PST Energy Shipping 7 LLC and Product Shipping and Trading SA  v. OW Bunker Malta Ltd and ING Bank SA (Res Cogitans) [2015] EWHC 2022 (Comm)

In a surprising decision handed down on 14 July 2015, the Commercial Court has ruled that standard form bunker supply contracts are not contracts for the sale of goods within the scope of the Sale of Goods Act 1979 (“SOGA”).

s2(1) of SOGA defines a contract of sale of goods as “a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price”.

The Court accepted that the parties’ contract was drafted as a contract of sale and contains numerous terms appropriate to such contracts. It is headed “Terms and Conditions of sale for Marine Bunkers”. It defines the parties as “Seller” and “Buyer” and contains numerous indications that the contract was understood by the parties to be a contract of sale, including detailed terms for the passing of title in the bunkers. The Court acknowledged that it is therefore a reasonable starting point that this is what the parties intended and is indeed the true nature of the contract which they have concluded. Notwithstanding such ‘starting point’, the Court concluded that an analysis of the obligations undertaken by the parties, and in particular the operation of the Retention of Title (“ROT”) clause, led to the conclusion that the bunker supplier had not undertaken an obligation to transfer property in the bunkers to the Owners, and thus the requirements of s2(1) of SOGA would never be satisfied.

The Court ruled that the parties must be taken to have understood that it was likely that title in the bunkers would never be transferred from the Seller to the Buyer because of the combined effect of (1) the ROT clause in the bunker supply contract; (2) the period of credit given to the Buyer before payment falls due; (3) the permission given to the Buyer to consume the bunkers during such credit period; and (4) the fact that some or all of the bunkers supplied were likely to be consumed before the expiry of the credit period, with the consequence that property in such bunkers would cease to exist upon their consumption. 

The background facts

On 31 October 2014, the Owners of the vessel ordered stems of IFO and MGO from OW Bunker Malta (“OWBM”), a company that is part of the OW Bunker group. OWBM’s “Sales Order Confirmation” of the same date gave a delivery date of 3 or 4 November 2014. The physical supplier of the bunkers was named as “Rosneft”, payment was to be made within 60 days from the date of delivery upon presentation of OWBM’s invoice and the transaction was to be subject to the OW Bunker Group’s “Terms and Conditions of sale for Marine Bunkers”. OWBM’s right to payment was assigned to its bank, ING.

OWBM placed an order for the supply of bunkers with its Danish parent company, OW Bunker & Trading AS (“OWBAS”) and that contract was also subject to the OWB Terms and Conditions. OWBAS in turn placed an order with Rosneft Marine (UK) Ltd, who then placed an order with its Russian affiliate, RN-Bunker Ltd. The contract between OWBAS and Rosneft was confirmed on 3 November 2014. It required payment to be made within 30 days of delivery and was subject to Rosneft’s Marine Fuels Sales General Terms and Conditions. In the event, RN-Bunker physically supplied the bunkers to the vessel at Tuapse in the Black Sea on 4 November 2014. Rosneft paid RN-Bunker for the stems on 18 November 2014.

Payment from OWBAS to Rosneft (and from OWBM to OWBAS) was due by 4 December 2014 at the latest (30 days after delivery). Payment from the Owners to ING was due by 3 January 2015 (60 days after delivery), OWBM’s invoice dated 4 November 2014 for US$443,800 having been presented to the Owners on 23 December 2014. Neither payment was made.

On or about 6 November 2014, OWBAS filed for an in-court restructuring procedure in the Danish Court. ING, as assignees of OWBM’s rights, claimed payment for the bunkers from the Owners. Rosneft, unlikely to be paid by OWBAS, also claimed the price of the bunkers from the Owners and asserted that it retained title to them.

The relevant contractual provisions

The OWB terms are governed by English law and provide for London arbitration. They include a ROT clause which provides, among other things, that: title/property in the bunkers remains vested with the Seller until full payment has been made; and, until full payment has been made, the Buyer is bailee of the bunkers and is entitled to use them only for propulsion of the vessel.

Therefore, while title was to remain with the Seller until payment, the Buyer had express permission to consume the bunkers for the propulsion of the vessel. The bunkers might therefore be consumed during the credit period.

The Rosneft terms also were expressly governed by English law and subject to London arbitration. They also contained a ROT clause. Unlike the OWB terms, however, they did not include an express prohibition on resale nor express permission for the bunkers to be consumed during the credit period. Since Rosneft knew that it was (or at least might be) selling to a trader for resale to an end user and that the vessel to which the bunkers were to be delivered would have placed an order with an OWB group company, the Court found, by necessary implication, that Rosneft permitted OWBAS to resell the bunkers and contemplated that OWBAS would do so on terms that permitted the Owners to use them in the vessel’s normal employment.

The nature of the dispute

The Owners argued that they were not obliged to pay ING/OWBM for the bunkers because Rosneft had not been paid and thus Rosneft retained property in the bunkers pursuant to the ROT clause in the Rosneft/OWBAS contract. Consequently, OWBM never acquired property in the bunkers and could not transfer such property to the Owners.

The Owners contended that the bunker supply contract was a contract for the sale of goods to which SOGA applies. Therefore ING’s claim for the price could only be maintained if the conditions of s.49 of SOGA are satisfied, namely that either (1) property in the goods has passed to the buyer, or (2) the price is payable on a day certain irrespective of delivery. In this case, neither condition was satisfied because (1) OWBM had never acquired property in the bunkers and therefore could not pass such property to the Owners; and (2) the price was not payable on a day certain specified in the contract because the date of payment depended upon a future, contingent event, namely the date of delivery of the bunkers.

