Court of Appeal decision illustrates high hurdle for establishing contract has been frustrated

A recent Court of Appeal decision acts as a reminder that the court will not lightly conclude that a contract has been frustrated, particularly where (as here) the court takes the view that the alleged frustrating event was foreseen by the parties and was caused, in part, by the actions of the party seeking to rely on the doctrine. It also shows that a delay in invoking the doctrine of frustration, while not determinative, will not be helpful: Armchair Answercall Limited v People in Mind Limited [2016] EWCA Civ 1039.

Under the common law doctrine of frustration, a contract is brought to an end automatically where something happens which makes performance impossible or which changes the nature of the outstanding contractual rights and obligations so significantly that it would be unjust to hold the parties to the contract. Cases considering the doctrine arise relatively infrequently, which makes the present decision all the more interesting.

There has been much discussion of the doctrine of frustration in recent months, in the context of whether a party might successfully argue that its contract has been frustrated by Brexit-related events. That question is considered in our recent publication English law contracts post-Brexit: What changes should commercial parties expect?, which is part of our series of contract disputes practical guides.  

Background

The defendant had entered into a Services Agreement with a third party, Kendlebell Limited, under which the defendant was to take over the management of Kendlebell's franchise business offering telephone answering services. Kendlebell had 10 franchisees who, between them, had about 1800 business customers to whom they provided call answering services. The franchisees would recruit customers and would invoice the customers and receive payments, as well as running the call centres. Kendlebell provided the necessary "know-how", brand name and various services in return for a commission.

Under the Services Agreement between the defendant and Kendlebell, the business was to be carried out by a new method, under which the call centres would be centralised at the defendant's headquarters and would no longer be run by franchisees. The defendant would also bill customers and receive payments. The franchisees would service existing customers and recruit new ones in return for a commission. 

The Services Agreement provided (at clause 4.7) that the defendant would contract directly with Kendlebell's managing director, Stephen Beasley (or a nominee company, ie the claimant), as an independent contractor to assist the defendant with the transition to the new arrangements. The agreement was to be for an initial 12 month period at a rate of £3,000 per month. The claimant and defendant then entered into a 12 month "Contractor Agreement" as envisaged by clause 4.7.

The transition to the new arrangements did not go well, as the franchisees were not prepared to accept certain aspects of the changes. There was considerable correspondence between the defendant and the franchisees, which culminated in the franchisees sending emails, on 5 October 2011, asserting that the franchise agreements were null and void and purporting to accept what they contended was Kendlebell's repudiatory breach of them. Kendlebell then served on the franchisees notice of breach and ultimately notice of termination. Matters between Kendlebell and the franchisees were resolved by Deeds of Termination and Release in December 2011 / January 2012.

The defendant continued to make payments to the claimant up to and including December 2011, but then sought to bring the Contractor Agreement to an end in February / March 2012. Its position was that the Contractor Agreement had been frustrated on or by 5 October 2011 because, by that date, the franchisees had made it plain that they regarded the franchise agreements as void or terminated or both, and had set up a rival business.

The County Court rejected the defendant's arguments based on frustration and gave judgment for the claimant. The defendant appealed.

Decision

The Court of Appeal dismissed the appeal.

The defendant argued that the whole purpose of the Contractor Agreement was to give help and assistance in the performance of the services laid out in clause 4.7 of the Services Agreement, which consisted of assisting with any aspect of the "Transition" to the new arrangements. The effect of the franchisees' emails of 5 October 2011 was that there was no realistic prospect of Kendlebell / the defendant securing the franchisees' acceptance of the new arrangements, and therefore the Contractor Agreement was frustrated.

The court did not accept this analysis for a number of reasons including the following.

• The "Transition" was defined very broadly in the Services Agreement and included implementing the new arrangements for new customers or new business, not just customers introduced by the franchisees. If the franchisees refused to accept the new arrangements, the defendant could seek to recruit new customers to take telephone answering services provided under those arrangements, including by recruiting new franchisees. Under the Contractor Agreement, the defendant was entitled to call upon the services of the claimant for those purposes. In other words, the court did not accept that the services to be provided under the Contractor Agreement were limited to procuring the acceptance by the franchisees of the arrangements.
• A frustrating event must be a supervening outside event which the parties could not reasonably be thought to have foreseen as a real possibility. The defendant's failure to persuade the franchisees to accept the new arrangements could not be said to fall into that category. It was recognised that franchisees might have objections to the changes; there was no basis upon which they could be compelled to accept them; and whether they did do so was dependent on the success or otherwise of negotiations with the defendant. In fact, the negotiations faltered in part because of the way in which, in their view, the franchisees were mistreated.

The court also noted that whether any given event is a frustrating event is, once the facts have been determined, a question of law. If so, the fact that the parties did not immediately treat it as a frustrating event does not alter the position. However, the parties' actions after the event may be a pointer to whether the event was in truth a frustrating one. In this respect it was striking that the defendant did not treat the contract as frustrated until some five months later. This was consistent with the court's conclusion that there was no frustrating event.