On May 11 2016, the Supreme Court handed down judgment in the long-running OW Bunkers case.(1) The decision is unlikely to be welcomed by owners, which now face the prospect of having to pay twice for bunkers: once to their immediate supplier, which may be insolvent as in OW Bunkers, and again to the physical supplier of the bunkers.

Facts

The parties appealing in the case were the owners and managers of the vessel Res Cogitans, which contracted with OW Bunker Malta Ltd (OWBM) for the provision of bunkers. The contract incorporated the OW standard terms, including the provision that until payment:

"the Buyer agreed that it is in possession of the Bunkers solely as Bailee for the Seller, and shall not be entitled to use the Bunkers other than for the propulsion of the Vessel, nor mix, blend, sell, encumber, pledge, alienate, or surrender the Bunkers to any third party or other Vessel."

OWBM obtained the bunkers under a contract with its parent company, OW Bunker & Trading A/S (OWBAS), another member of the OW Bunker Group, which at the time was the world's largest bunker supplier. OWBAS procured the bunkers from a physical supplier, Rosneft. OWBAS's contract with it was on Rosneft's standard terms, which provided for retention of title by Rosneft until payment, which was to be made 30 days after delivery.

The owners were supplied with bunkers under this contractual scheme on November 4 2014. Following the supply of the bunkers (and after it was likely that some or all of the bunkers had been consumed), but before payment had been made, OWBAS applied to the court in Aalborg for restructuring.

This was when the risk of the owners having to pay twice for the bunkers first arose. The insolvency proceedings triggered default provisions under OWBAS's financing agreement and ING Bank NV became the assignee of any claim which OWBM had against the owners. ING therefore asserted a right to the debt that the owners owed to OWBM. Waiting in the wings was the physical supplier, Rosneft, which asserted that it remained the owner of the bunkers (pointing to its retention of title clause) and that it was entitled to payment from the owners.

Proceedings prior to Supreme Court

The owners commenced arbitration proceedings, claiming a declaration that they had no liability to pay OWBM or ING for the bunkers. The arbitrators held that OWBM and ING were entitled to payment.

The tribunal's reasoning was that the Sale of Goods Act 1979 did not apply to the contract between OWBM and the owners. If the contract was one of sale, then according to authority in the Caterpillar decision(2) which the arbitrators considered binding, Section 49 precluded recovery of the price of goods in circumstances where the property in goods had not passed to the buyer. In other words, if the contract was subject to the Sale of Goods Act, Caterpillar meant that OWBM was barred by Section 49 from any claim to the price. As the Sale of Goods Act did not apply, the arbitrators found that the contract price fell due on expiry of the 60-day credit period and could be recovered as a debt claim against the owners irrespective of which party owned the bunkers.

The owners appealed to the High Court. Justice Males upheld the arbitrators' decision with particular reference to Paragraph 51 of the award, which stated:

"Stripped of all unnecessary detail, 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. Such an agreement does quite obviously resemble in some respects a contract of sale, but its terms and their performance do not to any extent rely on property or title or their transfer."

The owners then appealed to the Court of Appeal. Again, the owners argued that the contract between themselves and OWBM was a contract for the sale of goods, which is defined in Section 2 of the Sale of Goods Act 1979 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 main difficulty with the owners' argument lay in the words 'transfer of property'. Given the 60-day credit period, it was probable that the bunkers would have been consumed before the price fell due. Since property in a non-existent thing cannot be passed, the contractual arrangements did not fit with the definition of a 'contract of sale' in the Sale of Goods Act. This decision was upheld.

Finally, the owners appealed to the Supreme Court.

Supreme Court decision

There were three questions for the Supreme Court:

  • Was the contract between the owners and OWBM a contract of sale within the meaning of the Sale of Goods Act 1979?
  • If not, was the contract subject to any implied term that OWBM would perform or had performed its obligations to its supplier, in particular by paying for the bunkers in a timely manner?
  • Should Caterpillar be overruled?

As to the first question, the owners argued that the contract between themselves and OWBM was a conditional contract for the sale of goods. The contract of sale was conditional upon the bunkers not having been consumed on the expiry of the credit period, with property in those bunkers passing on payment. Insofar as any bunkers had been consumed, this was permitted under the contract and the property in such consumed bunkers was deemed to have been transferred.

The Supreme Court rejected this argument and held that the contract was:

"in substance an agreement with two aspects: first, to permit consumption prior to any payment… without any property ever passing in the bunkers consumed; and, second, but only if and so far as bunkers remained unconsumed, to transfer the property in the bunkers so remaining to the Owners in return for the price."

The court went on to note that "in its essential nature", the contract "offered a feature quite different from a contract of sale of goods - the liberty to consume all or any part of the bunkers supplied without acquiring property in them or having paid for them". Accordingly, the Supreme Court held that the contract was not one of sale within the Sale of Goods Act, with the result that the owners had no defence to the claim for the price.

As to the second question, the Supreme Court held that the contract between OWBM was subject to no implied term regarding performance by OWBM or OWBAS of any supply contract higher up the chain, though it was subject to an implied promise by OWBM that OWBM was entitled to supply the bunkers to the owners on terms permitting their use on the vessel prior to payment.

The Supreme Court's answer to the third question was that Caterpillar was wrongly decided and that Section 49 of the Sale of Goods Act is not a complete code for when a seller might sue to recover the contract price of the goods. If the contract between the owners and OWBM had been one of sale, the court concluded that it would have permitted OWBM to found an action for the price.

Comment

The legal basis for the Supreme Court's decision was that the contract between the owners and OWBM for the supply of bunkers was not a contract for sale of goods. As a result, OWBM and ING were entitled to sue for the price. While this legal reasoning may be considered sound, there can be little doubt that it has led to a commercially surprising result and the very real prospect of owners around the world having to pay twice for the same bunkers.

For further information on this topic please contact Nick Shepherd or Chris Grieveson at Wikborg Rein by telephone (+44 20 7367 0300) or email (cjg@wrco.co.uk or njs@wrco.co.uk). The Wikborg Rein website can be accessed at www.wr.no.

Endnotes

(1) PST Energy 7 Shipping LLC v OW Bunker Malta Limited [2016] UKSC 23.

(2) FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [2014] 1 WLR 2365.

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