#13888 - The Doctrine Of Risk And Frustration - Commercial Law

The Doctrine of Risk and Frustration

When does property pass?

• Specific goods

s17, SGA 1979

• ‘Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred’

• Will be clear from the conduct from the parties or the agreement itself.

• In this module the intention will not be clear. If the intention is not clear you need to fall back on the default rules, which apply: s.18 (below).

• s18 SGA 1979 lays down rules for determining when the property in goods passes

  • ‘Unless a different intention appears, the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer’

  • In other words it is quite a comprehensive set of guidelines

• Rules 1-4 – apply to specific goods

• Rule 5 – applies to unascertained goods

• Unascertained goods

s16, SGA 1979

• ‘Where there is a contract for the sale of unascertained goods no property in the goods is transferred to the buyer until the goods are ascertained’

• the courts need to be absolutely certain which goods belong to the subject matter of the contract

• Where goods are unascertained and have not yet been unascertained then the goods will not pass. What we mean by that is that we have to have unconditional appropriation.

Pignatoro v Gilroy & Son [1919]

• Contract to sell 140 bags of rice- by default they are unascertained goods

• S notified to B that goods were available for collection at specified address

• B failed to collect the goods for one month

• Meanwhile goods had been stolen

• Quite important to determine when property in goods has passed, because when property in goods has passed then the general rule is that risk also passes

• In a scenario such as this where the goods have been stolen – courts asked: who is liable for the loss?

• Must consider whether one of the parties is at fault – as fault overrides risk

• Assuming that no party is at fault – go back to the position of who has risk? In order to answer that must ask who has property in the goods

• In this situation property had passed – surely there was nothing that the buyer could say that could excuse him from being required from taking delivery of the goods

• The goods fit the description – apparently the seller notified the buyer to be collected, and so must have set it aside. Certainly we must have unconditional appropriation

• The courts have said that for unascertained goods we need unconditional appropriation (Carlos Federspeil) so we can say that from seller to buyer that property will pass

• UA means earmarking the goods and giving notice (can be constructive notice)

• The general rule is that property and risk will pass together. And so if property has passed then the buyer is liable for the stolen goods.

Retention of title

• Insolvency issues (“the Romalpa clause”)

Seller ? Sells raw materials (leather)

Buyer 1 Makes them into handbags

Buyer 2 buys the handbags to sell in a shop

What happens when the bags have been sold to buyer 2, but has not yet paid S for the goods? What rights and remedies would S have if B1 were to go insolvent?

• Buyer 2 in applying nemo dat takes the goods in good faith & without notice – actually are these are the same goods as these? Not the same chattel – one car, one piece of jewellery – something different. Buyer 2 walks away.

• Advice to seller: incorporate a retention/reservation of title clause into the contract.

• This is more or less borne from s.19 of the Sale of Goods Act 1979, which talks about the retention of the right of disposal. It is essentially a condition into the contract – and only once the condition is met will property pass

• A way of holding property back from passing to buyer 1.

• In this scenario the condition most likely will be is that once the debt is discharged will property pass.

• The seller can incorporate this clause and say something as simple as “property will not to buyer 1 until the credit is met (not good enough from the nemo dat exceptions)” or “goods that are kept in the warehouse of buyer 1 must be labelled belonging to the seller” or “buyer 1 must store the goods in such a way that they are clearly identifiable as the seller’s”

• So the second clause is quite useful – as if contractually the buyer has not met the credit the seller can keep the goods. And the goods are labelled – so there is certainty

• Alluding to (Romalpa, see below) The seller decided to provide in the contract between seller and buyer 1, that buyer 1 owed a fiduciary duty to hold monies on account from the proceeds of sale of any goods which originated from the seller’s raw materials on behalf of the seller

  • So as we can see it is an agency relationship. Buyer 1 becomes an agent of the seller

• What if buyer 1 doesn’t do this? There needs to be something to prevent buyer 1 from doing this

