Frustration of Contract

Frustration of Contract - What happens when a Contract of Employment becomes impossible to perform due to unforeseen circumstances?

An unforeseen event which makes performance of a contract impossible, or radically different from what the parties originally intended, is known as ‘frustration of contract’.  The event must be unexpected i.e.  not envisaged as a possibility by either party at the time the contract is formed.

When a contract is frustrated, it is ended automatically by an operation of law.  This means that there is no dismissal by the employer, or resignation by the employee.  Employment Tribunals, and indeed courts in general, are reluctant to find that a contract has been frustrated, as essentially the party asserting the frustration is avoiding their contractual obligations.

It is important to seek legal advice whenever an employer believes that an employment contract has been frustrated, as there may be other legal obligations to consider which mean the contract has not been frustrated.

If an employee is sentenced to a term in prison, what should an employer consider?

Where an employee is sentenced to a term in prison, this will not always amount to a frustration of contract.  Before deciding on the appropriate course of action, the employer should consider the following:

• The length of sentence in relation to the length of service held by the employee
• Whether the absence was envisaged at the time the contract was formed
• How necessary it is to find a permanent replacement for the employee

How long is the prison sentence?

Where an employee is sentenced to a duration which is shorter than their notice period, it will not be a frustration of contract.  For example, if an employee has 15 years service, the employer will be expected to be more accommodating of the long term absence than if they had worked for the employer for just 2 years.

Was the absence envisaged?

Where an employer allows for other types of long term absence, for example, through a generously enhanced occupational sickness payment scheme, the employee may be able to argue that the contract is not frustrated.

Is a permanent replacement necessary?

The question that an Employment Tribunal would ask here is: “what would a reasonable employer expect the likely duration of absence to be at the time the decision regarding a replacement is made”.  In addition, the Employment Tribunal will examine whether it is possible for the employer to absorb the duties among existing staff, or to cover the role using temporary staff.

If the contract is not frustrated, how can an employer dismiss an employee who has been imprisoned?

The principles of natural justice apply to all dismissals.  The employee must be given full opportunity to explain their position, and the employer must be able to demonstrate that the continued employment of the individual will have an adverse impact on the business.  The fairness of the dismissal will depend on the nature of the offence and the risk of retaining the employee.  The dismissal of an administrator convicted of a drugs related offence may be unfair, whereas the dismissal of a youth worker convicted of the same offence could be a potentially fair reason to dismiss.

The employer should conduct a full investigation to establish the facts surrounding the case.  It is probable that the employee will find it difficult to attend meetings, so alternative methods should be considered to enable the employee to explain their case.  For example, they may be able to appoint a representative, or provide written submissions.  Timescales may need to be extended to allow the employee sufficient time to respond to correspondence.

After completing the investigation, the employer will need to convene a meeting with the employee to decide their future employment.  Again, if a meeting is not possible, the employer should consider alternatives.  Following the meeting, which is likely to be held in the employee’s absence, the employer should again consider the length of service, length of sentence, nature of the offence, and the impact on the business and the role.  It may be appropriate to consider alternative roles for the employee at this point.

If a decision is taken to dismiss, the employer should allow a reasonable time for appeal, again, giving consideration to the fact that the employee may not be able to respond to correspondence as promptly as usual.