The bunker trade in particular has been keenly awaiting the decision of the Supreme Court in the “RES COGITANS” case (PST Energy 7 Shipping LLC and another -v- O W Bunker Malta Limited and another [2016] UKSC 23).

It has finally determined whether OW Bunkers receivers can successfully recover sums from ship owners for unpaid bunker supplies. The Supreme Court has confirmed that OW can recover.

As readers will probably recall, this case focuses on whether a contract for the sale of bunkers subject to English law is a ‘contract of sale of goods’ within the meaning of the Sale of Goods Act 1979 (the Act).

The fact that LMAA arbitrators, the High Court and the Court of Appeal in England and Wales have so far ruled that it is not, has caused a great deal of consternation for owners facing claims from both OW Bunkers and physical suppliers. But the arbitrators and the English Courts have clearly sought to avoid the strictures of the Act's technical requirements when a seller sues for the price, given the atypical nature of a bunker sale.

Why is the standard bunker sale contract so different from most other sale contracts? In essence because the buyer is contractually permitted by the seller to use and consume the goods in part or in whole before the time for payment arises even though property in the goods remains with the seller until payment. Normally bunker sales are of small quantities of fuel which are burned before a 30 or 60 day credit period has elapsed.

Retention of title (ROT) clauses combined with a licence to consume the goods prior to payment have produced circumstances which cannot have been envisaged by the drafters of the Act.

A contract of sale is defined at s2(1) 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’.

But in “RES COGITANS”, title did not pass in the goods before they were consumed or at all.

If nevertheless the standard bunker supply contract could fall within the Act's definition, where an unpaid seller of goods wants to bring a legal action for the price, the seller must satisfy one of two conditions in s49 of the Act.

It is these requirements that have caused the arbitrators and the Courts significant concern.

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 to the buyer - which is the OW scenario - but the price of the goods is ’payable on a day certain irrespective of delivery’.

The first condition did not apply in this case as the property in the bunkers did not pass to OW, which had not paid its suppliers, and owners likewise did not pay OW.

The second condition 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’ which assumes that the time of payment is ascertainable upon agreeing the contract independently of any conduct by the parties.

So, OW Bunkers could only recover its debt claim if the contract itself falls outside the Act's regime.

The Supreme Court judgment

The Supreme Court's decision of 11 May 2016 was given by Lord Mance.

There were three questions the Court had to decide:

  1. Was the contract a contract of sale within the meaning of s2(1) of the Act?
  2. If not, was there an implied term that OW would perform or had performed its obligations to its supplier including paying for bunkers timeously?
  3. If this was a contract of sale pursuant to the Act, was s49 a complete code for the circumstances in which the price must be paid?

In answer to the first question, Lord Mance recognised that bunker suppliers knew their goods would be used prior to payment such that the OW contract was not a straightforward agreement to transfer property in goods in return for the price. Instead it was a sui generis or unique type of agreement.

As to the second question, the Supreme Court ruled that there was no such implied term but only an implied promise that the owner of the bunkers allowed those bunkers to be supplied through the sales chain to the ultimate user with permission to use them for propulsion prior to payment.

But furthermore, Lord Mance went further than the Courts below to say that even if the OW contract had been a contract of sale under the Act, s49 of the Act would not have been a bar to recovery.

In answer to the third question, he said that s49 is not a complete code for situations in which the price of goods may be recoverable under a contract of sale. In so saying, he accepted that he would have over-ruled previous Court of Appeal case law if this had been a contract of sale to which the Act applied (G Wilson (Engineering) Ltd –v- John Holt & Co (Ltd) [2014] 1 WLR 2365 (known as "CATERPILLAR")).

Commentary

It is interesting to note that only days before the judgment of the Supreme Court in England, the Southern District Court in New York (in Hapag-Lloyd AG –v- US Oil Trading LLC) recognised and upheld the foreign scope of injunctions issued in US interpleader actions where owners face competing claims from intermediate bunker suppliers and physical suppliers.

This is an important remedy which is still available to ship owners or time charterers facing competing claims where, if there is a US nexus to their case, it may be possible to seek the assistance of the US Courts.

The Supreme Court's judgment in “RES COGITANS” follows a logic which has been adopted from the arbitrators upwards. It goes further though with the finding that a seller is not confined by the limits of s49 when suing for unpaid deliveries of goods. This decision is likely therefore to have far reaching effects.