PST Energy 7 Shipping LLC and Product Shipping & Trading S.A. v OW Bunker Malta Ltd and ING Bank N.V. [22.10.15]
Court of Appeal rules that OW Bunker is entitled to payment for bunkers supplied on the basis that the contract was a hybrid contract to which, on the facts, the Sale of Goods Act did not apply.
In a decision with far-reaching implications, the Court of Appeal has confirmed that a contract for the sale of bunkers containing a retention of title (ROT) clause and an express right to burn fuel during a credit period of 60 days was not a contract of sale within the meaning of s.2 Sale of Goods Act 1979 (SOGA).
Experienced arbitrators, the Judge at first instance and the Court of Appeal have all now found in favour of OW Bunker Malta Ltd (OWBM)/ING Bank N.V. (ING) on this issue. However, the decision is unlikely to give the market the finality or clarity that had been hoped.
The essential nature of a contract of sale (or agreement to sell) is that the seller agrees to transfer the property in the goods to the buyer in exchange for payment of the contract price. In many aspects the OW Bunker (OWB) group terms resembled a contract of sale. However a seller cannot pass title in goods that have ceased to exist. So, if the bunkers have been consumed by the time payment is made, property in them cannot pass at that time.
The result, said the Court of Appeal, was that there was a hybrid contract, to only part of which SOGA might apply. To the extent bunkers were consumed before payment, the buyer had none of the implied protection as to quality and fitness for purpose which SOGA would give.
The Court of Appeal stated that if the owners, PST Energy 7 Shipping LLC (PST) had not burnt the bunkers by the end of the credit period and OWBM then failed to transfer title, OWBM would have been in breach of contract. However, any such breach would only have entitled the owners to treat the contract as discharged and to refuse payment to OWBM if the quantity of fuel remaining in the vessel at the end of the credit period represented a high enough proportion of the total fuel supplied that it could be considered a total failure of consideration. What proportion would be high enough is unclear.
It is perhaps questionable whether commercial parties would really have intended to create such a hybrid contract, the precise nature of which would, in practice, be determined subjectively by the unilateral decision of the buyer, post-contract, as to whether to burn the bunkers before paying for them. The ‘hybrid’ contract analysis had been rejected by the arbitrators and Mr Justice Males in the Commercial Court. Males J held that the contract was not a contract to which SOGA applied but merely gave the owners a license to consume the bunkers supplied.
The OWB group would ordinarily have made a small commission on the supply of bunkers. The decision provides an effective windfall to the trustee in bankruptcy at the expense of the physical suppliers, who are now more likely to look to the owners to recover that shortfall. Owners face an increased risk of having to pay twice over for the same stem. The Court of Appeal viewed this simply as a risk inherent in the business of owning ships.
The decision still leaves many important issues unresolved. Parties facing similar claims for payment arising out of OWB contracts are now likely to have to ascertain the quantity of bunkers remaining on board at the time when the OWB credit period expired, in addition to considering whether or not OWB had the ability to pass title at the time payment became due.
The facts in any given situation may differ from those in this case, especially those which were assumed for the purposes of the Court of Appeal’s decision. The precise factual situation in each case will still need to be considered carefully before decisions are made as to whether, and if so whom, to pay. Much may turn on the precise wording of ROT clauses, especially if they can be interpreted as passing title as from delivery but conditionally upon payment.
Supplies through OWB group companies involve numerous physical suppliers operating under different terms and conditions, subject to a wide variety of laws in different jurisdictions. There have been several decisions in other jurisdictions which include findings that payment to physical suppliers discharges owners from any obligation to pay OWB group companies.
The decision, if correct, has significant implications. ROT clauses will need to be reassessed. Buyers may need to seek contractual promises as to quantity, quality, and fitness for purpose to the extent that the goods are consumed prior to payment. In the bunker industry, this may lead to:
- A reduced use of bunker intermediaries by bunker suppliers.
- The re-wording of bunker suppliers’ standard terms, bearing in mind that ROT clauses merely provide a diminishing security for payment no longer fit for purpose.
- A possible return to requests for up-front cash payments by bunker suppliers.
