Introduction

OW Bunker was a leading global ship fuel supplier until its recent liquidation in late 2014, which brought about numerous claims and vessel arrests by physical bunker suppliers and receivers/liquidators of OW Bunker against charterers and shipowners who contracted with the group.  One of the major disputes is whether the charterers and shipowners should pay the physical bunker suppliers, OW Bunker or both for the bunkers supplied to the vessel. The recent decision by the English Commercial Court in PST Energy 7 Shipping LLC v. OW Bunker Malta Ltd (Res Cogitans) [2015] EWHC 2022 (Comm) was the first test case on this issue.

In this case, despite the risk that shipowners may have to pay twice to both the physical supplier and OW Bunker for the same bunkers supplied, the judge held that a typical contract for the supply of bunkers was not a sale of goods contract falling within the Sale of Goods Act 1979 (“SOGA”).

Background
On 31 October 2014, PST Energy 7 Shipping LLC (the“Owners”) placed an order for the supply of bunkers to their vessels with OW Bunker Malta Limited (“OWBM”), a company which is part of the OW Bunker group. OWBM did not supply the bunkers physically, but placed an order for the supply with its Danish parent company, OW Bunker & Trading A.S. (“OWBAS”). OWBAS then contracted with Rosneft Marine (UK) Ltd (“Rosneft UK”), which in turn placed an order with its Russian subsidiary RN-Bunker Ltd (“RNB”), who ultimately supplied the bunkers to the vessels of the Owners on 4 November 2014.

OWBM’s right to payment was assigned to ING Bank N.V. (“ING”). Although RNB was paid by Rosneft UK later on 18 November 2014, both Rosneft UK and OWBAS had not been paid by OWBAS and OWBM respectively. As a result, when the OW Bunker group filed for bankruptcy on 7 November 2014, ING claimed the outstanding payment for the bunkers in the sum of US$416,000, under the contract between OWBM and the Owners (the “Contract”). The Owners, who did not want to risk paying twice to both OWBM and Rosneft UK, denied liability to pay ING.

The Contract
The Contract between OWBM and the Owners incorporated the OW Bunker group’s standard Terms and Conditions of sale (the “Terms”), which are commonly used in the shipping industry. The Terms include, among other things, a retention of title clause which stated that the title and property rights in the bunkers shall remain vested in the Seller (i.e. OWBM) until full payment has been made. The Terms also made it clear that before full payment is made, the Buyer (i.e. the Owners) possess the bunkers only as a Bailee for the seller, and shall not be entitled to use the bunkers other than for the propulsion of the vessel.

In other words, the title and property rights in the bunkers were to remain with OWBM until full payment is made by the Owners. However, during the credit period, the Owners had permission to consume the bunkers for the propulsion of their vessels.

The Major Arguments
The Owners denied liability to pay on the basis that the Contract was a sale of goods contract to which SOGA applied. Accordingly, under section 49 of SOGA, ING’s claim could only be maintained if either (1) “the property in the goods has passed to the buyer” or (2) “the price is payable on a day certain irrespective of delivery”. In this case, as the contracts with both OWBAS and Rosneft UK contained retention of title clauses while OWBM also failed to pay OWBAS, the Owners argued that OWBM never had the title or property in the bunkers and was therefore not in a position to transfer title to the Owners.

Alternatively, the Owners’ position was that even if the Contract was not one of sale of goods, terms equivalent to section 12 of SOGA must be implied so that OWBM was still in breach of an obligation to pass property in the bunkers to the Owners at the time of payment.

In response, ING contended that the Contract was not a sale of goods contract to which SOGA applied. Hence, it did not matter that the contract could not satisfy the requirements in section 49 of SOGA as it was merely a straightforward claim in debt.

The Decision
The dispute was first referred to arbitration, where the tribunal accepted ING’s contention that SOGA did not apply to the Contract. The Owners then appealed, but the English Commercial Court, agreeing with the arbitration tribunal’s decision on key issues, found in favour of ING. In the judge’s opinion, in order to qualify as a contract for sale of goods within the scope of SOGA, four conditions must be satisfied:

1.         the contract must be for “goods”;

2.         the seller must undertake an obligation to transfer the property in the goods (i.e. good title to them) to the buyer;

3.         there must be a money consideration payable by the buyer to the seller; and

4.         there must be a link between the transfer of title and the money consideration, such that the buyer is paying for title to the goods but not some other benefit.

In the present situation, the Contract failed to satisfy both the second and the fourth conditions to qualify as a sale of goods contract.

The court’s reasoning was that as a result of (1) the retention of title clause, (2) the period of credit before payment fell due, (3) the permission given to the Owners to consume the bunkers, and (4) the fact that some or all of the bunkers supplied were likely to be consumed before the expiry of the credit period, the parties must have taken to have understood that the title of the bunkers would never be transferred to the Owners. It could not be the parties’ agreement that the Owners were paying for the transfer of title of the bunkers. Consequently, the Contract was not a sale of goods contract to which SOGA applied.

Instead, the court was of the view that on a true construction of the Contract, the Owners were merely paying for the right to consume the bunkers, such that the use of the bunkers for the propulsion of their vessels would not be an unlawful possession that would expose them to the risk of being sued by the true owner RNB when the bunkers were delivered. Under such analysis, as far as English law is concerned, OWBM had already performed its contractual obligation by delivering the bunkers to the vessels of the Owners. Accordingly, there is no breach by OWBM of the Contract and the Owners should pay.

Implications
The decision was surprising as it is likely to bring about far-reaching impacts to the shipping industry where the majority of bunker supply contracts are structured in a very similar way to that in the present case. Following the collapse of the OW Bunker group which affected numerous transactions, many claims dealing with similar issues are expected to arise.

One significant implication of the present decision is that bunker supply contracts similar to that in the present case would no longer be protected by the SOGA. In the Court’s opinion, the parties were only bargaining for a right to consume the bunkers (i.e. akin to a licence to use the bunkers). Purchasers of bunkers would not enjoy the protection offered to buyers under the statute (e.g. implied condition as to the quality of the bunkers), unless the parties had expressly incorporated those terms into their contracts or unless further terms can be implied.

Besides, despite the fact that companies of the OW Bunker group have not paid the physical supplier, they are still entitled to be paid for the bunkers.

Further, the Owners may risk paying twice for the same bunkers supplied as the physical bunker suppliers may also have a claim for conversion against the Owners for consuming the bunkers.

Although the present case was decided in the United Kingdom, given that the Sale of Goods Ordinance (CAP. 26) in Hong Kong was closely modelled after SOGA, it is likely that this decision will be an authority to be accepted by the Hong Kong Courts in cases involving bunker supply contracts with similar terms and conditions. 

However, this judgment is unlikely to be the end of the story as the Owners have been given leave to appeal to the Court of Appeal recently.  It appears that this issue will not be settled until a final decision is made by the Court of Appeal or the House of Lords.

For enquiries, please contact our Litigation & Dispute Resolution Department:

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.