A shipowners' bid to avoid the risk of having to pay twice for bunkers supplied has been thwarted by the English High Court decision in PST Energy 7 Shipping LLC v OW Bunker Malta Ltd [2015], which held that a contract for the supply of bunkers is not a sale contract falling within the Sale of Goods Act 1979.

Facts

The owner of the Res Cogitans contracted with OW Bunker Malta Ltd (OWBM) for the supply of bunkers to the vessel. OWBM, through a series of string contracts, arranged for the bunkers to be physically supplied by the Russian subsidiary of Rosneft Marine (UK) Ltd. All of the contracts in the chain provided for payment on credit with retention of title clauses in favour of the supplier on terms typically found in many bunker supply contracts. One such term was that the owner had permission to consume the bunkers before payment fell due.

No payment was made by the owner to OWBM prior to its insolvency and no payment was made to Rosneft. The owner's concern was that if it paid OWBM, it risked a claim being made against it by Rosneft and thus risked having to pay for the same bunkers twice. The owner denied any liability to pay OWBM on the grounds that since OWBM had not paid for the bunkers, property in them could not be transferred to the owner for the purposes of Section 49 of the Sale of Goods Act. This in turn meant that OWBM could not sue for the price.

OWBM's response was that the contract was not one to which the Sale of Goods Act applied, but was rather a claim for a contractual debt. As such, OWBM did not need to demonstrate that it could pass property in the bunkers at the time of payment.

At first glance, it seems obvious that a contract for the supply of bunkers is a contract for the sale of goods – what else could it be? However, the London arbitrators held that it was not a contract falling within the Sale of Goods Act, and on appeal to the High Court Justice Males agreed with the arbitrators' view.

Decision

The starting point in the court's analysis was the permission given to the owner to consume the bunkers prior to payment being made. Once bunkers are consumed, the property in them is extinguished and cannot be transferred. Where a sale takes place on terms that the seller retains title to the goods, but nevertheless gives permission for those same goods to be consumed, the parties must be taken to have understood that title to the goods may never be transferred to the buyer.

In order for a contract of sale to fall within the Sale of Goods Act, four conditions must be met:

  • The contract must be for 'goods';
  • The seller must undertake to transfer good title in the goods;
  • The goods must be paid for by the buyer; and
  • There must be a link between the payment and the transfer of title.

In other words, what the buyer is paying for is title to the goods.

If a contract contemplates payment for the goods being made without title to those goods being transferred because property in the goods has been extinguished by consumption of the goods in question, the requirements of the Sale of Goods Act have not been met and the act does not apply. In answering the question of what an owner is paying for under a bunker supply contract if not title in the bunkers being purchased, the court held that where a bunker supply contract combines a retention of title clause and permission to consume, the owner is paying not for title to the bunkers being supplied, but rather for a lawful right to consume those bunkers.

The court made clear that it was not the existence of a retention of title clause alone which prevented the bunker contract from being a contract of sale within the Sale of Goods Act; nor was it the delivery of goods to a person with permission to use them in a way which would result in their consumption, as this would usually infer that property in them was intended to pass to that person. Rather, it was the combination of the retention of title clause and the imminent consumption or destruction of the goods that resulted in this being a contract that fell outside the Sale of Goods Act.

Comment

OWBM's obligation under its contract with the owner was to deliver bunkers on board the vessel and to give the owner permission to use those bunkers before payment was made. In its contractual arrangements with Rosneft, OWBM had secured permission for the owner to consume the bunkers; it had thus fulfilled its contractual obligations, for which it was entitled to be paid. Rosneft had no claim under English law against the owner, since it had given permission for the bunkers to be consumed without payment being made. The fact that Rosneft could arrest the vessel in other jurisdictions by asserting a maritime lien to secure payment did not trouble the court, which took the view that exposure to foreign claims linked to the possibility of arrest is one of the trading risks which shipowners run.

This decision has been appealed to the Court of Appeal and the appeal will be dealt with on an expedited basis. The decision is important since, as the court recognised, the contract terms in this case are "typical of hundreds or even thousands of such transactions carried out every year". The Court of Appeal's judgment will be awaited with considerable interest – not least because the decision has been greeted with some concern by the shipowning community. As it stands, the decision places the unwelcome burden of the risk of bunker traders not paying their physical suppliers squarely on the shoulders of shipowners.

For further information on this topic please contact Clare Calnan or Fiona Pounds at Wikborg Rein by telephone (+44 20 7367 0300) or email (clc@wrco.co.uk or fep@wrco.co.uk). The Wikborg Rein website can be accessed at www.wr.no.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.