Press Articles & Comment

Less frustration for employers?

(First published in ELA Briefing Volume 12, Number 4, May 2005)

Frustration - general principles

The general principles of frustration were conveniently summarised by Lord Brandon in Hannah Blumenthal as follows:

"There are two essential factors which must be present in order to frustrate a contract. The first essential factor is that there must be some outside event 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. The second essential factor is that 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 either the fault or the default of either party to the contract."

In other words, there must be an unforeseen external event, which doesn't arise from the fault or default of either party, as a result of which performance of the contract becomes impossible or substantially different.

The most commonly known example of frustration in the context of an employment relationship is long-term illness. However, whether the contract has been frustrated in any particular case very much depends on its facts. For example, in R.A. Marshall v Harland & Wolff Ltd (one of the earlier cases on frustration of employment contracts), the NIRC indicated that in addition to the more obvious considerations (such as the prospects of recovery), one of the factors that a Tribunal will need to look at in order to determine whether a contract has been frustrated through an employee's long-term illness is the nature of the employment - was the employment in a key post, for example. In that case, an 18 month period of absence was held not to frustrate the contract.

Another factor that will, of course, be relevant to the question of whether long-term illness has frustrated an employment contract is whether the employer has put in place a private health insurance (PHI) scheme, or otherwise provided in the contract for the payment of long-term sickness benefits. Clearly, if the employer has done so, it will be more difficult to argue that an extended period of illness is "not foreseen or provided for". The point was neatly encapsulated by Sedley LJ in Jowitt v Pioneer Technology (UK) Ltd - "the ordinary consequence of long-term incapacity is to bring the contract of employment to an end by frustration." However, a clause in the contract providing for payment of PHI benefits was "a provision which keeps the contract in being".

There is also authority for the proposition that imprisonment of the employee may frustrate the contract - see FC Shepherd & Co Ltd v Jerrom .

The Four Seasons case was slightly different. It concerned an employee who was charged with a criminal offence and who, as a result of his bail conditions, could not continue working at the same location.

Background to the Four Seasons case

Mr Maughan worked as a Registered Mental Nurse at a care home operated by Four Seasons Healthcare. An allegation was made that he had abused a patient at the home, as a result of which he was suspended without pay on 17 January 2003 .

Four Seasons initially intended the suspension to be for no more than 7 days, in accordance with its disciplinary policy. However, after it had notified the police of the allegation Mr Maughan was subsequently arrested, interviewed and charged with a number of serious offences. He was granted bail, but two of the conditions of this were that he could not communicate with the management and certain employees at the home, and that he could not visit the home.

Mr Maughan's suspension without pay continued. In May 2003, his union wrote to Four Seasons asking for further details of the allegations against him and asking for his pay (other than in respect of the initial 7 day suspension) to be paid. The Company responded that, because of the seriousness of the charges, Mr Maughan, would remain suspended without pay until a full investigation had been carried out. Moreover, the police had asked Four Seasons not to undertake its investigation until the prosecution had been completed. Mr Maughan was sentenced to two years' imprisonment on 24 November 2004 .

The EAT decision

Mr Maughan may have been convicted, but in one sense all was not lost. He brought a claim alleging that in failing to pay him after the initial 7 day suspension, Four Seasons had breached his contract and made an unlawful deduction from his wages (contrary to s13 Employment Rights Act 1996). In turn, Four Seasons claimed that the contract had been frustrated and that therefore it had been released from its obligation to pay Mr Maughan.

Four Seasons' first argument was that as Mr Maughan had assaulted a resident, it would have been contrary to the Care Homes Regulations 2001 to continue to employ him. Specifically, Regulation 19(1) prohibits a care home from employing someone to work there unless "the person is fit to work at the care home". It was argued, therefore, that as Mr Maughan was no longer a fit person to work at a care home, the contract had been frustrated from the date of the first assault.

The EAT was not persuaded by this line of argument. It took the view that it was not an outside event that caused the situation; instead, it was Mr Maughan's own behaviour in committing the assault. Perhaps more materially, the EAT also pointed out that termination on these grounds was clearly contemplated by the parties given that the disciplinary procedure made specific reference to physical abuse directed towards residents of the care home. It was therefore difficult to say that the event was "not foreseen or provided for". The EAT highlighted the words of Mustill LJ in F C Shepherd v Jerrom that "the presence of a termination provision should inhibit the Court from being too ready to find in favour of frustration".

The EAT also felt that it could only be said that Mr Maughan was unfit to work within the meaning of Regulation 19(1) once a "qualitative decision" had been taken to this effect. In this case the qualitative decision was not made until Mr Maughan was convicted by the Crown Court.

As an alternative, Four Seasons argued that Mr Maughan's bail conditions effectively prevented him from working for an unreasonably long period, thereby frustrating the contract. Again, this cut little ice with the EAT.

The EAT took note of the fact that Four Seasons had a right under Mr Maughan's contract to change his place of employment in exceptional circumstances. Although, evidence had apparently been given that Four Seasons would not have allowed Mr Maughan to work in any of its other care homes, this did not change the EAT 's view. It was also persuaded by the suggestion that by suspending Mr Maughan without pay, Four Seasons had in effect itself concluded that Mr Maughan's bail conditions were not such as to bring the contract to an end.

Comment

It is not difficult to feel some degree of sympathy for Four Seasons. Mr Maughan was unable to continue working at his existing location for a period of in excess of nine months before his eventual conviction. During that time, Four Seasons was prevented from investigating the matter further.

Although the EAT suggests that Four Seasons could have made the "qualitative decision" that Mr Maughan was no longer fit to work at the care home, or could have dismissed him, Four Seasons may well have felt that this was a risky option given that it had been asked by the police not to investigate the matter. The EAT 's suggestion that "there was clearly some information available to [Four Seasons] in relation to the allegations against the employee, and on the basis of that information they could have taken the decision to dismiss" is perhaps at the more bullish end of the 'range of reasonable responses'.

Where Four Seasons made life difficult for itself, it was in limiting the period of unpaid suspension in the contract to seven days, with no right to extend this in circumstances of this sort. That meant that when the suspension had to continue for more than 7 days, it was almost inevitable that Four Seasons would have to pay Mr Maughan or face a non-payment of wages claim.

More generally, the case illustrates the difficulty of arguing that an employment contract has been frustrated. This will be particularly so where the would-be frustrating event has apparently been provided for in the contract. Equally, it appears that a wait and see approach similar to that adopted by Four Seasons (suspending without pay until the outcome was known) will also make it more difficult to argue that a contract has been frustrated. None of which makes it any easier for employers trying to negotiate their way through the long-term absence labyrinth.

Chris Middleton

Cases referred to:

Four Seasons Healthcare Ltd (formerly Cotswold Spa Retirement Hotels Ltd) v Maughan EAT 6.10.04 (0274/04)
Paal Wilson & Co AS v Partenreederei Hannah Blumenthal [1983] I AC 854
RA Marshall v Harland & Wolff Ltd and The Secretary of State for Employment [1972] IRLR 90
Jowitt v Pioneer Technology (UK) Ltd [2003] IRLR 356
FC Shepherd & Co Ltd v Jerrom [1986] ICR 802