(1) PST ENERGY 7 SHIPPING LLC; (2) PRODUCT SHIPPING & TRADING S.A. V. (1) O.W. BUNKER MALTA LTD; (2) ING BANK N.V. [2016] EWSC 23 (‘RES COGITANS’)

Judgment of the Supreme Court, 11 May 2016

Last week, the Supreme Court handed down judgment in this case, which has been the subject of huge industry interest since its inception following the insolvency of OW Bunker in November 2014.The case centres on the question of whether the contract between a shipowner and the OW Bunker subsidiary company for the provision of bunkers is or is not a contract for the sale of goods.

The Supreme Court has not departed from the previous appeal decisions.The shipowner-OW contract was not a contract for sale and ING (as OW Bunker’s assignee) is entitled to claim the contract price.The Supreme Court has also confirmed that even if it the contract had been a contract of sale, the shipowner would still have been liable for an action on the price (notwithstanding the limits of s.49 SGA).

The practical effect of this is that ING have put themselves one step closer to safety in the Mexican standoff by which they, the physical bunker suppliers and shipowners are working out which group will bear the financial cost of the OW Bunker insolvency.

Factual and contractual background

In a previous bulletin, the facts of this matter have been set out in detail.In brief summary, the Appellants PST contracted with the OW Bunkers group for the supply of bunkers. The contract incorporated the OW standard terms, including the provision that, until payment,

“the Buyer agreed (sic) 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”

To fulfil the PST-OW contract, OW procured the bunkers under contract from its supplier, Rosneft. The OW-Rosneft contract was on Rosneft standard terms. Rosneft’s terms provided for retention of title by Rosneft until payment, which was to made 30 days following delivery.

Following supply of the bunkers to PST (and after it was likely that some or all of the bunkers had been destroyed through use), but before payment had been made, OW applied to court for restructuring.At this stage, ING Bank took the benefit as assignee of any debts owed to OW (including PST’s) and Rosneft asserted that it remained the owner of the bunkers such that it was entitled to payment from PST.

PST – in a position shared by shipowners worldwide following the collapse of OW – was therefore faced with 2 claims for the price in respect of the bunkers that it bought.

The claim to date

In a previous bulletin, the earlier decisions in this matter, made by an arbitral tribunal, the High Court and the Court of Appeal, have been analysed in detail. In brief summary, the argument has focused on the question of whether the PST-OW contract was a contract for the sale of goods within the meaning of s.2 SGA as, if so, OW (& ING) are not entitled to claim the price (it not being disputed that Rosneft are entitled to be paid).

At all stages to date, it has been held that the PST-OW contract was not one for the sale of goods.The reasoning for these decisions has been that the contract was and is not concerned with the question of title.Although the PST-OW contract can be commercially described as a contract of sale and appears similar to such a contract, the contract’s “terms and their performance do not to any extent rely on property or title or their transfer” (High Court, [51] per Males J as upheld by the Court of Appeal).

The issues on (yet further) appeal

The 3 questions for the Supreme Court were: (1) Was the PST-OW contract a contract of sale within the meaning of s.2(1) SGA? (2) If not, was it subject to any implied term that OWB would perform or had performed its obligations to its supplier, in particular by paying for the bunkers timeously? (3) Should the Court of Appeal decision F G Wilson (Engineering) Ltd v John Holt & Co (Ltd) [2014] 1 WLR 2365 (‘Caterpillar’) be overruled?

Advocating the road less travelled: PST’s argument on (final) appeal

PST sought to persuade the Supreme Court to depart from the position taken unanimously by each tribunal that came before – the arbitrators, the High Court, and the Court of Appeal – and instead find that PST were not liable to OW & ING under the PST-OW contract.

PST argued that the PST-OW contract was a conditional contract for the sale of goods. PST’s argument was that the contract of sale was conditional on the bunkers not having been consumed on the expiry of the credit period, with property in those bunkers passing on payment; to the extent that any bunkers had been consumed, this was permitted under the contract and the property in such consumed bunkers deemed to have passed.

Following the well-trodden path: the approach of the Supreme Court

The Supreme Court did not accept the conditional sale argument, finding that the PST-OW contract was one with 2 aspects – the first, that PST were permitted to burn the bunkers supplied and no property in those bunkers would ever pass to PST; the second, that insofar as any bunkers remained unconsumed when payment was made, property in those remaining bunkers would pass. However, the Court declined to treat this as a conditional sale because there was a single contract price for all bunkers – whether consumed or not, whether actually sold (ie. with a passing of property) or not.The failure to separately provide a price for those bunkers that would be consumed and those which would be left was fatal, on the Court’s analysis, to the argument that the PST-OW contract was one of sale.

The second and third issues on appeal 

As in the Court of Appeal, PST argued in the alternative that there was an implied term to the effect that OW would perform its obligations under the OW-Rosneft contract in a timeous manner. However, this point (as both the Court of Appeal and Supreme Court noted) did little to advance PST’s position overall and, as it made minimal difference, was given little attention in both argument and the final judgments. The argument that there was an implied term was dismissed.

The final point, raised by OW in counter-appeal, was given more thought by the Supreme Court.Although it was not necessary (given the decision that the PST-OW contract was not one of sale), the Supreme Court did provide extensive obiter comments on OW’s argument that the decision in Caterpillar of the Court of Appeal was wrongly decided and that a seller is entitled to claim the price even while reserving title in the goods being sold.

The Supreme Court considered the remit of s.49 SGA, which provides a seller’s action for the price.To found an action for the price under s.49 SGA, property in goods must have passed save that there is an exception in subs.2 which provides that the action is also available where the price is to be paid on a day certain.The Court held (again, strictly obiter) that the Caterpillar decision was wrong and that s.49 SGA is not a complete code for when a seller might sue to recover the contract price of the goods.The Court concluded that, had the PST-OW contract been one of sale, it would have permitted OW to found an action for the price given that the (i) though the seller’s property were at the buyer’s risk, and (ii) were permitted to be consumed by the buyer. The Court expressly left open the question of exactly what the limits of the action on the price would be, so this remains something of an open question.

Conclusions

Although the vessel’s name, Res Cogitans, stems from philosophy and Cartesian doubt, regrettably for PST and other shipowners the Supreme Court’s decision now brings not only certainty but also finality to the question of whether OW bunker contracts are contracts for the sale of goods.

To date, the many parties who have  become caught up in the collapse of OW Bunkers have been waiting on the outcome of the Res Cogitans. No money has changed hands while in any situation, ING, the physical supplier and the shipowner have been in a Mexican standoff. Now at least ING have obtained an advantage in the standoff and have taken a step towards collecting payment.

From PST’s (and other shipowners’) perspective, they now have 2 questions: first, should they now contest the arbitrations commenced by OW/ING (Res Cogitans was decided on assumed facts as a preliminary issue only); and second, what to do in the battle with the physical suppliers (in Res Cogitans, Rosneft)? On the second question, the claims of the physical suppliers (who at all times had property in the goods) have generally been perceived as stronger than OW/ING’s claim. However, in the battle to establish who will bear the brunt of OW’s insolvency, shipowners seem unlikely to give in now.

In any event, there are certainly difficult times ahead for shipowners. Not only are they potentially facing the prospect of paying twice over for bunkers, but the accrued interest will now be substantial.They will also likely wish to revisit the current arrangements by which they obtain bunkers to prevent a future collapse sparking a repeat of the OW litigation.