Too frustrating: long-term disability and frustration of contract

The name says it all. Frustration of contract is, for many workers with disability in Canada, exactly that: frustrating. Employers reach for it when a worker goes on long-term disability (LTD), often hoping it will end the employment relationship cheaply. However, it rarely works as cleanly as they think.

What is frustration of contract in long-term disability cases?

Frustration of contract is a common law doctrine that ends a contract automatically when an unforeseen event makes performance impossible or so different from what the parties agreed to that holding them to it would be unjust. In personal injury, this most often comes up when a worker develops a serious illness or injury and the employer concludes the job can no longer be performed.

What is the test for a “supervening event”

The Supreme Court of Canada set the test in Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58: frustration occurs when a supervening event alters the nature of the other party’s obligation “to such an extent that to compel performance despite the new and changed circumstances would be to order [that party] to do something radically different from what the parties agreed to under the tendering contract.”

Common law on supervening event

In the LTD context, the supervening event is usually the disability itself. However, the doctrine does not kick in just because a worker is sick, off work, or collecting LTD benefits.

For instance, courts in Ontario have been clear that the threshold is high:

• disability must be permanent, and not just merely prolonged
• no reasonable likelihood of the employee returning to work within a reasonable time
• assessment is made at the date of termination, and neither before nor after

This is the test that came out of Roskaft v. RONA Inc., 2018 ONSC 2934, which remains one of the leading Ontario decisions on the point.

Below is a video that explains frustration of contract under employment law:

Check out our article on “Personal injuries proceedings act: Limits, notices, and traps” to learn about the factors that lawyers and litigants should not miss in these cases.

What “permanent” actually means

Permanency must be grounded in objective medical evidence; it cannot rest on:

• the employer’s belief,
• the passage of time, or
• the fact that the employee has been collecting LTD benefits

In Naccarato v. Costco, 2010 ONSC 2651, the employee had been absent for five years and the employer still could not prove frustration because it failed to show there was no reasonable prospect of return.

Factors in assessing frustration

There are five factors that courts use when assessing whether a disability has frustrated an employment contract:

• the terms of the employment contract, including any sickness provisions
• how long the employment was likely to last absent illness
• the nature of the employment
• the nature and duration of the illness and its prognosis
• the period of past employment

These factors came from Marshall v. Harland & Wolff Ltd., [1972] 2 All E.R. 715, a 1972 decision of the English Court of Appeal, which have been applied consistently in several Canadian cases.

Can an employer invoke permanent incapacity to end LTD benefits?

When employers and LTD insurers each make their own determination about a worker’s capacity to work, those determinations are not the same thing. This is where practice and law collide in a very costly way.

Policies for LTD benefits typically contain a “change of definition” date, which is usually at 24 months. After this date, the policy pays out only if the worker cannot perform any occupation for which they are reasonably suited by education, training, and experience.

Many employers take that two-year mark as a green light to terminate, treating the insurance classification as a legal finding of contract frustration. However, it is not, according to common law.

The two-year myth when employers invoke incapacity

The court in Naccarato put it plainly. It held that the question is whether there is evidence of a permanent disability with no reasonable likelihood of return, not the amount of time the employee has been absent.

As such, an employer who terminates simply because two years have passed on LTD, without a proper medical and accommodation analysis, may be terminating the employee wrongfully and owing full common law notice.

Accommodation must come first

Before invoking frustration of contract in a disability case, the employer is required to genuinely explore all reasonable accommodation options. For example, under the Ontario Human Rights Code, accommodation means:

• exploring modified duties
• considering a transfer to another role
• developing a return-to-work plan
• maintaining meaningful contact during the leave period

Notably, a firm line was drawn by the court in Katz v. Clarke, 2019 ONSC 2188. It was held that the duty to accommodate is triggered only when an employee expresses both:

• a desire to return to work, and
• evidence of the ability to do so

An employee’s wish to return, without any medical evidence of capacity, does not obligate the employer to explore accommodation. But the reverse is equally true: an employer that never asks, never explores, and never offers, will find a frustration defence very difficult to sustain.

Watch this video to learn more about when frustration of a contract occurs under the law:

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How do courts assess a frustrating event in LTD claims?

Foreseeability is the sleeper issue in most frustration defences. A supervening event cannot ground frustration if the parties knew about it, or reasonably should have known about it, when the contract was signed.

