The doctrine of frustration: not an easy way out of an employment contract

What you need to do

• Ensure that the employment contract is drafted with the particular employee in mind, paying particular attention to the allocation of risk as between the parties. 

• In highly regulated industries, where an employee's ability to carry out their duties and obligations depends on them obtaining certain licenses and regulatory approvals, make their ongoing employment contingent upon them obtaining and maintaining these licenses and approvals.

• Before asserting that the contract has been frustrated, consider whether there are alternative means for the employee to fulfil their contractual obligations to the company.

Matthew Stahl was formerly employed by a business aviation company as a pilot on its Gulfstream aircraft. He was meant to serve the China and Asia markets for business travel, with Shanghai being designated as his Crew Base City. Soon after Mr. Stahl commenced employment in early 2020, the COVID-19 pandemic began and many governments imposed travel restrictions. Mr. Stahl was not in China at the time. While he had a business visa (Type M), this did not permit travel to China under existing regulations. Mr. Stahl needed a cabin crew visa (Type C) in order to enter the Mainland. 

At the company's behest, Mr. Stahl travelled to Hong Kong and applied for a Type C visa but was unsuccessful. The Chinese authorities informed him that the current situation was uncertain and there was no guarantee that Type C visa applications would be approved. Brilliant Jet initially placed Mr. Stahl on unpaid leave but then subsequently dismissed him summarily on the basis that, amongst other things, he had failed to obtain all necessary permits required for the performance of his duties, and as he was not based in Shanghai.

Mr. Stahl brought proceedings against Brilliant Jet in the Labour Tribunal. While the Labour Tribunal ordered the payment of his wages for the duration he was on unpaid leave, it held that the company did not have to pay his wages for the remainder of his notice period. This was because the employment contract had been frustrated by the Chinese government's policy changes arising from the pandemic, which made it impossible for the employment contract to be performed.

On appeal to the Court of First Instance, Mr. Stahl argued that the contract had not been frustrated since alternative means of performance existed. Amongst other things: 

• he could have performed his duties for Brilliant Jet in any other location outside of China since his employment contract stated that he was required to serve any part of the world and on any route served by Brilliant Jet. In fact, the company had full discretion to designate Mr. Stahl's place of work on a temporary or permanent basis; and

• some of his colleagues who were in a similar predicament to him had managed to obtain Type C visas and were able to enter China.

The Court of First Instance reiterated the established common law principles of frustration. In summary: 

• for a contract to be frustrated, it requires a supervening event, not contemplated by the parties, which goes to the root of the contract and which makes its performance impossible (and not merely difficult); 

• the circumstances giving rise to the supervening event cannot have been brought about by the default of either party;

• frustration cannot be relied upon if alternative means of performance are available;

• the doctrine should not be lightly invoked since it operates to discharge the parties from any further obligations or liability to the other; and

• in assessing whether the doctrine applied, a fact-specific and multi-factorial approach which involves examining, amongst other things, the parties' knowledge, expectations, assumptions and contemplations, in particular as to risk, at the time the contract was formed, would be required.

On the facts, Mr. Stahl's employment contract was drafted in fairly wide terms. He would have to serve Brilliant Jet in any part of the world and on any route it serviced. He would also need to relocate to a different Crew Base City if directed by Brilliant Jet to do so. It therefore could not be said that the employment contract could only have been performed from Shanghai.

Moreover, whilst Mr. Stahl's Type C visa application had not been granted by the Chinese authorities, this was not to say that it would have been impossible to obtain a Type C visa. On the facts, some of Mr. Stahl's other colleagues had been successful, and the Chinese authorities did state that visa applications would be considered on a case-by-case basis, ideally supported by a letter from a Mainland company proving the necessity of the application. Mr. Stahl's chances of being granted the Type C visa were therefore uncertain but not impossible.

As Mr. Stahl's contract had not been frustrated, Brilliant Jet's decision to summarily dismiss him from employment was held to be wrongful. The parties' existing obligations to each other under the contract continued to stand and, accordingly, Brilliant Jet was required to pay Mr. Stahl his salary until the expiry of his notice period.

Key takeaways

The decision reaffirms that the doctrine of frustration has a high threshold under Hong Kong law. 

As employment agreements are often drafted with broad discretions in favour of the employer, including as to the location of employment and the type of duties that the employer can direct the employee to carry out, employers should give careful consideration as to the likely (and unlikely) consequences of such a wide discretion. In most cases, this tends to be advantageous for the employer as it retains the right to determine how, when and where the employee's work is carried out. 

However, and somewhat counter-intuitively, there might be circumstances where a more circumscribed set of rights might actually be preferable, e.g. in highly regulated industries where regulatory licenses or approvals may be required. The employer should give due consideration to the particular circumstances of the employee and the allocation of risks between parties in weighing up where to draw the line.