Frustration Of Contract In The Employment Context: Lessons From Hedrick

The recent British Columbia Supreme Court decision of Hedrick v Johnston Meier Insurance Agencies Ltd., 2026 BCSC 1250 (“Hedrick”) confirms the high threshold for frustration of contract in the employment context. The decision also underscores the importance of responding meaningfully to workplace health and safety concerns and clarifies when WorkSafeBC benefits may be deducted from wrongful dismissal damages.

Background

Hedrick concerns an employee of Johnston Meier Insurance Agencies Ltd. (“JMI”), Amber Hedrick, who developed permanent psychological injuries after years of being stalked by a representative of one of JMI’s clients. As the stalking escalated and her mental health deteriorated, Ms. Hedrick repeatedly raised concerns with her manager who failed to take concrete steps to address the stalking, failed to explore alternative working arrangements, and failed to take positive steps to protect her health and safety. Ms. Hedrick was then directed to JMI’s human resources (“HR”) manager, who put her in contact with WorkSafeBC. On October 4, 2021 Ms. Hedrick reached a breaking point and requested vacation due to declining mental health, and ultimately went on medical leave. She began receiving temporary wage-loss benefits from WorkSafeBC as of this date.

The stalking continued after Ms. Hedrick went on leave and on August 24, 2022, WorkSafeBC determined that Ms. Hedrick had suffered permanent injuries, including post-traumatic stress disorder and major depressive disorder. WorkSafeBC determined that the actions of the stalker and Ms. Hedrick’s manager contributed to her injuries. It also imposed permanent restrictions preventing Ms. Hedrick from working with JMI, her manager, and the stalker. After receiving this decision, JMI formally terminated Ms. Hedrick’s employment on September 16, 2022, on the basis of frustration.

Was the Contract Frustrated?

A key issue was whether WorkSafeBC’s determination amounted to frustration of contract. Frustration occurs where an event not contemplated by the parties and not caused by either party makes performance of the contract impossible.¹ When relying on frustration, the employer must prove that an employee’s contract has been frustrated.

In Hedrick, the parties agreed that the relevant events had not been contemplated when they entered into the employment agreement. However, the defence failed at the second step of the inquiry: whether supervening event occurred without fault on the part of JMI. In making its assessment, the Court emphasized the stringent standard for frustration in the employment context.

The Court held that Ms. Hedrick’s manager had a positive duty under section 23 of the Workers Compensation Act, RSBC 2019, c 1 (the “WCA”), to ensure the health and safety of workers under his direct supervision. The Court found that JMI failed to take reasonable steps to address the known hazard to Ms. Hedrick’s health and safety. Ms. Hedrick brought the issue to her manager multiple times, but he did not take meaningful steps to protect her, despite knowing the stalker’s impact on Ms. Hedrick’s mental health.

The HR manager similarly failed to provide her with workplace support. The Court therefore found that JMI’s conduct directly contributed to Ms. Hedrick’s injuries and inability to return to work and the defence of frustration failed.

When Are WorkSafeBC Benefits Deductible from Damages?

Wrongful dismissal damages are intended to place an employee in the financial position they would have occupied had the employer provided reasonable notice. An employer may seek a reduction for income earned in mitigation or for a compensating advantage that would otherwise result in double recovery. For example, a benefit intended to replace the lost income during the reasonable notice period may be deductible from wrongful dismissal damages. By contrast, a benefit serving an independent purpose, such as compensating for an injury or loss of function, may not be deductible. Accordingly, the Court focused on the nature and purpose of the WorkSafeBC benefits Ms. Hedrick received.

The Court determined that the benefits Ms. Hedrick received before August 29, 2022 were primarily wage loss benefits and, in principle, deductible. However, because they did not overlap with the reasonable notice period, they were not deducted. The benefits Ms. Hedrick received after August 29, 2022, when WorkSafeBC determined her injuries were permanent, were intended to compensate Ms. Hedrick for her injuries, loss of function, recovery and return-to-work needs, rather than to replace lost wages. Accordingly, none of the WorkSafeBC benefits were deducted from Ms. Hedrick’s wrongful dismissal damages.

Key Takeaways for Employers

This decision is an important reminder that employers and supervisors have a positive legal duty to ensure the health and safety of their employees and to address known or reasonably foreseeable workplace hazards. A failure to respond meaningfully to a known hazard may prevent an employer from later asserting frustration arising from an employee’s resulting inability to work.

The decision also confirms that a WorkSafeBC determination that an employee is permanently unable to return to work does not, by itself, establish frustration. Before terminating on the basis of frustration, an employer should assess whether its own acts or omissions contributed to the circumstances that made continued employment impossible or radically different.

Finally, not all WorkSafeBC benefits serve the same purpose. Employers seeking a deduction from wrongful dismissal damages should confirm the type, purpose and timing of the benefits at issue. Temporary wage-loss benefits may be deductible where they overlap with the reasonable notice period and compensate for the same loss of income. Benefits intended to compensate for permanent injury, loss of function, or vocational rehabilitation may not be deductible.

Footnote

1 Aldergrove Duty Free Shop Ltd v MacCallum, 2024 BCCA 28 at paras 36-37 [Aldergrove].