‘Given that the doctrine of frustration applies to commercial contracts, sections 6 and 7 of the Sale of Goods Act 1979 are unnecessary and serve only to over-complicate the law.’ Discuss.
Introduction
The will theory, of classical contract law, holds an agreement to be enforceable by parties mutually exercising their free will to create an exchange of promises[1]. When such agreements become unattainable due to the buyer or seller being unable to perform the contractual obligations, the doctrine of frustration steps in to correct this eventuality. The test was initially formulated by the House of Lords, where Lord Radcliffe articulated that ‘frustration occurs where…a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract’[2]. It is worth noting there is no requirement of default by either party, and that the test has been applied objectively by the courts. English common law has consistently asserted that the doctrine applies ‘automatically’[3] and totally, so frustration forces a contract to an end ‘forthwith, without more’[4]. This therefore begs lawyers to question the necessity of statutory rules of frustration, namely under the Sale of Goods Act 1979[5]. This discussion is polarised between the need for supplementing the protection of parties to a frustrated contract which was out of their control, and those who assert that the relevant provisions serve only as an unwelcomed complication.
The starting point for the SGA is that the rules of common law are explicitly preserved[6], and it is this overlap which shall be critically discussed throughout this essay. Encompassing all supervening events, the common law focuses on the difference between the arrangement originally envisaged and the outcome rendering performance of obligations impossible to fulfil. It operates to discharge both parties from obligations which are yet to be accrued after the destruction of goods, and to recover the price paid if there has been a total failure of consideration. Going hand in hand with frustration, the doctrine of risk asserts that prima facie, if the goods perish before the property passes, the seller must bear the loss and cannot claim the price. By referring only to situations where the seller has not defaulted, section 7 serves to mitigate the potentially harsh effects on sellers were the common law rules to apply by discharging both obligations of payment and delivery. this would support the widely held view that section 6 and 7 came as statutory solutions[7] to the issues discussed in the cases of Couturier v Hastie[8] and Howell v Coupland[9], respectively.
Section 6 and frustration
The SGA provides that: “Where there is a contract for the sale of specific goods and the goods without the knowledge of the seller have perished at the time when the contract is made, the contract is void.”[10]. Particular focus, here, is put on the word ‘perished’. Although it holds seemingly archaic connotations, this wording held to convey the essential requirement of the goods being in existence at some point, then becoming destroyed at a later time. This section, nor any other, does not include an exhaustive definition of the verb so courts have interpreted it widely to account for all methods of destruction resulting in irreversible and severe change. Because the section seeks to protect parties at the time of the contract being made, rather than during performance, it gives rise to the presumption that the seller is not contracting that the goods actually exist – so there is no implied condition of existence. The widely-cited Australian case, McRae v Commonwealth Disposals Commission[11], highlights the gap created by this requirement. The latter contracted to sell McRae a tanker shipwreck on the ‘Jourmand Reef’ which supposedly contained oil, giving the buyer specific coordinates to find it. It later became known that the Commission officer had been mistaken, and there had never been a shipwreck, and the existence was merely a product of rumours. Even though the buyer has relied on this information from the seller, and paid money for the goods, the party would not be protected under section 6 because the shipwreck never existed. If section 6 were to apply, it would discharge the obligations of both parties which would treat the sellers generously in such a negligent agreement, and would put the buyer into the same position that it was pre-contract. Another difficulty created by the provision is where a party cannot establish the cause of destruction, because the court requires positive proof that it fell outside of the seller’s control. In Joseph Constantine SS Ltd v Imperial Smelting[12] a vessel was damaged in an explosion which then rendered the use of the vessel futile and unable to carry out the contractual obligations. Even though this would satisfy the requirement of perishing, the cause of the explosion could not be established so normal common law rules of frustration were applied. This meant that only the obligations accrued after the destruction of the vessel would be discharged, and the price paid would likely not be recovered as some consideration can be established. Because of these gaps, where common law rules do apply, this section has often been regarded more as a rule of construction. McKendrick[13] categorises the provision outside of frustration, and more as ‘an exemplar of the rule of common law rendering a contract void for antecedent impossibility’[14]. When analysing cases similar to the above, it becomes apparent that section 6 creates more gaps than it fills: it gives rise to difficulties with perishing (and partial perishing) as opposed to destruction or theft, and the meaning of a specific good at the time of a contract.
