Contract Frustration – Seeing Into The Future?

What is "frustration"? Contractual frustration is the legal termination of a contract in circumstances where an event occurs, which is so fundamental and entirely beyond the contemplation of the parties at the time of contracting and which renders performance impossible, illegal or which makes the obligations of the parties radically different. If a contract is deemed to have been frustrated, it is automatically discharged and the parties are released from their future obligations.

There is a high threshold to reach in order to claim frustration. One of the most important criteria and one which is often overlooked, is the need for the frustrating event to be one that is beyond what the parties contemplated at the time of contracting. Therefore, if you appreciate the likelihood of an event occurring, even if such a likelihood is very slim, it is unlikely that you would be successful in claiming contractual frustration.

For this reason, when negotiating commercial agreements, it is important to reach a deal which holds as much certainty as can reasonably be achieved and which as far as possible, accounts for the foreseeable. Having a well drafted and certain contract which provides a mechanism for the parties to work with in the event that something goes wrong will help to avoid disputes.

The recent case of Armchair Answercall Limited v People in Mind Limited [2016] EWCA Civ 1039 is an example of parties to an agreement appreciating the likelihood of issues arising, but not setting out in their agreement how these should be dealt with.

In this case Kendlebell Ltd (Kendlebell) ran a franchise business which offered telephone answering services. It had 10 franchises which were based in the UK and Ireland. Each franchise recruited its own customers and provided them with premises, equipment and call handlers, which it then invoiced them for.

As the franchisor, Kendlebell provided its franchisees the necessary know-how, hardware and software, operational manual, training, brand name and other services in return for commission which was based on the turnover of the franchise. The business model was ineffective as it only allowed for the realisation of few economies of scale amongst the franchisees.

Kendlebell therefore, entered a "Services Agreement" with Armchair Answercall (AA) under which AA would take over the management of Kendlebell's business and operate it under a "New Method" which was to improve productivity. Under this New Method, AA...