(1) PST Energy 7 Shipping LLC and (2) Product Shipping and Trading S.A. v (1) OW Bunker Malta Limited and (2) ING Bank N.V. [2015] EWHC 2022 (Comm)

In a well-publicised case, the High Court has ruled that shipowners are obliged to pay OW entities under OW's standard terms. If shipowners have already paid the physical supplier for bunkers (or have a liability to do so in another jurisdiction), they may in fact be liable for paying two invoices for the same fuel stem, following the collapse of OW Bunker last year. However, leave to appeal the decision has been granted.

Background

The facts of the case are synonymous with the situation many shipowners are facing in the wake of the collapse of OW Bunkers.

The Owners of the vessel Res Cogitans placed an order for bunkers with OW Bunker Malta Ltd (“OWBM”). The Order Confirmation stated that the physical supplier would be “Rosneft” and that payment was due within 60 days from the date of delivery upon presentation of OWBM’s invoice. OWBM’s right to payment was assigned to its bank, ING Bank N.V. (“ING”). ING is the assignee of most of the OW group companies.

OWBM placed an order for the bunkers with OW Bunker & Trading A.S. (“OWBAS”). OWBAS in turn placed an order with Rosneft Marine (UK) Ltd (“Rosneft”), who duly placed an order with its subsidiary, RN-Bunker Ltd. RN-Bunker Ltd was the physical supplier of the bunkers.

Pursuant to the terms of each of the contracts, OWBAS was to pay Rosneft $416,000 within 30 days after delivery, while Owners were to pay OWBM (or ING as assignee) $443,800 within 60 days. Neither invoice was paid. However, Rosneft paid R-N Bunker Ltd for the bunkers, and title passed to Rosneft.

Both ING and Rosneft claimed payment from Owners of their invoices. Owners did not object to paying for the bunkers, but did not want to pay twice.

The High Court decided that the Owners were obliged to pay ING.

The Law

The judgment was determined on the basis that the contract was not one to which the which the Sale of Goods Act 1979 (the “Act”) applies and therefore it was not necessary for property to pass in the bunkers in order for Owners to be obliged to make payment.

Therefore, the complications arising from the retention of titles clauses and when property passes in the bunkers were not fundamental in the decision, although they were discussed at length. The Judge held that ING’s claim was one for a straightforward debt.

The doubt over whether the Sale of Goods Act 1979 applies only arises because of the combination of the retention of title clause and the imminent destruction of the goods. If there were no such clause, it would clearly be a contract to which the Act applied. The reason the Act does not apply in this situation is that the supplier does not undertake to transfer title.

The Court concluded that there was no breach by OWBM of its contract with the Owners. However, Males J stated that he “cannot exclude the possibility that the Owners may have a liability to Rosneft under some system of law other than English law and, if so, that the vessel may be exposed to arrest in some jurisdictions.”

Males J held that Owners were liable to pay ING.

Legitimacy of arrest

Many shipowners find themselves exposed to threats of arrest from the physical supplier of the bunkers, who has not been paid by the OW entity. In some cases, ING may also threaten to arrest the vessel, on behalf of the OW entity, as security for the outstanding debt. But does either party have a legitimate right of arrest?

As a matter of English law, a ship can only be arrested pursuant to a maritime lien or a statutory lien. Maritime liens will only arise in respect of four categories of claim: damage done by a ship; salvage; seamen’s wages, and bottomry and respondentia.

The Supreme Court Act 1981 (as amended), which gives effect to the International Convention on Arrest of Ships 1952 and 1999 (the “Arrest Convention”) sets out a closed list of claims pursuant to which a statutory lien is created and a vessel can be arrested.

One of the claims on the closed list is “any claim in respect of goods or materials supplied to a ship for her operation and maintenance”, which covers claims made directly by the supplier of the goods, and would include the supply of bunkers.

Where, as in the reported case, OW has not supplied the bunkers to the ship directly, it seems probable that OW’s claim is not caught by the Supreme Court Act 1981, and therefore no statutory lien exists.

Therefore, the clause will not create a maritime lien and is unlikely to create a statutory lien pursuant to which the OW entity or ING can arrest the vessel.

The physical supplier, on the other hand, will have a legitimate right of arrest, as their action for the supply of necessities does fall within the closed list of Maritime Claims. This will be true in any jurisdiction which has signed the Arrest Convention and incorporated the supply of necessities as a right of arrest in local law.

This leaves the shipowner in the position of facing arrest from the supplier, and an obligation to pay ING in light of the Res Cogitans case. However, at least the owner would be unlikely to face an arrest by both physical supplier and ING (and ING’s claim on the owner will be unsecured).

Until we have finality following the outcome of the appeal in the case, physical suppliers can legitimately effect arrest, although OW Bunkers/ING cannot. In order to avoid disruption, it may be possible to agree with physical suppliers to put the funds in escrow. However, shipowners will nevertheless be exposed to the risk of payment to ING in the future, as the law currently stands.

Practical advice

  • If shipowners pay the physical supplier or secure that claim to avoid or secure release from arrest, they may still be liable to pay ING for the payment owed to the OW entity.  
  • ING are unlikely to be able to effect a valid arrest.  
  • However, physical suppliers do still have a statutory right of arrest, by virtue of the Arrest Convention. This is the case in any jurisdiction which has ratified the convention.