Following on from our recent article, ‘OW! The Fallout’ we now have the first significant decision of the High Court on bunker supply contracts.

The case of PST Energy 7 Shipping LLC & Another –v- OW Bunker Malta Ltd & ING Bank N.V. (the RES COGITANS) will be relevant to hundreds of pending arbitration disputes and thousands of transactions which took place in the autumn of 2014 when payments were not made as a result of the OW collapse.

PST, the owners of the RES COGITANS, entered into a contract for the supply of bunkers with OWBM, a company which is part of the OW Bunker group. As is typical in the trade, the transaction involved a number of supply contracts each with retention of title clauses in favour of suppliers down the contractual chain. Each contract provided that payment would be due a fixed number of days after delivery but that bunkers could nevertheless be consumed in the meanwhile.

Owners argued that pursuant to s49 of the Sale of Goods Act 1979 (the Act), OW and their assignees, ING Bank N.V., were prevented from claiming the price of the goods because property in the goods had not passed to the buyer and/or the price of the goods was not payable on a certain day, irrespective of delivery.  

It is worth taking a step back to consider the key provisions of the Act in this context.

Firstly, under s2(1) of the Act, a’contract of sale of goods is 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‘. So there must be an agreement to transfer property in the goods to the buyer in return for payment of the price for the contract to be a contract of sale to which the Act applies.  

Secondly, where the seller wants to bring a legal action for the price, s49 of the Act sets out two alternatives, one of which must be satisfied. Either property in the goods has passed to the buyer and then if the buyer refuses to pay, the seller may bring an action for the price. Or, property in the goods has not passed but the price of the goods is ’payable on a day certain irrespective of delivery’. The first alternative did not apply in this case as the property in the bunkers never passed to the buyer because OW did not pay its suppliers due to its insolvency and owners did not pay OW. The second alternative was and is equally problematic for bunker supplies. Where the price was payable a fixed number of days after delivery, this is not ’a day certain irrespective of delivery‘.

The judge, Mr Justice Males, clearly recognised these difficulties and acknowledged that there were competing claims from physical suppliers in the background but which he stated were not matters which should sway him when determining the respective rights of the parties under the bunker supply contract.

The judge dismissed the owners’ appeal from a LMAA arbitration award, concurring with the arbitrators that the contract was not one to which the Act applies because the bunker supplier does not undertake to transfer title in the goods in return for payment. By reason of the retention of title clauses and partial or total consumption of the bunkers during the credit period, the judge recognised that property would not pass.

Instead under a bunker supply contract, after delivery of the bunkers, ship owners (or time charterers) were permitted to use the bunkers for the propulsion of the vessel and the actual owners of the bunkers, up the supply chain, consented to this use pending payment.

The judge found that ING had ’a straightforward claim in debt which was not subject to any requirement as to the passing of property in the bunkers to the owners at the time of payment‘.  

Given the importance of this decision, permission to appeal to the Court of Appeal has been granted by Mr Justice Males. The High Court decision will therefore not be the end of the road for those holding out against paying OW/ING.