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Contractual doctrine – A ‘frustratingly’ high bar

Business Meeting 10 Print publication

24/11/2016

A doctrine for the discharge of contracts

The doctrine of frustration, which can be an effective defence to a claim for breach of contract, provides that, on the occurrence of a ‘frustrating event’, parties are no longer bound to perform their obligations and a contract is therefore effectively terminated. A frustrating event is one which:

  • occurs after the contract has been formed;
  • is so fundamental as to go to the root of the contract;
  • is neither party’s fault; and
  • renders further performance impossible, illegal or makes it radically different from that which was contemplated by the parties at the time the contract was made.

Frustration is an option which commercial clients often wish to consider when contracts do not turn out as they had hoped. However the doctrine operates within very narrow confines as the law of England and Wales will not lightly relieve parties of their contractual obligations.

In particular, frustration is not available where the contract has otherwise made express provision for the consequences of the occurrence of the event in question, where an alternative means of performing the contract is possible or if the contract merely becomes more expensive or less commercially viable to perform. In addition, because no one party is at fault in an incidence of frustration, neither party may claim damages and if a party incurred obligations before the time of frustration, it remains bound to perform them.

Court of Appeal case: Armchair Answercall v People in Mind

A recent Court of Appeal decision [1] is a clear commercial example which provides practical pointers for any client looking to pursue or defend a frustration claim.

The defendant had agreed to take over the management of a franchised telephone answering service business. It had entered into a contract with the business’ existing managing director (by his nominee company, the claimant) under which he would assist with the transition to the new arrangements.  Under the new arrangements, the business would no longer be run by franchisees and new customers would be recruited.  The franchisees were not happy with the new arrangements.  They alleged in e-mail correspondence in October 2011 that, by as a result of the changes, the existing business was in repudiatory [2] breach of contract, such that the franchise agreements were null and void.  The franchisees therefore set up a rival business.  Some five months later, the defendant argued that the franchisees’ repudiation was a frustrating event which terminated its contract with the claimant.  The defendant therefore stopped paying the claimant, who sued on the basis that the contract was continuing and payments were due and owing for the remainder of the term.

Highlighting the limitations of the doctrine of frustration, the Court of Appeal disagreed with the defendant’s argument that there had been a frustrating event. In doing so, the court noted:

  • According to the contract, the transition to the new arrangements with which the claimant was contracted to assist included arrangements with new customers, not just those introduced by the franchisees. Therefore, rejection of the arrangements by the franchisees, while a significant blow to commercial viability, was not so fundamental as to go to the root of the contract, nor to render the claimant’s future performance impossible.
  • It was in the contemplation of the parties at the time the contract was entered into that the franchisees might object.
  • Whether or not the franchisees accepted the new arrangements was dependent, in part, on the actions of the parties, including the actions of the defendant now seeking to allege frustration. That was at the defendant’s risk.
  • Although whether or not an event is a frustrating event is a question of law, the facts of a case, including the parties’ actions after the event, may be indicative. Here, the fact that the defendant continued to work with the claimant and did not allege termination by frustration for several months is consistent with there being no frustration.

Practical advice

There are various important considerations for any party looking to bring a contract to an end, or to defend a breach of contract claim, on the basis of frustration. Are there any express contractual remedies that would preclude frustration in any event?  Would a finding of frustration actually bring about a commercially acceptable resolution, or might a damages claim or continued contractual performance prove more financially worthwhile?  Can it truly be said that the event in question was wholly outside the parties’ contemplation at the time the contract was entered into and is it strictly correct that the event renders performance of the contract impossible (as opposed to merely more expensive or inconvenient)?

To ascertain whether a particular event amounts to a true example of frustration, specialist legal advice will be required. The best practical advice is that an expert professional view should be sought at the earliest possible time, so that any genuine case of frustration is not undermined or impaired by the parties’ subsequent actions or delay.

If you would like any further advice or assistance, please do not hesitate to contact Malcolm Simpson or any member of the Commercial Dispute Resolution team.

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[1] Armchair Answercall Limited v People in Mind Limited [2016] EWCA Civ 1039
[2] a ‘repudiatory’ breach is a breach that is so serious that it goes to the heart of the contract and allows the aggrieved party to terminate.

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