In the wake of the OW Bunker (OWB) insolvency in late 2014, shipowners have found themselves at the risk of double payment demands from physical suppliers, OWB's liquidators and ING Bank NV. Numerous vessels were arrested, forcing shipowners to pay physical suppliers even if they (or their charterers) had already paid OWB or ING, respectively.
A Union Supreme Court judgment has now accepted an appeal by the owners based on the principle of relativity of contracts – that is, that the physical supplier has a contractual claim only against the bunker trader, not the shipowner or charterer as the ultimate buyer.
While on the face of it, this appears to be good news for shipowners, it is still not entirely clear what the decision means for future arrest applications, as the judgment did not:
- overturn the arrest; or
- specify the relationship between the physical bunker supplier's contractual claim and his statutory right of arrest.
It is to be hoped that these issues will be clarified by the Court of Appeal, as the case has been referred back for retrial.
The charterers of the MT S had purchased bunkers worth around $1.5 million (the claimed amount) to be supplied to the vessel. In turn, OWB approached the supplier to supply the bunkers. The supplier agreed and delivered the bunkers to the vessel against receipt of a bunker delivery note signed by the vessel's chief engineer.
Due to the resulting non-payment caused by OWB's liquidation, the supplier arrested the vessel in February 2015. The vessel was released shortly thereafter, as the owner deposited the claimed amount with the court.
The supplier's arrest was based on Article 115(i) of the Commercial Maritime Law, which allows the sequestration of vessels for the supply of products or equipment necessary for the use or maintenance of the vessel. This claim was against the owner, the operator and OWB, seeking an order requiring the defendants jointly and severally to pay the supplier the claimed amount (together with interest and costs) and confirm the validity of the arrest. During the proceedings, ING (together with the receiver) sought to intervene against the charterer, claimant, owner, operator and OWB, seeking the claimed amount from the owners.
The owner and charterer requested the court to reject the arrest on the basis that they bore no responsibility for the payment of the bunker supply as they had no contractual relationship with the claimant. While admitting that it was the contracting party, OWB averred that it was not responsible for the claimed amount due to its insolvency.
The first-instance court dismissed OWB's argument on the basis that the Company Law places the liquidator of a company in the company's shoes and therefore holds the liquidator responsible for the company's debts. The court dismissed the claim against the owners on the basis that there was no contract between the owners and the supplier and therefore denied the validity of the arrest of the vessel. The court also rejected ING's claim on the basis that it had failed to prove that the original debt was due to OWB, which was a prima facie requirement in order to prove its assigned rights.
Court of Appeal decision
The judgment was appealed by all parties (the owners opposing the appeal). The Court of Appeal reversed the first-instance judgment and ordered the defendants jointly to pay the claimed amount, while confirming the validity of the arrest. The Court of Appeal dismissed ING's claims with costs.
OWB, the owners and ING appealed the Court of Appeal's judgment to the Union Supreme Court.
Union Supreme Court decision
OWB argued that the Court of Appeal had ignored the relativity of contracts and that, given that the contract was between the supplier and OWB, there was no valid claim against third parties. Therefore, as a matter of law the claimant should be entitled to claim only against OWB. This appeal was dismissed for a lack of cause of appeal. The Union Supreme Court held that regardless of its findings relating to the argument on the relativity of contracts, OWB was neither authorised nor permitted to defend the other judgment debtors. It found that the challenge was intended to achieve a theoretical interest which was ineffective and thus dismissed. Thus, the Court of Appeal's judgment against OWB is final and binding.
ING pleaded that the Court of Appeal had failed to deal with its application properly. This was accepted by the Union Supreme Court, ruling that the Court of Appeal had failed to consider ING's appeal, thereby infringing on the appellant's rights.
In the third, most notable appeal, the owners argued that the Court of Appeal had erroneously applied the law by ignoring the principle of the relativity of contracts when it ordered the appellants jointly to pay the judgment debt. According to the owners, they had entered into a contract with OWB and OWB had entered into a second, separate contract with the supplier. As such, the owners argued that they need not meet an obligation under a contract that they were not party to. In addition, the owners argued that there was no basis for the joint liability of the appellants in law or per the contract.
The Supreme Court allowed the appeal. It confirmed that, on the basis of the principle of relativity of contracts (relying on Articles 250 and 252 of the Civil Transactions Law), the claimant had a contractual claim only against the immediate seller (OWB), not against the owners, which had bought the bunkers under a separate contract from OWB. Put simply, the court found that the owners were third parties, as they were not parties to the contract; therefore, they assumed no liability to the seller (supplier). The court found that this conclusion was not changed by the fact that the owners had supplied the vessel directly.
Further, the court agreed with the appellants in that there was no basis for the joint liability of the appellants and overturned the Court of Appeal's judgment in this respect.
On the basis of the above considerations, the Union Supreme Court referred the case back to the Court of Appeal for retrial.
Shipowners are sure to welcome the decision, as they can now rely on the Union Supreme Court's judgment to defend contractual claims from physical bunker suppliers. While judgments in the United Arab Emirates operate under civil law and thus do not enjoy the same authoritative precedent as in common law countries, they still serve as a persuasive precedent.
Although the Union Supreme Court has decided that the owner is not contractually responsible for the settlement of the supplier's claim, it is still the owner (or charterer) that will be commercially pressured to put up security to release the vessel. If the court then later holds the bunker trader as the contractual debtor liable for payment of the bunkers, it is unclear whether the security amount will be released to the supplier and, assuming it will, whether the owner is provided with a right of recourse against the bunker trader. However, even if such right is awarded, it appears that the owner may still face the risk of double exposure in circumstances where the bunker trader cannot settle the debt.
It is hoped that the Court of Appeal will shed some light on this uncertainty and provide guidance for the industry when its judgment is delivered.
For further information on this topic please contact Carl Turpin or Paul Katsouris at Fichte Legal Consultants by telephone (+971 4 43 57 577) or email ([email protected] or [email protected]). The Fichte Legal Consultants website can be accessed at www.fichtelegal.com.