Frustration in franchising

Frustration in franchising

The Court of Appeal recently held in Armchair Answercall Ltd v People in Mind Ltd that a contract for services assisting with the transition to a new franchise model was not frustrated despite all of the franchisees claiming that their franchise agreements with the franchisor were void, terminated or both.

Kendlebell Ltd (Kendlebell), a franchisor, ran a franchise business which offered telephone answering services through its franchisees. Kendlebell provided the brand, knowhow, hardware, software and an operations manual. The franchisees provided premises, equipment, call handlers and invoicing of customers.

Kendlebell wished to change the business model to centralise and outsource the provision of the telephone answering services then being offered by its franchisees to Armchair Answercall Limited (AA). To this end, Kendlebell entered into a services agreement with AA under which AA was to take over the management of Kendlebell’s business and provide the call handlers and invoicing of customers rather than the franchisees. Tthe franchisees would, in effect, become sales branches for the services now being carried out by AA.

AA entered into an agreement with an initial term of 12 months with People in Mind Limited (PIM) which was in effect a nominee for Stephen Beasley who had previously been involved with Kendlebell under various positions including managing director. Under the contractor agreement, PIM was to provide advice on Kendlebell’s history and franchisee recruitment and support in understanding for the transition to the New Method. PIM was also to make themselves available to AA to perform the services at such times as agreed between the parties.

Many franchisees were concerned about the change in the business model. Correspondence was exchanged between the franchisees and AA in which AA was “to a degree confrontational” and set out concerns and disappointments with some of the franchisees.

A solicitor’s letter was sent to AA on behalf of the franchisees on 28 September 2011 complaining about lack of proper information about the new arrangements and that the franchise agreements were void and unenforceable under EC law. One of the franchisees then emailed Kendlebell on 5 October 2011 claiming that the franchise agreements were (with one exception) null and void because they prohibited the franchisee from having independent websites. The email also claimed that Kendlebell was in repudiatory breach of the agreements as a result of its arrangements with AA.

On 6 October 2011, Kendlebell served breach notices on the franchisees and on 20 October 2011 terminated the franchise agreements. Deeds of Termination and Release were executed between 19 December and January 2012.

Some months later, in February and March 2012, the directors of AA emailed Mr Beasley of PIM to say that the purpose of the agreement had terminated as there were no longer relevant services which could be provided and the contractor agreement had been frustrated by the course of events so they suggested it should terminate on 16 March 2012.

On 3 October 2012 PIM brought proceedings to recover the monthly payments due under the contractor agreement. The AA claimed that the contractor agreement had been frustrated on or by 5 October 2012. In court, counsel for AA claimed the contractor agreement had been frustrated by the franchisees rejection of the new business model in their email of 5 October 2011.

The Court of Appeal held that the contractor agreement had not been frustrated.

Examining the authorities, the court referred to the test for frustration as follows: an event must supervene that “so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution” that it would unjust to hold them to the contract and they are discharged from performance. The extent to which the event was foreseeable was also significant.

The court found that the services to be provided by PIM to the AA relating to the transition covered not just persuading franchisees of the benefits of the new model but also securing new business from new customers, which were not necessarily to be via existing franchisees. There were, therefore, still services to be provided under the contractor agreement. Additionally, both parties knew that the franchisees might have objections to the new business model and AA played a role in the franchisees’ rejection of this and the termination of their franchise agreements. Therefore, the franchisees’ rejection of the new business model was not a supervening outside event which the parties could not reasonably have foreseen.

Further, whilst whether a particular event is frustrated is a matter of law, the court found that the parties’ actions after the event may be a ‘pointer’ as to whether the event was a frustrating one. The delay of five months before the AA treated the contractor agreement as frustrated was noted by the court as being consistent with its conclusion that the contractor agreement had not been frustrated.

This case serves as a useful reminder that frustration cannot be easily relied on to get a party out of a bad bargain.  During the course of a contract, circumstances surrounding the contract may change but this does not necessarily mean that a contract is frustrated under law. In order for a contract to be frustrated, an outside event must occur which the parties could not reasonably have foreseen. Businesses should therefore consider the various circumstances that could arise during a contract and make sure that they are willing to comply with their obligations under the contract in any of these circumstances. Additionally, businesses should ensure that any contracts that they enter into are well drafted and give them appropriate contractual rights and remedies.

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