While it is trite to say that all industries have been affected by the COVID-19 pandemic, very few have been as hard hit as the travel industry. With government-imposed travel restrictions including border closures in Canada and the US since March 2020, travel to and from Canada was brought to a near standstill until recently when Canada, US and other countries began easing travel restrictions to allow fully vaccinated international travelers on their soil. It is therefore no surprise that, during this period, many travel and tourism-based businesses have had to shutter their doors or go into survival mode by reorganizing or trimming staff. However, terminating staff because of a significant decline in business does not frustration of employment contract make, as one travel industry business learned recently.
In Verigen v. Ensemble Travel Ltd.,1 the employer, an international travel agency cooperative, with an office in Toronto, provided travel-related programs and services to its members, who are travel agencies in Canada and the United States. The employer’s primary source of revenue was from sales generated by its members. On February 5, 2019, by email, the employer offered the employee, a 30-year veteran in the tourism and hospitality industry, employment as its Business Development Director. Attached to the email was a formal offer letter (the “Letter”) with numerous attachments including the job duties of the position. The duties required the person filling the position to “[b]uild, manage and close a pipeline of new prospective members”; “[d]evelop and manage long-term member relationships/partnerships with the executive … decision makers in assigned territory”; and travel “up to 50%”. The Letter also provided that confirmation of the employee’s start date was contingent upon signing confirmation of the employer’s Employee Handbook and Proprietary Information Inventions Agreement. However, the Handbook was not among the documents she was sent by email. The employee began working for the employee on February 18, 2019, and about three months later, the employer sent her a new document entitled “Employee Handbook” dated May 2019. On the last page of the Handbook, there was a signature line directing her to sign and date receipt of the Handbook and return the receipt document to the Human Resources Administrator. The employee signed the document on May 13, 2019 and returned it to the employer as requested. The Handbook contained a “TERMINATION OF EMPLOYMENT” clause effectively limiting her entitlement to termination notice, without cause, to the minimum under the “Applicable Law”, which phrase was defined in the document to mean, in BC, the Employment Standards Act.
The employee continued working until March 2020, when the employer, in response to a significant downturn in business in the travel sector caused by the COVID-19 pandemic, temporarily laid off half of its workforce, about 36 of its total 72 employees, in Canada and the United States. The employee was one of the Canadian employees laid off temporarily on March 25, 2020, with an expected return to work date of “no later than June 29, 2020”. However, this temporary layoff was extended twice by the employer with the last of the extensions scheduled to end on August 31, 2020. The employee reluctantly consented to the layoff and all subsequent extensions, although neither the Letter nor the Handbook allowed the employer to temporarily layoff the employee.
On August 25, 2020, the employer terminated the employee’s employment without cause. Around the same time, the employer terminated 13 additional positions in its Canadian operations and by the end of the summer it reduced a total of 30 employees from its North American workforce of 73 in order “to survive long term”. The employer did not foresee those positions returning in the foreseeable future.
The employee brought an action against the employer seeking damages for what she says was the employer’s failure to provide her with reasonable notice. The employer sought to have her claim dismissed on the basis that her employment contract had been frustrated by the pandemic. In the alternative, the employer argued that if the contract remained in effect when her employment was terminated, then she was only entitled to the minimum period of notice set out in the Employment Standards Act.
Determining whether or not a contract has been frustrated:
In determining whether or not the employee’s contract was frustrated, Justice Milman referred to KBK No. 138 Ventures Ltd. V. Canada Safeway Limited 2000 BCCA 295, wherein Braidwood J.A. expressly approved the following summary of the test of frustration provided by Sigurdson J. in Folia v. Telinski (1997), 14 R.P.R. (3d) 5 (B.C.S.C.), at paragraph 18:
In order to find that the contract at issue has been frustrated the following criteria would have to be satisfied. The event in question must have occurred after the formation of the contract and cannot be self-induced. The contract must, as a result, be totally different from what the parties had intended. This difference must take into account the distinction between complete fruitlessness and mere inconvenience. The disruption must be permanent, not temporary or transient. The change must totally affect the nature, meaning, purpose, effect and consequences of the contract so far as concerns either or both parties. Finally, the act or event that brought about such radical change must not have been foreseeable.
In finding that the contract of employment was not frustrated, Justice Milman reasoned that the collapse in the travel market during the pandemic went to the employer’s “ability to perform”, and not to “the nature of the obligation itself.” More particularly, his Lordship noted that while much of the consumer demand that drove the business on which the employer and its members depended had “abated, at least for the time being, not all of it has, and then not permanently”. His Lordship also observed that while the employer chose to terminate a large part of its work force in the summer of 2020, it maintained or preserved some positions and also filled a recently-opened vacancy. The choice made by the employer to “relinquish” the employee’s branch of the business to reduce its operating costs to survive the “ongoing storm” did not frustration make, as the disruption in the business was not permanent in nature and the pandemic-related events did not render the contractual obligation between the parties incapable of being performed or a thing radically different than that which was undertaken when the parties entered into the contract of employment.
Employee’s notice entitlement when contract not frustrated:
Having concluded that the employee’s contract was not frustrated, Justice Milman went on to determine the employee’s notice entitlement. His Lordship noted that the employer paid the employee two weeks’ salary in lieu of notice pursuant to the Employment Standards Act on termination of her employment on August 24, 2020, but the employee contended that the Handbook did not limit her claim to the statutory minimum notice periods because: (i) the language used in the Handbook was not sufficiently clear; and (ii) the language “purports to amend the employment agreement that the parties entered into when she was hired [and] … it fails for want of fresh consideration”. With respect to the second argument, Justice Milman relied on the governing law relating to consideration set out by Verhoeven J. in Matijczak v. Homewood Health Inc., 2021 BCSC 1658, that “the law in B.C. continues to require consideration where an employer seeks to impose an amended employment agreement with significant modifications, detrimental to the employee”, to conclude that the termination clause in the Handbook the employee signed in May 2019, after having already commenced her employment, did not limit her claim on termination to the statutory minimums and, was not binding on her for lack of fresh consideration. His Lordship went on to apply the Bardal factors in awarding the employee damages reflecting a five-month period without deduction which reflected the middle-ground between the 9-months’ notice the employee sought and the 2- to 3-months’ notice the employer argued she was entitled to.
In summary, only where the nature of the contractual obligation is lost due to discrete unforeseen events or events out of the parties’ control or where “contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract” will frustration arise. Mere hardship or inconvenience or material loss itself will not give rise to frustration. Frustration will also not arise where there is a significant loss of the market for the kind of work the employee was hired to do, even where the business, to stay afloat, undergoes a significant reduction in the workforce.
Finally, where the employer wants the employee to be bound by all terms of employment, it is imperative that the employer, when presenting the employee with an offer of employment, discloses all of the terms of employment and requires the employee to acknowledge receipt of the terms by signing the employment offer or agreement document in advance of starting their employment with the employer. Where the employer introduces an amendment to a pre-existing employment contract or, as in Verigen, presents the employee, after her employment has commenced, with terms that should have been disclosed with the offer letter, the amended terms or the newly disclosed terms will not apply or be enforceable in court unless the employer provides the employee with fresh consideration.
* The content in this article is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers of this article are advised to seek specific legal advice by contacting members of Kornfeld LLP (or their own legal counsel) regarding any specific legal issues.
- Verigen v. Ensemble Travel Ltd.2021 BCSC 1934 (CanLII)