Court of Appeal decides bunker supply contracts between OW Bunker and Owners are not covered by SOGA 1979.

Key Points

On 22 October 2015, the Court of Appeal (Lord Justices Moore-Bick, Longmore and McCombe) delivered their judgment on Owners' appeal of the decision of Mr Justice Males (sitting in the Commercial Court). The much-anticipated judgment has confirmed that the bunker supply contract in question, which incorporated OW Bunker's standard terms and conditions, was not a contract for the sale of goods within the meaning of the Sale of Goods Act 1979 (the Act).

This is a further step towards certainty of the position as between Owners and OW/ING, with the result that, at least as far as the Court of Appeal is concerned, Owners' argument that OW/ING had to satisfy Section 49 of the Act in order to succeed in their claim is wrong. An application for leave to appeal to the Supreme Court seems likely given the importance of the issue, in the context of the complex range of litigation currently underway globally in relation to the collapse of OW Bunker & Trading AS.

But where does this leave the parties to the chain of bunker contracts in question? On the basis of the Court of Appeal's decision, there is little doubt that Owners are obliged to pay OW/ING the sums due under their contract. However, a more important question (as far as Owners are concerned) is whether they will be required to pay physical suppliers in addition, and therefore pay for the bunkers twice (which, as matters stand, they may have to). It remains unlikely that anything the English courts decide will prevent physical suppliers from claiming against shipowners and seeking to arrest across the world.

Background

The original dispute related to a contract between vessel owners (Owners) and OW Bunker Malta Limited (OWBM) for the supply of bunkers to the Owners' vessel, the "RES COGITANS". This was made on the standard OW Bunker Group 2013 Terms and Conditions of Sale for Marine Bunkers.

As is common in the bunker supply industry, OWBM did not supply the bunkers itself but rather subcontracted with its now bankrupt parent, OW Bunker & Trading AS (OWBAS), to do so. OWBAS then contracted with Rosneft Marine (UK) Ltd (Rosneft) for the supply of the bunkers, which in turn contracted with its subsidiary RN-Bunker Ltd (RN), which apparently was the physical supplier of the bunkers to the Owners.

The bunkers were delivered on 4 November 2014 and Rosneft paid RN on 18 November 2014. Owners were due to pay OWBM within 60 days of delivery (3 January 2015) whilst payment from OWBAS to Rosneft was due within 30 days of delivery (4 December 2014). However, following OWBAS' filing for bankruptcy in early November, neither payment was made.

Arbitration

In arbitration, Owners sought a declaration that they were not liable to pay ING Bank (ING), in its capacity as assignee of OWBM's rights to payment, on the basis that the contract was a sale of goods governed by the Sale of Goods Act 1979. They argued that the requirements in Section 49 of the Act had to be satisfied for ING to maintain an action for the price of the bunkers supplied under the contract. Amongst these requirements was the need for either:

  1. Property in the goods to have passed to the buyer; or
  2. The contract price to have been payable on a "day certain"

Owners maintained that neither of these requirements was satisfied: first, the contract between Owners/OWBM had not identified a payment date that was fixed and ascertainable at the date of the contract and, second, property had not passed from OWBM to the Owners because OWBM had not, at any point, had title to the bunkers. Owners argued this was because OWBAS had not paid Rosneft for the bunkers, and Rosneft had, therefore, retained property in them pursuant to a "retention of title" clause in the OWBAS/Rosneft contract.

The arbitrators rejected this argument and agreed with ING's contention that the Sale of Goods Act 1979 did not apply to the Owners/OWBM contract as it only covered "contracts of sale of goods" as defined in Section 2(1) of the Act. The Owners/OWBM contract did not come within the Section 2(1) definition because the goods were supplied on credit and were for immediate consumption, meaning that ING's claim to payment did not have to be brought within the strict requirements of Section 49.

