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Frustration of contracts - frustratingly elusive?

Posted: 29/11/2016

Frustration: the feeling of being upset or annoyed as a result of being unable to change or achieve something. An apposite word for many in this most capricious of years. Legally speaking, a contract is frustrated when something happens which makes it impossible or illegal to perform the contract, or which changes the parties’ contractual rights and obligations so fundamentally that it would be unjust to make the parties perform them.

A frustrated contract is discharged automatically, with the parties excused from any further obligations. Because a frustrating event must not be the fault of either party, neither party may claim damages for non-performance: any loss lies where it falls. A potentially useful doctrine then, in present circumstances? The recent Court of Appeal case of Armchair Answercall Ltd v People In Mind Ltd suggests that frustration may remain frustratingly out of reach.

Frustrating facts

Kendlebell Ltd (Kendlebell) ran a franchise business offering telephone answering services. Its 10 franchisees of varying sizes recruited customers and provided premises, equipment and call handlers nationwide. They also invoiced and received payment from their 1800 customers directly. Kendlebell provided the necessary “know how”, hardware and software, operations manual, training, a brand name and other services in return for a commission.

Difficulties arose between Kendlebell and the franchisees. In 2011, Kendlebell and Armchair Answercall Ltd (AA) entered into a services agreement under which AA took over management of Kendlebell’s business. The business was to be carried out under a new method, which involved centralising the call centres, invoicing and payments – leaving the franchisees effectively as sales branches.

Clause 4.7 of the services agreement provided that AA would contract directly with Kendlebell’s managing director, Mr Beasley, or a nominee company – People in Mind Ltd (PIM) - to assist AA with the transition to the new method. The initial 12 month contract was for the equivalent of three days per week at £3000 per month (the contractor agreement).

Franchisee fallout

The franchisees did not take kindly to the proposed new method. Despite a more generous commission arrangement, they objected to the loss of control of invoicing and payment, and the removal of the call handling function. After considerable correspondence, on 5 October 2011 the franchisees asserted that the franchisee agreements were (with one exception) null and void under EC law; and purported to accept Kendlebell’s repudiatory breach of the franchise agreements because of the services agreement, amongst other things.

Neither Kendlebell nor AA accepted that the franchise agreements were void, and denied that Kendlebell had been in repudiatory breach of them. On 20 October 2011, Kendlebell served notices of termination of the franchise agreements. This stalemate was resolved by deeds of termination and release executed between December 2011 and January 2012.

Frustrating finish

This was not the end of the matter though. In February 2012, AA sent Mr Beasley notice of termination of the contractor agreement on 16 March 2012. AA argued that the contractor agreement was frustrated on or by 5 October 2011, because by that date the franchisees had made clear that they regarded the franchise agreements as void or terminated or both. They had also set up a rival telephone answering business.

However, AA had continued to pay PIM up to and including December 2011. AA proposed settling one further invoice, and suggested that Mr Beasley become an introducer for the Armchair and Kendlebell brand. Mr Beasley did not accept this, and on 3 October 2012 PIM brought proceedings to recover £3000 plus VAT per month up to October 2012. In October 2014, Collender J held that the contractor agreement had not been frustrated. AA appealed.

Final frustration

The Court of Appeal dismissed AA’s appeal. 

AA argued that the whole purpose of the contractor agreement was to secure Mr Beasley’s assistance with “any aspect of the transition of the franchisees to the new method”. Although the agreements had recognised that issues might arise with individual franchisees, the total refusal of all franchisees to engage with the new method was neither foreseen nor foreseeable as either likely or possible. The effective mass exodus of UK franchisees on 5 October 2011 therefore constituted a frustrating event.

Lord Justice Christopher Clarke did not accept this analysis. “Transition” was broadly defined and included implementing the new method for new customers and business, not just existing customers or new customers introduced by franchisees. This broad definition meant that it was impossible to say that there was no scope for PIM to support AA once the franchisees had rejected the new method: on the contrary, there was plenty of work for PIM to do, particularly given Mr Beasley’s expertise and experience in the area. PIM’s services were not limited under the contractor agreement to procuring the franchisee’s acceptance of the new method.

Foresight and facts

The Court of Appeal was clear that for an event to be frustrating, it had to be a “supervening outside event which the parties could not reasonably be thought to have foreseen as a real possibility” (paragraph 48). This was not the case here: negotiations were always going to be a delicate and complex process, and there was no means of compelling the franchisees to accept the new method. In fact, the franchisees felt that they had been mistreated, and Collender J had found that the franchisees’ departure was promoted by the acts of AA.

Clarke LJ concluded by saying that whether or not a given event is a frustrating one is, once the facts have been determined, a question of law. “If it was, the fact that the parties did not immediately treat it as such does not alter the position. What the parties did or did not do after the event may, however, be a pointer to whether the event was in truth a frustrating one” (paragraph 51). The “striking fact” that AA did not treat the contractor agreement as frustrated for some five months was consistent with the court’s conclusion that there was no frustrating event.

Finishing flurry

This case serves as confirmation that the courts continue to apply the doctrine of frustration very narrowly. There must be no element of fault by either party, and the more foreseeable the event, the less likely it is to be a frustrating event. For those reviewing their contracts in response to June’s referendum, frustration is (depending on the facts) likely to be frustratingly elusive. A new clause or variation dealing expressly with what happens when/if the UK leaves the EU is likely to lead to a far less frustrating outcome.

This article was published in Commercial Litigation Journal in October 2016.

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