The Covid-19 pandemic has had a profound impact on humanity. Persons who have not experienced any effects of the pandemic are few and far between, even non-existent. Quite apart from the tragic loss of life and the damage to human health, it has had devastating and debilitating effects on the world of work and livelihood of people. As highlighted in Resolution I of the 109th session of the International Labour Conference 2021, the pandemic has led to increased unemployment, underemployment and inactivity; losses in labour and business income, especially in the most impacted sectors; enterprise closures and bankruptcies, particularly for micro, small and medium-sized enterprises; supply chain disruptions; informality and insecurity of work and income; new challenges to health, safety and rights at work; and exacerbated poverty and economic and social inequality.
In this backdrop, one of the most frequently asked questions by both employers and employees is: ‘can employment contracts be frustrated?’ Finding the answer to this question in the Sri Lankan context is in itself frustrating owing to the dearth of case law on the subject. A plea of ‘frustration’ is not often tried and tested in the context of employment contracts given the stringent approach and the conventional attitude towards termination of employment contracts under the labour laws of Sri Lanka. This article is an attempt to provide some guidance on how the doctrine of ‘frustration’ may affect employment contracts under the laws of Sri Lanka.
Simply put, impossibility of performance or frustration is where a contract is discharged or automatically brought to end by operation of law as a result of some supervening impossibility. This refers to a situation concerning a global call to action for human-centered recovery from the Covid-19 crisis that is inclusive, sustainable and resilient’. Where the performance of a contract, although initially possible at the time it was entered into, subsequently becomes permanently impossible through no fault of the parties. This usually includes an extraordinary event, irresistible force, or unavoidable accident beyond the control of the parties such as natural calamities or so called ‘acts of God’ and acts of State. The consequence of such impossibility is that the parties are discharged from all further performance and liability under the contract.
PERFORMANCE?
Although not perfectly identical in content, both the terms frustration or impossibility of performance in their core sense refer to the same thing i.e. the occurrence of an unavoidable event or circumstance that renders performance of a contract objectively and permanently impossible and which cannot be averted through diligence and the exercise of reasonable care. Frustration is the term used in English law, whereas impossibility of performance is the term used in Roman Dutch law, which is the residual or ‘common law’ applicable in Sri Lanka. The distinction between ‘frustration’ and ‘impossibility of performance’ in the context of employment contracts was highlighted by Tredgold J in Beretta v Rhodesia Railways Ltd. and the legal position in Ceylon was set out by the Labour Tribunal in The Lanka Estate Workers’ Union v The Superintendent, Hewagama Estate. Although these authorities and some scholars have asserted that the English doctrine of frustration has no place in our labour laws, others have noted that the doctrinal differences between English law and Roman-Dutch law have lost much of their significance today as they are broadly similar in their practical application. Having flagged the distinction between the two, in keeping with popular usage, this article
will continue to adopt the term ‘frustration’ as an interchangeable and convenient shorthand for the doctrine of impossibility of performance.
In view of the foregoing, the logical conclusion may seem to be that, when it is ‘impossible’ to provide work to an employee due to a supervening event such as a pandemic, the contract of employment is automatically terminated by frustration. In other words, where there is no work, there can be no employment. As simple as it may sound, the application of the doctrine to employment contracts is far from simple or straightforward.
It is pertinent to note that the mere the fact that an external event renders performance uneconomical, expensive or inconvenient offers no defence whatsoever. A contract is only discharged, and the parties are accordingly freed of their contractual obligations by reason of frustration, only where performance is factually or legally impossible.
In Sri Lanka, statute has intervened to modify the law relating to the termination of employment contracts. The termination of employment contracts (on non-disciplinary grounds) is governed by the Termination of Employment of Workmen (Special Provisions) Act No. 04 of 1976 (TEWA). The law states that no employer shall terminate the scheduled employment of any workman without the prior consent in writing of the workman himself or the prior written approval of the Commissioner of Labour. As one may rightly assume, obtaining the consent of the employee or the approval of the Commissioner of Labour, can be a challenge. It is understood that no employee would consent to the termination of his employment unless there is a financial incentive to do so, such as an attractive pay-out from a Voluntary Retirement Scheme (VRS).
On the other hand, obtaining the prior written approval of the Commissioner may be time consuming, expensive and tedious. The law further provides that the Commissioner may decide whether such approval should be granted or refused and the commissioner is vested with absolute discretion in arriving at this decision. The Commissioner may hold an inquiry with the employer and employee, parties may adduce evidence and make submissions to support their respective positions and the Commissioner will make a final and conclusive decision In the event the approval for termination is granted, the Commissioner may also award compensation to the employee under the formula set out in TEWA. Furthermore, until the inquiry is concluded and the matter is finally determined by the Commissioner, the contract of employment remains valid and salaries as well as other emoluments must therefore be paid to the employee as per the contract until a finality is reached. In practice, this process may take months and, in some instances even years, notwithstanding the three-month time period stipulated by law.
