If there is a government ‘lock down’ for coronavirus (COVID-19), is it possible that employment contracts might be frustrated?

If there is a government ‘lock down’ for coronavirus (COVID-19), is it possible that employment contracts might be frustrated?

For information on workplace issues in light of the fast-changing position in relation to coronavirus (COVID-19), see Practice Note: Coronavirus (COVID-19)—dealing with issues in the workplace.

For information on the doctrine of frustration generally, see:

• Practice Note: Distinguishing dismissal from other forms of termination, in particular the section titled: Operation of law, including frustration

• Harvey AII[402]–[406.02]: Frustration

The doctrine of frustration is one instance of termination by operation of law: where, without the fault of either party, some supervening event occurs which was not reasonably foreseeable at the time when the contract was made, and which renders further performance of the contract either totally impossible or something radically different from what the parties bargained for, then the contract is forthwith discharged by operation of law. The superseding event must be one that was unforeseen and not catered for in the contract.

The precise terms of each contract must therefore be considered in order to ascertain which circumstances were, or were not, envisaged by the parties.

Typical instances of frustration of a contract of employment involve:

• death or serious illness or injury of an individual party to the contract

• imprisonment

• a change in the law

• serious damage or destruction to the work premises

• war

However, this is always subject to the express (or implied) terms of the contract that it will continue in the relevant circumstances.

The doctrine of frustration will only be found to apply in clear cases: courts and tribunals will be alive to the legal consequences for the employee of a finding of frustration, ie that their statutory rights in relation to unfair dismissal and a statutory redundancy payment will not apply.

The courts have also recognised that application of the doctrine may have industrial relations implications, as it provides an easy escape from employer's obligations to conduct a fair investigation.

Analysis of the likely position in relation to frustration is perhaps more straightforward in the case of an employee with a serious illness (eg one brought about by contracting coronavirus), as there is a fair amount of relevant case law in relation to frustration where employees who are absent from work due to illness.

In The Egg Stores (Stamford Hill) v Leibovici, a case concerning an employee who was absent from work following an accident, the EAT distinguished between:

• short-term, periodic contracts of employment, which can be terminated at short notice, and

• fixed-term contracts of substantial length

In the case of fixed-term contracts of substantial length, the EAT stated that no question can arise of the employer's terminating the contract and application of the doctrine of frustration is necessary if it has become impossible for the employee to continue to perform the contract.

In the case of short-term, periodic contracts of employment, different considerations apply. Subject to statutory minimum notice provisions, the employer can terminate the contracts of employment at short notice, and, if it does so, the only question will be whether in the circumstances such dismissal was unfair.

According to the EAT, there are two possible kinds of events that may be relied upon as bringing about the frustration of a short-term, periodic contract of employment:

• an event (eg a crippling accident) so dramatic and shattering that everyone concerned will realise immediately that to all intents and purposes the contract must be regarded as at an end

• an event, such as illness or accident, the course and outcome of which is uncertain

In the case of the latter, it may be a long process before one is able to say whether the event is such as to bring about the frustration of the contract. Among the matters to be taken into account in reaching a decision in such a case are:

• 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 illness or disabling event

• the need of the employer for the work to be done, and the need for a replacement to do it

• the risk to the employer of acquiring obligations in respect of redundancy payments or compensation for unfair dismissal to the replacement employee

• whether wages have continued to be paid

• the acts and the statements of the employer in relation to the employment, including the dismissal of, or failure to dismiss, the employee

• whether in all the circumstances a reasonable employer could be expected to wait any longer

It is likely that the contractual terms in relation to sickness will be a relevant factor, eg where a contract envisages that an employee will receive contractual sick pay for a specified period, the employer will not be able to argue that the employee’s absence due to sickness for a shorter period constitutes a frustrating event, as both parties clearly contemplated that the employee may be absent for the period for which contractual sick pay is payable.

In contrast, where there is a shutdown or downturn in business caused by steps taken by the government in relation to coronavirus, eg to close pubs, restaurants, cinemas and theatres, the position is less clear and we have been unable to find reported case law which considers an analogous situation. However, the principles set out in the guidance in Leibovici may still be of some assistance when considering the position of each employee in light of their contractual employment terms. It may also be relevant to take into account that it is generally accepted that there will always be fluctuations in business fortunes and that the statutory redundancy scheme exists to provide a degree of financial protection for employees in such circumstances.

As mentioned above, case law demonstrates that courts and tribunals will be alive to the legal consequences of a finding of frustration upon an employee's statutory rights, eg the right not to be unfairly dismissed and the right to a statutory redundancy payment.

If an employee with at least two years’ continuous employment is dismissed, and the reason for dismissal falls within the broader definition of ‘redundancy’ that applies for statutory redundancy payment purposes, they will be entitled to a statutory redundancy payment.

See Practice Notes:

• Entitlement to statutory redundancy payment

• Definition of redundancy, in particular the section titled: Redundancy payment entitlement, and fair reason for dismissal

Even if the employer purports to terminate the employees’ contracts of employment in reliance on the doctrine of frustration, the risk of unfair dismissal claims from qualifying employees (with the requisite two years’ continuous employment, unless the reason falls within one of the exceptions to that requirement) remains.

See Practice Notes:

• Entitlement to claim unfair dismissal

• Qualifying period for unfair dismissal

For the purposes of this Q&A we have assumed that the relevant contracts contain no right to lay-off employees (ie where the employer temporarily shuts down its operation because it cannot find any or enough work for the employees) or to instigate short-term working (ie where employees are required to do less than their full contractual hours and receive less pay as a result). If that is not the case and such contractual rights exist, consideration should also be given to the right for qualifying employees to claim a redundancy payment or a guarantee payment.

For guidance on the issues that arise in these situations, see Practice Notes:

• Redundancy payments for lay-offs and short time

• Guarantee payments

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