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Frustration is a legal concept that refers to the situation where the parties cannot fulfil a contract due to a radical change of circumstances that you could not have foreseen. As employment agreements are types of contracts, they are theoretically capable of being frustrated. However, the law is clear in New Zealand that frustration is not a viable means of getting around good faith obligations.

This article will set out:

  • what frustration is;
  • whether frustrating employment agreements is a good option for employers to consider; and 
  • the case study of COVID-19 and whether the pandemic qualifies as grounds to frustrate a contract.

What Is Frustration?

A frustrated contract is a contract that parties are incapable of implementing. This is due to an unforeseen event (or a series of events), resulting in the contract’s obligations being radically different from those considered by the parties at the start.

In the employment context, frustration represents an extremely high bar. It is difficult to prove that an employment agreement is frustrated, and therefore that an employer’s obligations have ceased. For instance:

  • the parties could not contemplate the event frustrating the contract when they signed the employment agreement. Courts interpret this quite strictly. As an example, an employee making a mistake and destroying company property would be a disciplinary issue, rather than frustration;
  • the event needs to be an event that stops employment in some way. Often, an event will close one work activity, and there may be other tasks available; and
  • an employer will still have good faith obligations, such as the need for consultation.

Is Frustrating Employment Agreements A Good Option For Employers?

In general, deciding that an employment agreement is frustrated is not a good option for employers, even when radically unexpected events occur. It may appeal to some employers as it is a much faster way to end an employment relationship than a disciplinary or poor performance process. However, the legal bar is high. This is to protect the rights of employees under employment law. It also ensures that both employers and employees follow good faith obligations.

As a general rule, frustrating employment contracts can only occur in serious situations.

For example, it might include the:

  • imprisonment or death of the employee or employer; or 
  • result of natural disasters, where businesses may have been destroyed and unable to fulfil the employment obligations.

If your business would like to consider frustrating an employment agreement, it is extremely important to seek legal advice. Frustrating an employment agreement may result in a personal grievance raised by the employee in question. At all times, ensure that your business is acting in good faith and complying with its obligations.

Did COVID-19 Frustrate Employment Contracts?

COVID-19 may seem like an unforeseen event that might be a justification to frustrate employment agreements. However, this is not necessarily true and is unlikely to be valid in most cases.

For instance, you cannot terminate employees on frustration grounds if they are able to do the majority of their usual duties (for example, remotely).

However, there might be circumstances where the COVID-19 alert level restrictions disrupted businesses to such a serious degree that an employer was unable to determine with any certainty how they may be able to continue or resume operations. Whether this would be enough to provide a valid legal justification for termination of employment will depend on the:

  • specifics of the employment agreement in question; and
  • requirements of the job.

Key Takeaways

Frustration is a legal concept referring to when parties cannot fulfil a contract due to a radically unforeseen change in circumstances or extraordinary event. For an employment contract, most instances of frustration are likely to occur when:

  • one of the parties dies; or
  • if a natural disaster destroys the business.

Because the bar for frustration is so high from a legal perspective, businesses should be very reticent to terminate employment agreements on this basis. Even COVID-19 will not necessarily qualify as grounds to frustrate an employment contract. If you want to know more about frustrating contracts, contact LegalVision’s New Zealand employment lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What does the frustration of a contract mean?

Frustration is a legal concept that refers to the situation where a contract cannot be fulfilled due to a radical change of circumstances that could not have been foreseen. 

When is it legal to frustrate an employment contract?

This depends on the detail of the agreement and the circumstances. In general, however, there must have been an unforeseen change in circumstances that makes it impossible to complete that contract’s obligations.

Is COVID-19 a legal ground to frustrate employment agreements?

The government has suggested that COVID-19 is only a valid ground to frustrate employment agreements in certain, limited circumstances. If an employee is able to do their job in a different way (such as remotely, or online) or another task, frustration will not be valid.

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