TEWA is not without exceptions. The provisions of TEWA make it clear that it does not apply to employers who have employed less than fifteen workmen on average during the period of six months preceding the month in which the employer seeks to terminate the employment. The provisions do not apply to workmen who have been employed for less than 180 days, computation of which is set out in the Act. A further exception is where termination occurs due to retirement in accordance with the provisions of a collective agreement or a contract of employment where the age of retirement is expressly set out. The Act also does not apply to government, local authorities, co-operative societies, public corporations in its capacity as the employer.
It is pertinent to note that ‘termination’ under TEWA is not restricted to the literal and common meaning of the word. Termination under the Act is deemed to include non-employment of the workmen by an employer, whether temporary or permanent as well as non-employment in consequence of the closure of trade, industry or business by the employer.
As absurd and unreasonable as it may sound from an employer’s perspective, a literal reading of the law seems to suggest that even under the present circumstances, where the pandemic and its effects have caused the closure of trade and business either temporarily or permanently, with no fault or control of the employer, the employers are required to obtain the consent of the employees or the approval of the Commissioner to terminate the contracts of employment and continue the payment of salaries until such time. On the flip side, this is good news to the employees whose employment is hanging by the thread in these unprecedented times.
The question therefore is, save for the exceptions or exemptions specifically provided in TEWA itself, whether the prohibition on the termination of the scheduled employment of any workmen, without the prior consent of either the workman in question or the approval of the Commissioner of Labour, is absolute so as to exclude the operation of the common law doctrine of frustration?
The doctrine that a contract was discharged by a supervening impossibility was well-recognized by Roman and Roman-Dutch law. Where the performance of a contract becomes impossible either physically or legally, the debtor is discharged from liability if the impossibility of performance is due to vis major or casus fortuitus. To quote C.G. Weeramantry, “A condition exempting a party from liability when through no fault of his own the contract becomes
impossible of performance is taken to be implied. Such an implication arises also when the subject matter of the contract is destroyed or when the condition or state of things contemplated by the parties as the foundation of their contract has ceased to exist or not been realised or if performance becomes legally impossible”.
A plea of frustration in contracts of employment is not without merit. However, with the stringent laws in place for termination of employment under TEWA as discussed above, introducing frustration into the sphere of employment contracts must be done with utmost care and caution. A plea of frustration in relation to employment contracts must be executed with a firm legal backing and its success would solely depend on the facts and circumstances of each case. Where an employer relies on frustration with no valid legal basis and contravenes the provision of TEWA, such termination of employment contracts may be illegal, null and void, and accordingly shall be of no effect whatsoever.
Francis Raleigh Batt states that “a contract of service may like any other contract, become frustrated, that is, by the intervention of circumstances after its creation rendering it impossible for either party to carry it out”.
Halsbury’s Laws of England states, “The doctrine of frustration may apply to a contract of employment which is affected by sufficiently drastic external factors with the effect that the contract terminates automatically without the need for any action by the employer and the fact that termination is by operation of law means that there is no dismissal, which in turn means that the employee cannot claim unfair dismissal or redundancy payment”.
A similar approach is adopted in Sri Lanka, where it is accepted that a contract of employment may come to an end without the necessity for the employer to terminate the contract in circumstances where the law will consider the contract to have terminated by frustration or due to impossibility of performance.
One cannot therefore argue that frustration does not come into play in employment contracts as there can be events of frustration that impact the continuity of employment. For instance, if the subject matter of the contract is completely destroyed and ceases to exist with no hope of restoration due to a natural disaster or a supervening event one cannot logically argue that the prior consent of the employees or the prior approval of the Labour Commissioner must be obtained before terminating the contracts of employment. This would cast an unreasonable burden on an already distressed employer who has lost their trade or business.
The concept of just and equitable principles is the golden thread that runs through the labour laws in Sri Lanka. Just and equitable principles and considerations must apply and must be seen to apply uniformly and consistently to both employers and employees. A system tilted towards one faction only results in relentless conflicts between servants and masters leading to a dysfunctional system weighing down the economy and inevitably, impacting foreign investment.
There can be several frustrating events that cause the automatic cessation of employment contracts. Such events may include, death of either the employer or employee, permanent illness or incapacity of the employee which renders him impossible to perform his duties as per the contractual terms, physical destruction of the subject matter and supervening illegality.
One might however argue that despite the occurrence of a frustrating event, the labour laws must be strictly adhered to and the approval of the Commissioner must be obtained after having satisfied the Commissioner that the contract of employment cannot be performed. This argument defeats the purpose of relying on frustration in the first place. Frustration of a contract, in essence, goes beyond the control of the parties.The employees or the Labour Commissioner would, therefore, not have a say in the matter. The commonly propagated argument that an employee’s consent or the Commissioner’s approval must nevertheless be obtained to terminate a contract of employment even in an event of frustration is in itself frustrating. For instance, where the contract of employment is frustrated by the death of an employer it is somewhat facetious to suggest that the consent of the employee or the approval of the Commissioner must be obtained to terminate the contract. Firstly, who would seek the consent or approval? Secondly, why is it necessary, when the consent or approval has no bearing on the continuity of the contract?
