due to the devastating impact of COVID-19 on the travel industry. Ms. Verigen started a legal action against ETL seeking more severance pay than she received at the time of her dismissal.

Decision

The court first determined that there was no enforceable agreement between the parties about how much severance pay Ms. Verigen would receive following her dismissal.

The court then turned to the more significant issue of whether the pandemic led to the frustration of Ms. Verigen’s employment agreement. The court clarified that a contract is frustrated "when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes a thing radically different from that which was undertaken by the contract'". When a contract is frustrated the parties to the contract are released from their obligations with no liability. Where frustration applies to an employment relationship it means that neither the employee nor the employer ended the employment relationship, but rather, the relationship simply ends, with no severance owed to the employee.

The court ultimately found that despite the financial struggles faced by ETL due to the pandemic, the employment relationship was not rendered impossible and therefore not frustrated. Rather, the court considered both the Bardal factors and Ms. Verigen’s lack of new employment prospects in an industry devastated by the pandemic in awarding her additional severance pay.

Key Take Away

While the impact of the pandemic was significant for many businesses, not all will be able to avoid paying a dismissed employee severance pay by arguing frustration of contract.

Further, Verigen is a good reminder that employers should ensure they have an enforceable termination clause in their employment contracts to avoid legal trouble down the road.