Section 7 and frustration
Section 7 of the SGA, as the counterpart for section 6, provides for the avoidance of the agreement where the three requirements apply: a) specific goods which have b) perished c) before risk has been passed. This immediately excludes future goods, unascertained goods and fully executed contracts – therefore, only applying in limited circumstances and covering a rudimentary notion of frustration. This has been widely criticised by academics as an ‘incomplete statement of the doctrine of frustration’.[15] However, it is submitted that the perishing of goods cannot frustrate a contract otherwise than under section 7, because the general presumption is that property and risk pass at the same time[16]. The provision not only embraces total physical destruction but also a total loss where the goods no longer are in a saleable state, and have deteriorated too much from those which were contracted for. Barrow Lane and Ballad v Phillips Phillips and Co[17] held that if partial perishing takes place, an inseverable good would be frustrated by this, but only the perished part of a severable good becomes frustrated, which provides an extension from the protection in section 6. This prevails over the common law rules when discussing perishing, but is not operative in other areas of destruction. Beyond the scope of section 7, common law frustration rules can be invoked before risk as passed, without default of the parties and subject to the other common law prerequisites. So, although the common law covers all grounds of destruction, section 7 is useful for supplementing the discussion of perishing beyond an agreement to sell. This means the provision is far from futile, and arguably has a simple relationship with the common law doctrine where cases fall beyond its scope.
Conclusion
Beyond the Sale of Goods Act 1979, the Law Reform (Frustrated Contracts) Act 1943 also acts to supplement the common law doctrine of frustration (but covers the consequences more than the subject matter of the contracts). Both statutes would never be regarded as the ‘perfect solution’[18], but the SGA goes comparatively better against the common law backdrop – i.e. there are no explicit areas of tension. Although section 6 gives rise to a few difficulties, section 7 should be viewed more as an extension of protection for commercial parties rather than a complication. The case law discussion of perishing has developed to new areas which, before the statute’s existence, would not have been securely protected.
Words: 1467
Bibliography
Books
- Charles Fried, Contract as Promise (1st edn, Harvard Press 1981)
- Christian Twigg-Flesner, Rick Canavan and Hector MacQueen, Atiyah and Adams’ Sale of Goods (13th edn, Pearson Education 2016)
- Ewan McKendrick, Goode on Commercial Law (5th edition, Penguin Books 2016)
- Michael Furmston, Commercial law (2nd edn, Pearson Education 2013)
- Sir MD Chalmers, The Sale of Goods Act 1893 including the Factors Acts 1889 and 1890 (9th edition, Butterworth and Co 1922)
Journal Articles
- Ho Hock Lai, Some Reflections of Property and Title in the Sale of Goods Act (1997) 56 Cambridge Law Journal 3
- John H Baker, Frustration and Unjust Enrichment (1979) 38 Cambridge Law Journal 2
Cases
- Barrow Lane and Ballad v Phillips Phillips and Co [1928] All ER Rep 74
- Couturier v Hastie (1856) 5 HLC 673
- Davis Contractors Ltd v Fareham U.D.C. [1956] A.C. 696
- Howell v Coupland (1876)1 Q.B.D. 258
- Lauritzen AS v Wijsmuller BV [1990] 1 Lloyd’s Rep. 1
- Joseph Constantine SS Ltd v Imperial Smelting [1942] AC 154
- McRae v Commonwealth Disposals Commission [1951] 84 CLR 377
Statutes
- Law Reform (Frustrated Contracts) Act 1943
- Sale of Goods Act 1893
- Sale of Goods Act 1979 section 6; 7; 48(1); 62(2)
Footnotes
[1] Fried C, Contract as Promise (1st edn, Harvard Press 1981)
[2] Davis Contractors Ltd v Fareham U.D.C. [1956] A.C. 696
[3] J. Lauritzen AS v Wijsmuller BV [1990] 1 Lloyd’s Rep. 1. per Bingham LJ
[4] Ibid
[5] (SGA) Section 6 and 7
[6] Section 62(2)
[7] Sale of Goods Act 1893
[8] [1856] 5 HLC 673
[9] [1876]1 Q.B.D. 258
[10] SGA section 6
[11] [1951] 84 CLR 377
[12] [1942] AC 154
[13] McKendrick E, Goode on Commercial Law (5th edition, Penguin Books 2016)
[14] Ibid 183
[15] Furmston M, Commercial law (2nd edn, Pearson Education 2013) 177
[16] SGA section 48(1)
[17] [1928] All ER Rep 74
[18] Baker J H, Frustration and Unjust Enrichment (1979) 38 Cambridge Law Journal 266
rhvs reports 