In an eagerly-awaited decision, the English Court of Appeal has unanimously upheld the conclusion of the Commercial Court (itself affirming a decision of London maritime arbitrators) that a bunker supply contract on the OW Bunker terms is not a "contract of sale of goods" to which the Sale of Goods 1979 Act applies[1].

For the background to the case and discussion of the first instance decision, see my previous blogpost here.

By way of a very brief recap, the issue arose because the Shipowners' ("Owners") defence to the claim for payment by OW Bunker Malta ("OWBM") (pursued by ING Bank as assignee) rested on two provisions of the Sale of Goods Act 1979 (the "Act").  While other points remain in dispute, it was recognised that, if the Act applied, OWBM's claim would fail. 

The appeal

The issue on appeal was restricted to the question whether the contract between the Owners and OWBM was a contract for the sale of goods within the meaning of the Act[2].  The Court of Appeal held that it was not, for essentially the same reasons as the arbitrators and the Judge at first instance. 

Like the Judge, the Court of Appeal accepted that the language of the OW Bunker terms suggested the parties were thinking in terms of a sale and purchase of the bunkers.  However, the labels which parties to a contract use only take the matter so far, and the Court of Appeal agreed that it was necessary to analyse the obligations which the parties in fact undertook. 

Looking at the terms of the contract, the Court of Appeal identified three critical provisions as showing that transfer of property in the bunkers was not the essential subject matter of the contract:

  • The retention of title until payment was made,
  • The period of credit before payment fell due, and
  • The permission given to the Owners to consume the bunkers in the meantime.

At first instance, the Judge gave equal weight to a fourth factor – that all parties were aware that some or all of the bunkers were likely to be consumed before expiry of the credit period.  The Court of Appeal did not consider this commercial context to be such an important factor.  In their view, it was not necessary to look far beyond the terms of the contract themselves, although the commercial context supported their conclusion.

The Court of Appeal then turned to consider what the true nature of the contract was, if not a contract of sale.

  • "It is a contract under which goods are to be delivered to the owners as bailees with a licence to consume them for the propulsion of the vessel, coupled with an agreement to sell any quantity remaining at the date of payment, in return for a money consideration which in commercial terms can properly be described as the price." 
  • "…what the owners contracted for was not the transfer of property in the whole of the bunkers, but the delivery of a quantity of bunkers which they had an immediate right to use but for which they would not have to pay until the period of credit expired."

In a passage which does not bode well for certainty, the Court of Appeal went on to say that the contract was a contract for the sale of goods to which the Act applied as regards the bunkers remaining at the time of payment.  A failure to pass title to such unconsumed bunkers would be a breach of contract by OWBM.  However, such a breach would not give Owners a complete defence unless "contrary to all expectations" such a large proportion of bunkers remained that there was a total failure of consideration.

At first instance, the Judge went on to consider whether OWBM had obtained the necessary permission from Rosneft (who retained title) for Owners to consume the bunkers.  The Court of Appeal considered that the Judge should not have done so, but Owners did not challenge the Judge's finding.  Rosneft themselves filed submissions on the issue, but the Court of Appeal declined to address it.

Comment

This is another disappointing decision for shipowners and charterers who contracted with OW Bunker.

The Court of Appeal has also (with respect) muddied the waters by holding that the Act doesapply to the sale of bunkers still on board the vessel at the time payment is made.  This, however, is a mere fortuity and it is surprising that the Court of Appeal considered it should affect the characterisation of the contract.

It is to be hoped that these important issues will receive consideration by the Supreme Court, and that the Court will speak clearly with one voice.  If not, much more litigation will inevitably follow.     

As mentioned above, the Court of Appeal did not address the question whether OWBM had obtained permission from Rosneft for the Owners to consume the bunkers.  This means they did not have to consider what is really the key commercial issue, namely the risk of arrest in other jurisdictions. 

It therefore remains something of a jurisdictional lottery for shipowners and charterers as to where physical suppliers choose to take action. 

While interpleader relief has been granted in the USA and Canada, it has been refused in Singapore, and it seems unlikely that the English courts would assist.  Although unrelated to the OW Bunker saga, shipowners also now face the possibility of arrest in Australia on the basis of maritime liens arising under foreign law.