Appeal of the arbitrators' award to the Commercial Court

Owners appealed the arbitrators' decision to the Commercial Court, maintaining their argument that the Owners/OWBM contract was a contract for the sale of goods to which the Sale of Goods Act 1979 applied, and that ING, therefore, had to satisfy Section 49 of the Act in order to succeed in their claim.

The Court agreed with the arbitrators that the Owners/OWBM contract was not subject to the Sale of Goods Act 1979 because it was not a "contract of sale of goods" by which "the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration". On this basis, the Court found that as the Sale of Goods Act 1979 did not apply to the Owners/OWBM contract, ING's claim to payment was a straightforward debt claim, not subject to any requirements as to the passing of property in the bunkers to Owners at the time of payment.

Appeal of the Commercial Court decision to the Court of Appeal

Males J granted Owners leave to appeal to the Court of Appeal under Section 69(8) of the Arbitration Act 1996 on the sole issue of whether or not the bunker supply contract was a sale of goods to which the Sale of Goods Act 1979 applied.

The unanimous decision of the Court of Appeal was set out in the leading judgment of Moore-Bick LJ, with a short additional comment provided by Longmore LJ.

On the central issue relating to the Sale of Goods Act 1979, Moore-Bick LJ upheld the decisions of the Tribunal and the Commercial Court to the effect that the terms of the contract in this case (which, importantly, incorporated the OW standard terms) did not fall within the scope of the Act. Although Moore-Bick LJ accepted that the language of OWBM's standard terms suggested that the parties were "thinking in terms of a sale and purchase" of the bunkers that were to be supplied under the contract, the Judge went on to describe the true effect of the contract as follows:

"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."

As such, the Judge held that the terms did not fall within the category of "contracts of sale of goods" as defined in Section 2(1) of the Sale of Goods Act 1979 with the result that Section 49 of the Act was irrelevant to OWBM's claim for the price due under the contract: OWBM's remedy was therefore a simple claim in debt under the contract. Moore-Bick LJ concluded his judgment by noting:

"For these reasons I would dismiss the appeal to the extent of holding that the failure of OWBM to transfer title in the bunkers does not release the owners from their obligation to pay for them."

In considering the effect of the Court of Appeal judgment, it is important to note that the decision focused far more on the narrow issue of the application of the Sale of Goods Act 1979 than had either the Tribunal or the Commercial Court. It is unclear how the reference will now progress, and any consequential issues hearing will be important in this regard.

Given that even the original arbitration was confined to preliminary issues relating to Owners' attempt to obtain a declaration that they were not bound to pay OWBM for the bunkers, the proceedings as a whole fell well short of a full trial of all the issues in the case. In addition, the Tribunal proceeded on the basis of a number of assumed facts agreed between the parties that were designed to facilitate this process. By the time the case came to be considered by the Court of Appeal - on an expedited basis - the issues to be determined had narrowed even further to the sole question of whether the Sale of Goods Act 1979 applied.   

Comment – What next for Owners?

An application by Owners for leave to appeal to the Supreme Court seems likely given the importance of the issue and the requirement for certainty regarding the respective parties' rights and obligations. Ideally, the Supreme Court would go further than the Court of Appeal by providing some guidance on the wider effect of the full chain of contracts relating to the supply of bunkers in this case, although the procedural history of this aspect of the litigation may prevent this.

In short, the central legal point arising out of the Court of Appeal's decision seems to be that whether a contract (including a bunker supply contract) is a contract for the sale of goods depends in large part on whether the transfer of title to the goods is an essential or fundamental part of the contract.

The key commercial point, however, is that Owners are obliged to pay OW/ING for sums due under the contract, but may in practice also have to pay the physical suppliers, thereby paying the price twice. Whether or not that is the case will likely depend on: a) what the Supreme Court decides if leave to appeal is given, b) the judicial weight given to that decision in the relevant jurisdictions across the world, and c) the terms of the relevant chain of contracts in question. Importantly, it remains unlikely that anything the English courts decide will prevent physical suppliers from claiming against shipowners and seeking to arrest.