In the context of a services agreement, the Court of Appeal has provided further guidance on what will amount to a frustrating event. In reaching its decision that the agreement had not been frustrated, the Court paid particular attention to the foreseeability of the alleged frustrating event and the significant delay between that event and the claim that the agreement had been frustrated.
Kendlebell (KL) ran a franchise business offering telephone answering services. Answercall (AA) was a competitor. KL wished to restructure the business to make it more efficient and AA agreed to take over management of KL’s business and assist with the restructure (under the Services Agreement). This included roll-out of the ‘New Method’ (the Transition). Under the Services Agreement, both parties accepted that the Transition was unlikely to be effected without issues arising with individual franchisees and existing customers which could result, directly or indirectly, in some loss of the existing business.
AA also agreed to engage People in Mind Ltd (PIM), effectively a nominee for the managing director of KL, to provide expert help and assistance in performance of the services, (the Contractor Agreement), as defined in that agreement and the Services Agreement.
The Transition was met with resistance from the franchisees and did not go well. On 5 October 2011, the franchisees emailed KL to say that their agreements were null and void (or alternatively that they accepted KL’s repudiatory breach of those agreements).
KL served notices of breach on the franchisees, followed by termination notices: as a result, none of the franchisees remained in the KL business, and the existing customers were lost to AA. However, AA continued to pay PIM up to and including December 2011 (under the Contractor Agreement). On 17 February 2012, AA gave notice of termination of the Contractor Agreement on the terms that PIM ‘invoice for [its] fees another 30 days and that [AA and PIM] allow the current agreement … to terminate on 16 March 2012’. AA also proposed that PIM’s director become an introducer for AA and the KL brand under a separate agreement. It was not until 13 March 2012 that AA asserted that the Contractor Agreement had been frustrated on 5 October 2011, with the departure of the franchisees.
The first instance decision in October 2014 held that the Contractor Agreement had not been frustrated and gave judgment in favour of PIM for the balance of the contract plus interest. AA appealed the decision to the Court of Appeal.
The appeal was also dismissed, on the basis that the services to be provided under the Contractor Agreement were not limited to procuring the franchisees’ acceptance of the New Method and activities in relation to existing customers. The ‘Transition’ in relation to which PIM was contracted to assist was more widely scoped to include advice as to how to deal with systems development, bid compilation and other issues; part of the Contractor Agreement also envisaged active recruitment of new customers. Further, non-acceptance on the part of the franchisees could not be regarded as a supervening event that the parties could not reasonably have foreseen: it had been recognised by the parties that the franchisees might have objections to the New Method. The possibility of not persuading any of the franchisees to remain was a real risk that AA assumed. The high threshold for discharge of the contract by frustration was not met.
This case highlights the importance of the foreseeability of a ‘supervening event’ in determining whether a contract is frustrated or not. When contracting for services, particularly in the context of the restructuring of a business, parties should be mindful of foreseeable events that have potential to significantly change the nature of a contract. For example, in this case, the consideration for services under the Contractor Agreement could have been structured differently to split out the different areas of consultancy that were to be provided by PIM, allowing a proportionate reduction in consideration where services that were to be provided were not required. Alternatively, the different services could have been provided for under two separate agreements, and the agreement dealing with existing customers and business could have included provisions for early termination in the event that retention of the franchisees prove unsuccessful.
Conduct of the party alleging frustration of the contract (AA) also played a role in court’s decision in this case. The court said that “[f]rustration, if it occurs, is a definite event. Whether any given event is a frustrating event is, once the facts said to constitute the event 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.”
In this case, AA’s belated treatment of the contract as frustrated, over 5 months after the ‘frustrating’ event occurred, was found to be striking.