As applied to LTD cases, this raises a question that courts are increasingly asking: did the employer contribute to the very condition being cited as the frustrating event?

When employer conduct defeats the frustration defence

This was answered in Hedrick v. Johnston Meier Insurance Agencies Ltd., 2026 BCSC 1250.

Here, a long-serving insurance producer experienced workplace harassment by a client’s representative. Her manager was aware of the situation and took no meaningful steps to address it. Around the same time, the manager unilaterally cut her pay by roughly one-third and responded dismissively when she disclosed her deteriorating mental health.

The employee’s condition worsened, she went on leave, and WorkSafeBC ultimately determined she was permanently unable to return. The employer relied on that determination to terminate for frustration of contract. The court rejected the defence entirely.

As stated by the court, frustration requires a supervening event that is not the fault of either party. Because the employer’s conduct had contributed to the employee’s inability to return, the first condition of the doctrine was not met.

The award in this case was nine months of pay in lieu of notice, approximately $116,000, calculated on averaged commission income over three years. The court refused to use only the depressed final year as the income base because the employer’s own conduct had caused that decline.

The lessons from Hedrick are directly applicable across Canada:

• a WorkSafeBC, Workplace Safety and Insurance Board (WSIB), or insurer determination that an employee cannot return is not a safe harbour
• if the employer’s conduct contributed to the disability, that same background defeats the frustration defence on their part
• adverse treatment during a worker’s leave (e.g., pay cuts, dismissiveness, inaction on known hazards) will follow the employer into subsequent damages calculation

What is the effect when frustration of contract is wrongly used?

When an employer invokes frustration and does not meet the legal threshold, the termination is treated as a dismissal without cause. At that point, the employee is entitled to common law reasonable notice, or pay in lieu, which can reach 24 months depending on:

• age,
• years of service,
• the character of the employment, and
• the availability of similar work

There is a further complication that has become much more common since Waksdale v. Swegon North America Inc., 2020 ONCA 391. Under this decision, if any termination-related clause in an employment contract fails to comply with the Employment Standards Act (ESA), the effects are:

• the entire termination framework in the contract is void, and
• the employee is then entitled to full common law notice, rather than any capped contractual amount

Many employment contracts signed before 2020 have this problem, and the issue was extended further in Henderson v. Slavkin et al., 2022 ONSC 2964. It was held that even a confidentiality or conflict-of-interest clause that references termination in non-compliant language can void the entire agreement.

What employees are still owed even where frustration is valid

Even where frustration of contract is legitimately established, the ESA and its Regulation 288/01 make clear that frustration arising from illness or disability does not relieve the employer of statutory obligations.

This means that employees retain the following:

• ESA termination pay, based on length of service
• statutory severance pay, where the employee has five or more years of service and the employer’s annual payroll exceeds $2.5 million
• all accrued vacation pay that are not yet paid out
• any outstanding wages owed at the date of termination
• the human rights exposure

An employer that terminates on the basis of frustration without genuinely engaging in the accommodation process faces both:

• a wrongful dismissal claim, and
• a potential complaint under the Ontario Human Rights Code

Particularly, human rights damages are awarded separately and are not capped. They compensate for injury to dignity, feelings and self-respect. Further, they stack on top of wrongful dismissal damages.

For personal injury lawyers whose clients face both an LTD dispute and a parallel employment termination, the overlap of these three claims, i.e., wrongful dismissal, human rights, and the underlying tort or insurance matter, represents a significant and often underexplored area of recovery.

Frustration of contract: when frustration gets in the way

Disability does not make a worker disposable. The doctrine of frustration of contract was never designed to be a cheap exit from a difficult employment situation, and Canadian courts have made clear they will not let it be used that way. Whether the concern is a two-year LTD threshold being used as a shortcut, an employer who helped cause the very disability now being cited, or a termination made without any accommodation effort, the legal framework gives affected workers real options.

Getting advice early matters. Limitation periods apply to wrongful dismissal claims and human rights applications, and signing a release before those options are understood can close the door permanently. For lawyers acting on LTD and personal injury files, the employment dimension of these cases deserves the same attention as the benefits dispute itself.

Bookmark Canadian Lawyer’s Personal Injury page for more articles on topics dedicated for Canadian legal professionals, in addition to the frustration of contract doctrine.