It is important to distinguish the events that caused the goods subject to the contract of sale not to exist both from the position before the contract is made and to those that arose after the contract is made.

Critically evaluate this statement.

Answer

The key to this question is the understanding of the differences between ss 6 and 7 SGA 1979.

By way of introducing your answer, you should explain that a contract for the sale of specific goods which, without the knowledge of the seller have perished at the time when the contract is made, the contract is void whereas an agreement to sell specific goods which, without any fault on the part of either of the parties, the goods subsequently perish before the risk passes to the buyer, the agreement is avoided.

s 6 deals with events before the contract is made and s 7 deal with the events after the contract has been made. Another way of looking at this is to consider s 6 under the category of “impossibility” or “mistake” and s 7 under the category of “frustration”. The key difference between these sections being that where a contract is impossible to perform at the time it was made, it might be void for mistake whereas if the contract subsequently becomes impossible to perform, illegal or radically different from that which was intended, then it might be deemed frustrated.

In the old House of Lords’ case of Couturier v Hastie (1856) 5 HL Cas 673, it was held that in the case of a contract of sale of goods, if, unbeknown to the parties, the goods no longer exist, there will be no liability. The effect of this decision can now be seen in s 6 SGA.

You should demonstrate your understanding of s 6 by explaining that the section only applies to goods that have perished and not where the goods never existed although if the seller agrees to sell specific goods which both seller and buyer believe to exist but which in fact did not exist, then the contract would be void at common law.

An explanation about what is meant by ‘perished’ is important. Beyond total destruction of the goods (in which case the goods will clearly have perished), the courts have also held that goods will be deemed to have perished if they become significantly altered so that, for commercial purposes, they can longer be said to be the same goods that were the subject of the contract (Asfar & Co v Blundell [1896] 1 QB 123). Better answers will explain the different (and seemingly incorrect) reasoning of Morris J in Horn v Minister of Food [1948] 2 All ER 1036 where he held that provided the goods were still in existence and remained in a form that could be identified as the goods relating to the contract then the goods will not have perished even if they are worthless. It is also important to explain the position about partial loss of the goods and explain the reasoning in cases like Barrow, Lane & Ballard Ltd v Phillip Phillips & Co Ltd [1929] 1 KB 574 and Sainsbury Ltd v Street [1972] 1 WLR 834.

Turning now to s 7 which deals with events after the contract is made. You should explain the common law position where, after a contract has been made, and through the fault of neither party something happens to make its performance impossible, the contract is said to be frustrated and the parties are released from future obligations. s 7 mirrors this common law position.

Better answers will explain your understanding of the application of s7 by pointing out that although it is similar to the common-law rules on frustration, the Law Reform (Frustrated Contracts) Act 1943 (which applies to common-law frustration by setting out the legal consequences of a contract that has been held to have been frustrated) has no application to contracts avoided by s 7 of the SGA: s 2(5)(c) of the 1943 Act.

Frustration, for the purpose of s 7, can arise when the goods subsequently perish before the risk passes to the buyer. It can also arise in cases where, after the contract has been made, its performance becomes illegal (Avery v Bowden (1855) 26 LJ QB 3).

You should emphasise in your answer that s 7 (as with s 6) only applies in the case of specific goods. In all other cases where the contract becomes impossible or illegal to perform, you should consider whether it has been frustrated at common law. Just as goods that have never existed cannot perish, a contract for the sale of future goods that do not materialise will not be avoided by s 7 (as this section only covers specific goods). However, such a contract may be frustrated at common law (Howell v Coupland (1875-76) LR 1 QBD 258).

You should also explain what happens in the event the contract is held to be avoided (or frustrated) in that the parties are relieved from further performance. This means that, subject to what was said in Sainsbury Ltd v Street about partial delivery, the seller is relieved from having to deliver the goods and buyer from paying for them. This reflects the presumed intention of the parties to the contract had they put their minds to the events that later occurred. Of course, had they put their minds to the problem and reflected this in the contract, then neither ss 6 or 7 will apply, as these only apply in the absence of agreement to the contrary.

You also need to explain the difference between the contract being avoided by s 7 and frustrated at common law. Where the contract is avoided under s 7, and the buyer has suffered a total failure of consideration, then he can claim the return of monies paid under the contract. He will have suffered a total failure of consideration if he received nothing for what he had bargained for. The failure of consideration must be total, and the goods must have perished before any of them were delivered to the buyer. If the failure of consideration was only partial, for example, in the unlikely event that the buyer had some use of the goods before they perished, then he will not be entitled to recover any of the money paid under the contract. Better answers will explain that this possibility is unlikely to arise because, once the goods have been delivered to the buyer, risk will usually also have passed to him and s 7 only applies in cases where the goods “perish before the risk passes to the buyer”. Where the contract is frustrated at common law, the effects of frustration and the question of monies is governed by the Law Reform (Frustrated Contracts) Act 1943. You should emphasise in your answer that the 1943 Act has no application where the contract is avoided by s 7 of the SGA.

Although the contract is discharged and automatically terminates upon a court holding it to be frustrated, it is important to appreciate that the contract is not treated as void or as if it never existed. The legal consequences of acts that were performed before the frustrating event will need to be considered.

Whichever way you decide to answer this sort of question, you should ensure that your answer explains the key points on ss 6 and 7:

• Both ss 6 and 7 relate only to specific goods and in the absence of any agreement by the parties to the contrary.
• Neither sections apply to unascertained goods nor to goods that were ascertained after the contract was made.
• s 6 deals with sales (of specific goods).
• s 6 applies only where, without the knowledge of the seller, specific goods perish before the contract is made. It does not apply where the goods never existed in the first place.
• s 7 does not cover immediate sales but only agreements to sell specific goods where property in the goods will pass to the buyer at a future date.
• With s 7, the perishing of the goods must arise after the contract was made but before risk in the goods passes to the buyer.
• If the risk in the goods has already passed to the buyer, then s 7 will not apply and the buyer will bear the loss and have to pay the contract price.
• Neither party can be at fault for s 7 to apply.