Re PST Energy 7 Shipping LLC & Product Shipping and Trading S.A. v OW Bunker Malta Ltd & ING Bank N.V. [2015] EWCA Civ 1058

Shipowners and bunker suppliers around the world have been eagerly awaiting the English Court of Appeal’s decision in PST Energy 7 Shipping LLC & Product Shipping and Trading S.A. v OW Bunker Malta Ltd & ING Bank N.V. [2015] EWCA Civ 1058.

In a judgment handed down on 22 October 2015, the Court of Appeal upheld the Commercial Court decision of 14 July 2015 that a contract for the sale of goods, containing a credit period and a retention of title clause, coupled with an express right to consume the goods during the credit period, is not a contract of sale within the scope of the Sale of Goods Act 1979 - at least so far as goods consumed during the credit period are concerned. 

The effect of the decision on the parties in that case is that the shipowners are required to pay OW Bunker for bunkers supplied even though OW Bunker were never in a position to transfer title to the bunkers supplied to the shipowners.

Facts

On 4 November 2014, the vessel, Res Cogitans, was supplied with bunkers pursuant to a contract entered into with OW Bunker Malta Ltd (“OWBM”) incorporating the OW Group’s standard terms and conditions. Those terms included a Retention of Title 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 OW Bunker AS, which in turn contracted with Rosneft Marine (UK), who contracted with RN-Bunker. RN-Bunker was the “physical supplier” who actually delivered the bunkers to the Vessel. The contract between OW Bunker AS and Rosneft Marine (UK) included a Retention of Title Clause and a credit period of 30 days, but it did not expressly allow Owners to use the bunkers. 

OW Group filed for bankruptcy on 7 November 2014 – before the Owners or OWBM paid for the bunkers. 

On 17 November 2014, Rosneft Marine (UK) 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 Rosneft 30-day credit period, and all of the bunkers had been consumed during the OWBM 60-day credit period.

Decision

The Court of Appeal found that OWBM was entitled to payment for the bunkers that had been supplied and 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 shipowners was in fact a ‘hybrid’ contract consisting of (a) a contract under which OWBM agreed to give the Owners a license to consume bunkers supplied immediately upon delivery and (b) 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 shipowners a license to consume bunkers supplied.  

  1. ‘License’ 

The Court of Appeal held that 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. 

In the Court of Appeal’s view, 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.

  1. ‘Contract for sale of goods to which Sale of Goods Act applies’ 

The Court of Appeal held that the contract also provided for the transfer of property in any remaining bunkers at the time payment fell due to the Owners, and to that extent, the contract was to be treated as one for the sale of goods to which the Sale of Goods Act 1979 applied. 

The Court of Appeal stated that 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. 

Discussion

With the Court of Appeal upholding the earlier Commercial Court decision, there are now three straight decisions in favour of OW Bunker (including the decision by the arbitration tribunal).

This judgment reinforces the currently held view that the bunker sale contract between OWBM and the shipowners was NOT a contract for the sale of goods falling within the Sale of Goods Act 1979. Accordingly OWBM did not have to be in a position to transfer title to the bunkers to the shipowners in order to be paid under the contract.

The ‘hybrid’ contract analysis introduced by the Court of Appeal does however raise some new uncertainties. It means that in every case, it may be necessary for Owners to also consider (1) what amount of bunkers was remaining on board the vessel at the time payment under the contract fell due and (2) whether OW Bunker possessed title to the bunkers at the time payment fell due. If a substantial amount of bunkers remained on board at the time payment falls due and OW Bunker still does not have title to the bunkers, Owners would arguably not have to pay OW Bunker.

Though in practice, bunkers supplied would have been completely or substantially consumed by the time payment falls due, these additional considerations may still be relevant in some cases and will make it more difficult for Owners to easily determine whether a payment should be made.

Given that OW Bunker deliveries involved a variety of physical bunker suppliers operating in different jurisdictions (with their own bunker supply contract terms and governing laws), Owners will still need to consider the circumstances of each claim carefully before deciding if a payment should be made. The facts of a particular case could substantially differ from those on which the Court of Appeal had based its decision and it would be unwise for Owners to conclude that the decision means that OW Bunker is entitled to payment in all cases.

This decision is unlikely to be the final word on the OW Bunkers cases and a further appeal to the United Kingdom Supreme Court should be expected.

Other jurisdictions

For completeness, we should state that there are in fact other OW Bunker cases that have been dealt with by other (non-English) Courts. At the time of writing, the writers are aware of several decisions in other jurisdictions, with a range of results some of which seem to have gone against OW Bunker:

  • The Singapore High Court noted in Precious Shipping Public Co Ltd v OW Bunker Far East (Singapore) [2015] SGHC 187 that the physical bunker suppliers claim against Owners in conversion was weak and that 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 OW and a charterer and that the charterer was discharged from any further obligation to pay OW by paying the physical supplier.
  • A Belgian Court has lifted an arrest by an unpaid physical supplier on the basis that Owners had already paid OW and this discharged the Owner from any obligation to pay the physical supplier.
  • An Israeli Court has found that a payment by Owners to a physical supplier discharged them from any obligations to pay OW.

No doubt there are other cases winding their way through different Courts around the world. Owners should therefore be advised that notwithstanding the English Court of Appeal decision, their position will depend to a large degree on the identity of Court assuming jurisdiction over the particular claim.