It may therefore be argued that where there is an event of frustration, parties are exempted from their liabilities arising under the contract. It can be argued further that the legal provisions under TEWA have no application since there is no termination of contract by the employer or closure of trade/business by the employer as cessation of employment takes effect by the operation of law.
We finally come to the most anticipated question. Can the pandemic or the effects of it, frustrate a contract of employment? Unfortunately, there is no ‘Yes’ or ‘No’ answer to this question. The answer would depend on the facts and circumstances of each case, as the pandemic has impacted and continues to impact different trades and businesses in different degrees and different ways.
For instance, an employee of a tour company may be affected differently and to a higher degree due to the prohibition/restrictions imposed on overseas travel and tours in comparison to a restaurant which has had less business owing to the imposition of curfew or a wedding reception hall which has had no business due to the intermittent ban
imposed on wedding receptions. The important point to note here is that, though the pandemic may be seen as the underlying reason or event which causes impossibility of performance, the events of frustration which have a direct impact on the trade in these scenarios are the prohibition/restriction on travel, the imposition of curfew and implementation of safety regulations.
When determining whether a contract of employment is frustrated during the pandemic, what is most important therefore, is the proper identification of the frustrating event. As you may see in the above examples, the events of frustration are not continuous or permanent, though the pandemic itself may last indefinitely.
Secondly, we must analyse the impact of such frustrating event on the trade or business as a whole. It may be that certain businesses have experienced a severe reduction in business where sustainability of it seems unfeasible or uncommercial. Frustration is unlikely to succeed on such grounds as the termination of the contracts of employment would still be within the control of the parties (i.e. the employer). If on the other hand, where an employer experiences permanent closure of his entire business operations with no hope of revival, resulting in severe cash flow problems, he may have a strong case to argue frustration of the contracts of employment.
Thirdly, the manner in which each employee is affected by the frustrating event must be assessed. Where the employer is faced with cash flow difficulties to pay the salaries of all the employees he cannot merely rely on frustration to terminate the contracts of a handpicked few. This will only demonstrate that the employer has control over whose contracts are terminated and frustration would therefore not come into play. If on the other hand, the entire business operation comes to a complete standstill and all the employees cannot be retained, a strong case of frustration may be made out.
Another important factor when pleading frustration is to prove that the party relying on the doctrine could not foresee the frustrating event and therefore could not have averted or mitigated it.
As stated by Chitrasiri J in S.D.M.Farook v L.B.Finance Ltd:
“In this regard, it is important to quote from the Law of Contract by Professor C.G. Weeramantry on the question of frustration of contracts. In his Book, he has stated thus: “Where one party and not the other, foresees the event which is said to have frustrated the contract, that party is not entitled to plead frustration. The position in regard to this aspect of the doctrine is clear and has been authoritatively laid down in Walton Harvey Ltd. v. Walker & Homfrays Ltd”.
Even in the pandemic, where an employer foresees and identifies the challenges unique to his trade and has the option of continuing trade or business overcoming such challenges via alternative means, such as remote and virtual platforms etc. a plea of frustration of employment contracts may not succeed. However, if in such circumstances the nature of the employment contract has to be altered substantially, frustration may not be an unconvincing argument.
It must also be noted that, in the event automatic cessation of employment due to frustration is challenged by an employee in a Labour Tribunal, taking into consideration the facts of the case, compensation may be awarded even in circumstances where the termination is found to be justified as the Labour Tribunal is vested with the power to make just and equitable orders. Having said that, whether or not an application to the Labour Tribunal under the Industrial Disputes Act is sustainable where there is no ‘termination’ of employment by an employer (as termination takes effect by the operation of law upon the occurrence of a frustrating event) is a moot point.
Taking a sympathetic view towards the employees, authorities, in 2020 went so far as to guarantee that no employee will lose their employment due to the pandemic. In order to provide some relief to the employers, The Employers’ Federation of Ceylon, the Ministry of Labour and Trade Union Relations along with several Trade Unions even agreed on an arrangement to pro-rate the wages for several months in the year 2020. These efforts would have undoubtedly relieved the burden on employers as well as employees, however, it falls short of addressing the issues faced by certain industries which have not only suffered colossal loss but are on the verge of collapse or complete closure with no real prospects of resuming business operations.
In conclusion, the possibility of relying on frustration in relation to contracts of employment cannot be ruled out. It is heavily reliant on the facts and circumstances of each case. In order to fall outside the ambit of the Termination of Employment of Workmen (Special Provisions) Act all factors must point towards permanent and absolute impossibility of performance of the obligations under the contract of employment due to no fault of either party, which is fact sensitive.
Conversely, a more liberal approach towards the doctrine of frustration could also result in adverse consequences, where the employers would seek to rely on frustration to downsize the workforce bypassing the law of the land.
Striking a balance between the laws in relation to termination of employment under TEWA and the common law doctrine of frustration is a delicate matter which must be tackled with care and caution upholding at all times the just and equitable principles, the golden thread that runs through the labour laws of Sri Lanka.
Rozali Fernando
Counsel