Frustration in Employment Contracts

Employment contracts are legally binding agreements between an employer and employee, typically ending through resignation or termination.

However, did you know that in some cases, an employment contract can come to an end due to frustration?

This article discusses the application of the doctrine of frustration in employment contracts.

When does it apply?

One of the most common application of the doctrine of frustration in employment contracts is circumstances involving severe and/or long-term medical conditions.

When an employee suffers from severe and/or long-term medical conditions, and can no longer perform their employment duties, an employer may seek to claim that the employment contract and employment relationship has been frustrated, and therefore “ended”.

To do so, the employer will need to prove the prerequisites of frustration as explained in Raj Joseph v. Linde Malaysia Sdn Bhd [2019] 2 ILR 449, which are essentially 2 things namely:

• There must be some outside or extraneous change of situation, not foreseen or provided for by the parties at the time of contracting which either makes it impossible for the contract to be performed at all, or at least renders its performance something radically different from what the parties contemplated when they entered into it; and
• The outside event or extraneous change of situation concerned, and the consequences of either in relation to the performance of the contract, must have occurred without the fault or the default of either party to the contract

The doctrine of frustration has been readily applied too in the industrial Court. For example in  Pauline Peck v. Saratim Insurance Agency Services Sdn Bhd [2010] 3 ILR 630, the Industrial Court held that employment contracts can be frustrated when an employee is suffering from a lasting or prolonged illness, which makes the performance of the employment contract to be physically impossible:

One of the ways by which a contract of employment may come to an end apart from the dismissal of an employee is by the application of the doctrine of frustration. By ‘frustration’ it is meant that there has been such a change of circumstances that events make it physically impossible for a contract to be performed as for example, where the illness of the employee lasts or is likely to last for a prolonged period. It cannot be disputed that illness or incapacity which is permanent will frustrate the contract, and so will illness which is of so prolonged a nature as to prevent the employer from getting substantially what he has bargained for as it is also accepted that an employee must provide satisfactory performance of the work which he has contracted to do. (Kumpulan Guthrie Sdn. Bhd. v. K.P. Sukumari Amana Narayana Meon, Award No. 33 of 1973 “Kumpulan Guthrie”)

Correspondingly, in MHS Aviation Sdn. Bhd. v. Zainol Akmar Hj. Mohd Noor [2001] 2 ILR 336, the Industrial Court recognized that absence from work due to ill health may result in a series of brief absences over a continuous period of time or an extended period of absence from work and the employment contract may be deemed frustrated.

Effect of Frustration in Employment Contracts

When an employment contract is deemed to be frustrated, the contract is said to have been terminated “by operation of law” and there is no dismissal.[1]

As a result, employees whose employment contracts have been frustrated cannot claim for unfair dismissal.[2] Both employer and employee are released from their obligations under the contract and there is no breach.

This, however, does not preclude the affected employee from claiming unemployment benefits or other benefits provided under the law including applying for the Invalidity Scheme provided by the Social Security Organization (SOCSO). The Invalidity Scheme under SOCSO provides a wide range of benefits, namely Invalidity Pension, Invalidity Grant, Constant-Attendance Allowance, Survivor’s Pension, Physical or Vocational Rehabilitation & Dialysis, Funeral Benefit and Education Benefit.

Important Legal Principles

In Pauline Peck v. Saratim Insurance Agency Services Sdn Bhd [2010] 3 ILR 630, the Industrial Court discussed some key principles and/or factors to be taken into account when dealing with frustration in employment contracts caused by illness:

1. Whether the illness suffered by the employee is capable of ending the employment contract is a question of fact to be decided by the court (Kumpulan Guthrie Sdn. Bhd. v. K.P. Sukumari Amana Narayana Meon, Award No. 33 of 1973)
2. The nature of the incapacity or illness must be serious and prolonged, not of temporary nature whereby the employee is incapable of carrying out his responsibilities in the foreseeable future, entitling the employer to terminate the employment contract (T. Fernandez v. See Sun Estate, Award No. 64 of 1974)
3. If there is a dismissal, the relevant question to ask is “can [the employer] be expected to wait any longer and if so, how much longer?” and the relevant circumstances to consider as to whether the dismissal was fair are “the nature of the illness, the likely length of the continuing absence, the need of the employers to have done the work, which the employee was engaged to do” (Spencer v. Paragon Wallpapers Ltd [1976] IRLR 373)
4. The decision to dismiss an employee is not a medical question and must be made after considering any available medical advice as employers are not medical experts (East Lindsey District Council v. Daubney [1977] IRLR 181)
5. An employer must consider the whole employment history and have regard to a range of factors, namely “the nature of the illness; the likelihood of it recurring or some other illness arising; the length of the various absences and the spaces of good health between them; the need of the employer for the work done by the particular employee; the impact of the absences on others who work with the employee; the adoption and the carrying out of the policy; the important emphasis on a personal assessment in the ultimate decision and of course, the extent to which the difficulty of the situation and the position of the employer had been made clear to the employee so that the employee realises that the point of no return, the moment when the decision was ultimately being made may be approaching” (Lynock v. Packaging Ltd. [1988] IRLR 510)
6. An employer is not expected to “go to unreasonable length in seeking to accommodate someone who is not able to carry out his job to the full extent” (Garricks (Caterers) Ltd v. V Nolan [1980] 1 IRLR 259)

Advice to Employers

Based on the above, here are some important principles an employer should keep in mind:

1. An employer is not expected to go to unreasonable lengths to accommodate employees[3]
2. An employer should accommodate their ill employees by offering alternative employment even if its lower paid[4]
3. An employer is not obligated to wait indefinitely for an employee to recover if their disability becomes a financial burden rather than an asset to the business[5]
4. Must not assume an employee’s illness to be permanent without making the relevant inquiries[6]

Conclusion

In conclusion, the circumstances giving rise to the frustration of employment contract vary case by case. Still, ultimately the frustrating event must be one which was unforeseeable by both employer and employee at the time they entered into the employment contract, and the illness suffered by the employee will cause the future performance of the employment contract to be physically impossible.

Generally, courts are slow to apply the doctrine of frustration in employment contracts as it means that employees will be left without a remedy in the Industrial Court bearing in mind that employees are already at a disadvantage due to their unequal bargaining power.

Employers are reminded to exercise caution and empathy towards their employees and not hastily dismiss them or to claim frustration of contract to minimize the risk of unfair dismissal claims.

If you are facing a similar situation, feel free to contact us.

PS: This article is written with the assistance of our Pupil-in-Chambers, Amelia Lo.

[1] Raj Joseph v. Linde Malaysia Sdn Bhd [2019] 2 ILR 449

[2] Raj Joseph v. Linde Malaysia Sdn Bhd [2019] 2 ILR 449

[3] Kempas Edible Oil Sendirian Berhad v. Abu Bakar Talib [2008] 3 ILR 11

[4] Gopalakrishnan Vasupillai v. Goodyear Malaysia Berhad & Anor [2010] 1 LNS 637

[5] Abdullah Abdul Rahman @ Abdul Halim v. Continental Tyre As Malaysia Sdn Bhd [2015] 4 ILR 512

[6] MHS Aviation Sdn. Bhd. v. Zainol Akmar Hj. Mohd Noor [2001] 2 ILR 336