A recent Court of Appeal decision, Armchair Answercall Limited v People in Mind Limited, confirms that there is a high hurdle for establishing that a contract has been frustrated. The court’s consideration of the doctrine of frustration is welcome, because it is rarely dealt with in case authorities.
The court refused to find that the contract had been frustrated in this case, particularly because it held that the alleged frustrating event should have been foreseen by the parties and was partially caused by the conduct of the defendant, who was seeking to rely on the doctrine. Another influential, if not determinative, evidential factor was the defendant’s delay in invoking the doctrine.
The defendant entered into a contract with the claimant, to manage the transition of a business telephone answering service from being run by a network of franchisees to becoming a centralised service where the franchisees effectively became sales branches (transition agreement). The new, centralised operation was to be run by the defendant under a subsequent contract with the claimant (contractor agreement).
The franchisees refused to accept the changes proposed and asserted that there had been repudiatory breaches of their franchise agreements, which were therefore null and void. Ultimately the dispute with the franchisees culminated with the termination of the various franchise agreements.
The defendant subsequently alleged that the contractor agreement had been frustrated by the franchisees treating their franchise agreements as void or terminated, and setting up rival businesses. The County Court gave judgment for the claimant, rejecting the defendant’s argument that the contractor agreement had been frustrated.
On appeal, the defendant argued that the franchisees’ conduct in refusing to accept the new arrangements had frustrated the whole purpose of the contractor agreement, which was for it to assist with the transition to the new arrangements. It contended that the franchisees’ email assertions that the franchise agreements were void had meant that, from that point onwards, there was no realistic prospect of the defendant securing the franchisees’ acceptance of the new arrangements, and the contractor agreement was therefore frustrated.
The court disagreed with that analysis for two key reasons. First, the services that the defendant was expected to provide under the contractor agreement were not limited to procuring the acceptance by franchisees of the arrangements; the defendant was expected to implement the new arrangements for new customers and new business as well, and when the franchisees refused to accept the new arrangements, the defendant could have sought to recruit new customers to take telephone answering services provided under those arrangements, including by recruiting new franchisees. Further, the defendant was entitled to call upon the services of the claimant for those purposes under the contractor agreement.
Second, the court held that a frustrating event must be a supervening outside event that the parties could not have reasonably foreseen as a real possibility. In this case, it had been recognised that the franchisees might object to the changes, particularly when they could not be forced to accept the changes. Whether or not the franchisees accepted the changes depended on how successful the defendant was in negotiating with them, and here the negotiations had stalled because the franchisees believed that they had been mistreated.
Another important evidential point related to delay. The court noted that whether any given event is a frustrating event is, once the facts have been determined, a question of law. Here, the parties delayed in treating the franchisees’ email assertions as a frustrating event for five months. That delay did not change the legal analysis. However, it was striking evidence from which it should be inferred that the event was not in truth a frustrating event.
Cases considering the doctrine of frustration arise relatively infrequently, which makes this decision so interesting. It demonstrates that the burden of proving frustration is a heavy one, which is unsurprising, because the consequence of frustration – that the agreement ends automatically – is so serious. The decision is particularly well timed, given recent discussion among practitioners as to whether a party might successfully argue that its contract had been frustrated by Brexit-related events.
The judgment is also a reminder that companies entering into contracts should try to identify all possible “supervening events”; in other words, events that could realistically happen and which, if they did, would make performing the contract impossible, or change the nature of each parties’ rights and obligations under it, thereby potentially ending the contract automatically because it had been “frustrated”.