The owners appear keen to try to appeal to the Supreme Court so there may yet be an opportunity for these issues to be reconsidered.
On 4 November 2014, the vessel, Res Cogitans, was supplied with bunkers pursuant to a contract entered into with OWBM incorporating the OWB group’s standard terms and conditions. Those terms included a ROT clause, coupled with a right to use the bunkers for vessel’s propulsion from the moment of delivery. The agreed credit period was 60 days.
OWBM then contracted with its parent company, OW Bunker & Trading AS (OWBAS), which in turn contracted with Rosneft Marine (UK) Ltd (RMUK), who contracted with RN-Bunker Ltd. RN-Bunker Ltd was the ‘physical supplier’ who actually delivered the bunkers to the vessel. The contract between OWBAS and RMUK included a ROT clause and a credit period of 30 days, but it did not expressly allow the owners to use the bunkers.
OWB group filed for bankruptcy on 7 November 2014, before the owners or OWBM paid for the bunkers.
On 17 November 2014, RMUK sought payment from the owners for the bunkers on the ground that it remained the owner of the bunkers. Part of the bunkers had been consumed under the RMUK 30-day credit period, and all the bunkers had been consumed during the OWBM 60-day credit period.
The Court of Appeal found that OWBM was entitled to payment for the bunkers that had been supplied. It did not matter that OWBM was never in a position to transfer title to the bunkers to the owners.
In arriving at its decision, the Court of Appeal appears to have taken the view that the bunker supply contract between OWBM and the owners was in fact a ‘hybrid’ contract, consisting of:
- A contract under which OWBM agreed to give the owners a license to consume bunkers supplied immediately upon delivery; and
- A contract for the sale of any bunkers remaining on board the vessel at the time payment under the contract actually fell due.
The ‘hybrid’ contract analysis was previously rejected by the arbitrators and Males J in the Commercial Court, who held that the entire contract was not a contract for the sale of goods but was to be treated only as a contract giving the owners a license to consume bunkers supplied.
In relation to each of these elements, the Court of Appeal held as follows:
- License: the nature of the contract was essentially an agreement under which bunkers were to be delivered to the owners as bailees with a license to use them, coupled with an agreement to sell any bunkers remaining at the date of payment, in return for the contracted price. The owners did not contract for the transfer of property in the whole of the bunkers, but only contracted for the delivery of a quantity of bunkers which they had an immediate right to use but for which they would not have to pay until the expiry of the credit period.
- Contract for sale of goods to which SOGA applies: the contract also provided for the transfer of property in any remaining bunkers at the time payment fell due to the owners. To that extent, the contract was to be treated as one for the sale of goods to which SOGA applied. Whilst a failure to pass title in the remainder bunkers would constitute a breach of contract on OWBM’s part, such breach would not entitle an owner to treat the contract as discharged and refuse payment to OWBM, unless the remainder bunkers represented such a large proportion of the total quantity delivered that it could be said that there had been a total failure of consideration. On the facts of the case however, all bunkers supplied had been consumed by the time payment fell due.
Other OWB cases have been dealt with by other (non-English) courts. We are aware of several decisions in other jurisdictions, with a range of results, some of which seem to have gone against OWB:
- The Singapore High Court noted in Precious Shipping Public Co Ltd v OW Bunker Far East (Singapore)  that the physical bunker suppliers claim against the owners in conversion was weak and that the suppliers must have intended the bunkers to be consumed on delivery.
- A Canadian court has found that a physical bunker supplier’s terms and conditions bound both OWB and a charterer and that the charterer was discharged from any further obligation to pay OWB by paying the physical supplier.
- A Belgian court has lifted an arrest by an unpaid physical supplier on the basis that the owners had already paid OWB and this discharged the owners from any obligation to pay the physical supplier.
- An Israeli court has found that a payment by the owners to a physical supplier discharged them from any obligations to pay OWB.
No doubt there are other cases winding their way through different courts around the world. Owners should therefore be advised that despite the English Court of Appeal decision, their position will depend to a large degree on which court assumes jurisdiction over the particular claim.