• So the fiduciary duty is mixed with a charge. A charge is like a lien in property law – but in this case would be relevant to a company that is registered at Companies House under the Companies Act 2006. So in the event that the company is insolvent we can see in the books at Companies House that someone has registered a charge and as having an interest in company

• In other words this person who registered a charge at companies house stands ahead of any secured/unsecured creditors in insolvency

• In order for this reservation title clause to be effective you must first say that property wont pass until the condition is met, or until the credit is met, and that any goods stored in the warehouse are labelled as belonging to the seller – clearly identifiable – and then you have to say that buyer 1 acts as seller’s agent therefore there is a fiduciary duty – therefore an account must be open to collect proceeds

• Must be very clear

Aluminium Industrie BV v Romalpa [1976]

• The clause said:

  • 1) the ownership in the goods is to pass on full payments

  • 2) That the goods must be stored until payment in such a way that they are clearly identified as property of the claimant (seller)

  • 3) If the purchaser makes new goods from (in this case aluminium foil) of the claimant then the seller becomes owners of the new goods as an assurance for the price

  • 4) Until full payment of the price has been made the buyer 1 is store the newly created goods in the capacity of fiduciary owners

    • So they are to keep any ‘handbags’ in the warehouse, and that FD is not only for the newly worked products but also the worked products in the warehouse.

    • They must be recognised as being held for the seller – so labelled

  • 5)The buyers are entitled to sell the new goods to the parties, in the ordinary course of business provided that they hand over their rights against those buyers, until the raw materials have been paid for.

    • So there is a very strong principal/agent situation here

    • The question really is whether where buyer 1 drops out – whether the seller is able to trace the proceeds of sale on the subsequent contract or with any of the third parties

• The Court of Appeal said that buyer 1 acts as a bailee. What the seller was hoping to do is to treat buyer 2 as bailee – which is not easily done. Buyer 2 knows nothing about the seller. So how can the seller be bailor and buyer 2 bailee?

• Important to recognise that there is a lot of literature on this. ROT are heavily criticised. They have to be comprehensive. They are these extra reqs such as registering the charge at Company’s house and a duty on the buyer to labelt he goods…something that the seller has no control of. Doesn’t provide absolute certainty. A risky venture. It is a possible solution to the problem – as it is common practice to sell goods in credit – where liquidity is an issue.

Non-existent goods (moving towards frustration)

SGA 1979, s.6:

• ‘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 was made, the contract is void.’

• Links to contract law. Entering into a contract on the basis of mistake: where on or both parties entered into the contract that they thought that the goods existed

• Before the contract

Couturier v Hastie (1856)

• Established the principle.

• Starting point with respect to sales of goods.

Barrow, Lane and Ballard Ltd v Philip Phillips Co Ltd [1929]

• 700 bags of nuts

• The nuts were believed to be in particular warehouse.

• Unknown to the parties – 9 bags of the nuts were stolen before the contract was made

• Held that s.6 applied and the contract was void

• Even though this was a mere 15% of the total – this was enough.

• Partial non-existence of the goods means the quantity is non-existent – and therefore the contract is void

Asfar and Co Ltd v Blundett [1896]

• Concerning a cargo of dates

• The dates were contaminated with sewage. And it began to ferment. Question was had the cargo dates perished?

• Well…applying a very strict definition of perished – they still exist – but just not fit for the original purpose of consumption

• The commercial objective had perished – and this was enough – “commercially perished” – with respect to the sales of goods act.

McRae v Commonwealth Disposals Commission (1951)

• A ship-wrecked tanker was supposed to be located on a particular reef. There was a tendering to see who could go & salvage the tanker

• Held: the vessel & reef did not exist and therefore no contract

• In that case McRae was able to recover damages on negligence

Frustration

• S.7 of the Sale of Goods Act 1979 provides where something has happened to the goods after the...