Further, the Owners argued that OWBM’s inability to transfer property in the bunkers, because property remained vested with Rosneft, meant that OWBM was in breach of the mandatory implied term at s12(1) of SOGA that the seller has the right to sell the goods or will have such right at the date when property is to pass; and that such breach would provide the buyer with a complete defence to a claim for the price.

 

The arbitral award

The arbitrators held that the bunker supply contract was not a contract of sale to which SOGA applies and so ING/OWBM did not have to meet the requirements of s.49. Rather, its claim to payment was a straightforward claim in debt that was not subject to any requirement as to the passing of property in the bunkers to the Owners at the time of payment. The Owners appealed this ruling.

The arbitrators also held that OWBM did not own the bunkers at any material time and that they remained the property of Rosneft.

The arbitrators further ruled against ING’s alternative claims that (1) property in the bunkers had passed to the Owners at the moment of consumption, entitling OWBM to maintain a claim for the price under s49(1); (2) the requirements of s49(2) had been satisfied; (3) the Owners were obliged to pay for “non-acceptance” of the bunkers pursuant to s50; and (4) OWBM were a buyer in possession within the scope of s25 of SOGA. ING appealed these rulings.

The Commercial Court decision

The Court upheld the tribunal’s finding that the bunker supply contract was not a contract of sale to which SOGA applied. In order to qualify as a contract of sale within the scope of SOGA, the Seller must undertake to transfer good title in the goods to the Buyer, and the Buyer must pay the price in exchange for title to the goods.

The Court concluded that the combined effect of the ROT clause, the credit period, the permission to consume the bunkers during the credit period, and the likelihood that some or all of the bunkers would be consumed before the expiry of the credit period, meant that the parties must be taken to have understood that it was likely that title in the bunkers would never be transferred from OWBM to the Owners. Thus the Court concluded that OWBM had not undertaken an obligation to transfer the property in the bunkers to the Owners and that the Owners were not paying for any such transfer of title. Rather, the Owners were paying for the right to consume the bunkers.

The Court concluded that the deal between the parties was that OWBM would ensure delivery of the bunkers, the use of which would be immediately available to the Owners, who would pay for them according to OWBM’s invoice. While such an agreement resembled a contract of sale in certain respects, it was not a contract of sale within the relevant definition in SOGA.

ING’s claim was therefore a straightforward claim in debt not subject to any requirement as to the passing of property in the bunkers to the Owners at the time of payment.

The Court further found that Rosneft had given its permission for the Owners’ consumption of the bunkers. Rosneft knew that OWBAS was not an end user but a trader and that it would contract either directly or indirectly with the vessel’s Owners and that the contract with the Owners would permit them either expressly or by implication to consume the bunkers. The giving of such permission by Rosneft would be a valid defence in English law to any claim against the Owners for conversion. The possibility of a claim, or vessel arrest, by Rosneft in a foreign court which views matters differently from English law in this regard, was considered by the Court to be no more than a typical risk which a shipowner undertakes when it trades its vessel globally.

The Court also ruled that a term equivalent to s12(1) would not be implied into the bunker supply contract in circumstances where SOGA does not apply. 

If SOGA applied to the contract, the Court noted that OWBM was in breach of the implied term contained in s12(1) and that this would represent a total failure of consideration which, applying Rowland v. Divall [1923] KB 500, provides the buyer with a defence to a claim for the price. As the arbitrators held, and in the end accepted by OWBM, the “anti-set-off” provision in the OWB terms would not operate to prevent that defence from succeeding.

In further “double” obiter, the Court held (on this point disagreeing with the arbitrators) that provision for payment to be made within a fixed period after delivery is sufficient to satisfy the requirement in s49(2). However, such claim would have been extinguished by OWBM’s breach of s12(1).

Comment

This is a surprising decision that has wide reaching consequences for the maritime and other industries. The overwhelming majority of bunker supply contracts are structured in a similar way to the OW Bunker Terms & Conditions. This is acknowledged by the Court.  Many other contracts for maritime supplies are structured in a similar way. 

Contrary to the parties’ commercial expectation that they are entering into a contract for the sale and purchase of goods, the Court has ruled that they are in fact entering into a contract that is akin to a licence for the use the bunkers. Under such agreement, unless further terms are implied, a purchaser of bunkers does not have the statutory protection afforded to buyers under SOGA, including the requirement that the goods be of satisfactory quality.

It is also difficult to reconcile the decision with the shipping industry practice of bunkers being sold between owners and charterers at the commencement and completion of time charters. It is common practice for ships to be bunkered by charterers prior to redelivery under time charters and for such bunkers to be sold by the charterers to the owners on redelivery, and for the bunkers to be sold on by the owners to their next charterers. If a bunker supply contract is not a contract for the sale of goods, it is difficult to see how the ownership of bunkers can be passed between owners and charterers under time charters.

The judgment also has consequences for other industries where goods are routinely supplied on terms that include a ROT clause combined with a credit period and a right to use the goods during such credit period. Such arrangements are commonplace in manufacturing industries, as evidenced by the number of cases that have considered the application of ROT clauses where goods have been consumed in the process of manufacturing. It would appear that such supply contracts are also not contracts for the sale of goods.