(1) PST Energy 7 Shipping LLC and (2) Product Shipping & Trading S.A. v. (1) O.W. Bunker Malta Ltd and (2) ING Bank N.V. [2015] EWCA Civ 1058.

In a decision which has wide reaching implications for ship owners, the Court of Appeal yesterday upheld the decision of the Commercial Court that a bunker supply contract incorporating a retention of title (“ROT”) clause together with a right to consume the bunkers before payment is not a contract to which the Sale of Goods Act 1979 (“SOGA”) applies.

It is an implied condition of SOGA contracts that the seller has the right to sell the goods. If the seller is unable to transfer property to the buyer at the agreed time, it will usually amount to breach of a condition and a total failure of consideration, and the buyer will be relieved of its obligation to pay.

In this case, on the premise that the bunker supply contract was a contract to which the SOGA applied, the ship owner sought to argue that it was not obliged to pay the O.W. entity with whom it had contracted for the supply of bunkers because the O.W. entity was unable to transfer title in those goods (because it had not paid its supplier and so did not have good title to transfer).

Whilst the parties had characterised the agreement as a sale contract, the Court found that this did not reflect the substance of the obligations. The contract contained a 60 day credit period and an express right for the bunkers to be consumed before payment. The Court found that the strong likelihood that the bunkers would cease to exist by the time payment fell due meant that the owners were not contracting for the transfer of property in the whole of the bunkers, instead they were contracting for the delivery 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”. 

The Court of Appeal therefore characterised the contract as one under which goods were to be delivered to the ship owner as a bailee with an immediate licence to consume, coupled with an agreement to sell any quantity remaining at the date of payment.

As a whole, this decision has important implications for ship owners who, when contracting for bunkers on terms which are prevalent in the industry, have lost the protection of the SOGA.

This may not be the final word if permission to appeal to the Supreme Court is granted