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When Does Failure Frustrate a Contract? Court of Appeal Considers

Business projects sometimes fail so completely that contracts which underlie them are frustrated and cease to have effect. In an important decision concerning the abject failure of a call handling venture, the Court of Appeal considered the circumstances in which that might occur.

Company A used a network of franchisees to handle calls on behalf of its clients. Company B took over management of company A’s business and attempted to persuade the franchisees to agree to centralisation of its operations. The upshot was a mass exodus of franchisees who objected to the new arrangements and ultimately set up a new business in competition with company B.

The former managing director of company A (the businessman) had, through his corporate alter ego, signed a services agreement with company B by which he would provide consultancy advice in respect of the new venture during the first year of its operation. However, when the failure of the project became apparent, company B stopped paying him under the contract. After the businessman launched proceedings, a judge found that the contract had not been frustrated and ordered company B to pay him the sums due under the contract in full.

In challenging that ruling, company B argued that the failure to reach agreement with the franchisees meant that the venture was dead in the water and that there was no service that the businessman could usefully perform under the contract. However, in dismissing the appeal, the Court noted that ultimately abortive negotiations with franchisees had continued for some time and that the businessman had continued to provide advice during that period. There was no definite event that could be said to have frustrated the contract.

Armchair Answercall Limited v People in Mind Limited. Case Number: B2/2014/3887