Frustration of Contract

Key points

§  At common law, a contract of employment is said to have been frustrated when one of the parties, usually the employee, is unable to comply with his contractual obligations – either through death, a prolonged or permanent illness or disability, or a sentence of imprisonment. The winding-up of a company, the appointment of a receiver, or the dissolution of a partnership will result in most, but not all, cases in the automatic termination of the contracts of employment of the relevant employees. In theory at least, the employer is under no obligation to terminate the contract formally or give notice to such an employee that he is no longer employed. In practice, the prudent employer will be a little more cautious before treating a contract of employment as no longer subsisting.

§  In the case of a prolonged illness, a contract cannot be frustrated so long as the employee has not exhausted his (or her) right to paid sick leave under the terms of that contract. Once the employee has reached the point beyond which no further sick pay is payable, the employer will need to consider other factors, such as the nature of his employment (is the employee a key worker or one of many doing similar jobs?), his length of service (how long has he been employed and might he have expected to remain with his employer until normal retirement age?), the nature of his illness or injury (how long has he been ill and what are his chances of recovery in the immediate or short-term future?), and so on. The burden of proof in frustration rests with the employer. In some situations, it will be difficult for the employer to argue frustration of contract if he still retains the employee's 'cards' or continues to pay pension contributions on his behalf.

§  In Harrison v George Wimpey & Company Limited [1972] 7 ITR 438, the judgment of the National Industrial Relations Court included the following: 'We wish to affirm that it is an employee's duty, when he is away sick, to keep his employer fully informed as to the progress he is making towards recovery, in order that the employer may know that his employee intends to return for further work. Equally, we regard it as very important that an employer who is minded to treat the employment as having come to an end for any reason, should communicate so far as he can with the employee, stating his intentions.'

§  With the appearance of unfair dismissal legislation (now to be found in the Employment Rights Act 1996), it would be unwise of an employer to rely on the doctrine of frustration when considering the position of a sick employee.

§  Frustration of contract does not necessarily occur if an employee is remanded in custody for an alleged offence and is awaiting a court hearing. Again, the employer will need to consider the employee's past employment record, his length of service, the size of his business, and how long he can reasonably expect to hold the employee's job open for him. He may dismiss the employee if the offence was committed on his own premises and he has reasonable grounds for believing that the employee is guilty – whether or not he has been remanded in custody and whether or not he is subsequently convicted. If he has held the employee's job open for him pending the outcome of the trial, he will almost certainly be justified in treating the contract of employment as having been frustrated if the employee is convicted and sentenced to a term of imprisonment.

§  Paragraph 26 of ACAS Code of Practice 1 (Disciplinary and Grievance Procedures) advises that criminal offences outside employment 'should not be treated as automatic reasons for dismissal, regardless of whether the offence has any relevance to the duties of an individual as an employee. The main consideration', says the Code, 'should be whether the offence is one that makes the individual unsuitable for his or her type of work, or unacceptable to other employees. Employees should not be dismissed solely because a charge against them is pending or they are absent through having been remanded in custody.' The small businessman, with but a handful of employees, may be obliged to take a contrary view if any such employee occupies a key post that must be filled without delay. So long as an employer in that situation has considered the pros and cons in a careful and reasoned manner, the tribunals are unlikely to challenge his decision to terminate the employee's contract of employment.