Introduction

As discussed in our previous newsletter “OW Bunker Crisis Saga – Nature of Bunker Supply Contract Reinforced”, the English Court of Appeal in PST Energy 7 Shipping LLC, Product Shipping & Trading S.A. v. O.W. Bunker Malta Ltd and ING Bank N.V. [2015] EWCA Civ 1058 upheld the Commercial Court’s decision.  The OW Bunker’s customers (the “Owners”) further appealed to the English Supreme Court, but by a unanimous decision the English Supreme Court dismissed the Owners’ appeal.  Many similar cases worldwide have awaited this decision with interest, as this case concerns the nature and effect of bunker supply contracts which are commonly used by bunker suppliers.  This newsletter will look at the decision of the English Supreme Court and discuss its possible implications.

Background

OW Bunker Malta Limited (“OWBM”) entered into a contract (the “Contract”) with the Owners for delivery of bunkers to the vessel on 30 October 2014. Then, OWBM obtained the bunkers through its parent company, OW Bunker & Trading A/S (“OWBAS”). OWBAS in turned obtained them from Rosneft Marine (UK) Ltd, which further contracted with RN-Bunker Ltd.

In late 2014, OW Bunker Group became insolvent and lost its status as the world’s largest supplier of bunkers.  Subsequently, ING Bank N.V. (“ING”) financed the OW Bunker Group and claimed as the assignees of any claim which OWBM had against the Owners.  Since the Owners had not settled any payment for all the bunkers consumed after the 60-day credit period, issue arose as to whether the Owners have to pay the immediate bunker supplier, OWBM, in the circumstances where OWBM has not passed the title of the bunkers to the Owners.  Another dispute was whether the Owners could rely upon the Sale of Goods Acts 1979 (the “SOGA”) to defend against OWBM/ING’s claim.

The Contract was for the sale and delivery of bunkers, coupled with a retention of title clause and 60-day credit period.  Under the Contract, the Owners also agreed that they would not acquire title or property rights in the bunkers until full payment to OWBM.  Instead, they would merely hold them as bailees with a license to consume them solely for the propulsion of their vessel. 

Lower Courts’ Decisions

Both of the English Commercial Court and the English Court of Appeal took the view that the Contract was not a sale of goods contract within the meaning of the SOGA, thus the SOGA was not applicable.  The Court of Appeal went further and held that the Contract was in essence a hybrid contract, comprising (1) an agreement that OWBM would give the Owners a license to consume the bunkers upon delivery and (2) an agreement for sale of any remaining bunkers at payment due date.  More importantly, the Court of Appeal was of the view that transfer of title in the bunkers was not the crucial subject matter of the Contract.  Even if OWBM/ING did not transfer the title of the bunkers, which the Owners had already consumed all the bunkers within the agreed credit period, the Owners would still be obliged to pay for them.

The Supreme Court’s Decision

The Supreme Court upheld the lower courts’ decision and dismissed the Owners’ appeal.  The view of the Supreme Court was that the Contract was in substance an agreement with two aspects: (i) to permit consumption prior to any payment and without any property ever passing in the bunkers consumed; and (ii) but only if and so far as bunkers remained unconsumed, to transfer the property in the bunkers so remaining to the Owners in return for the Owners paying the price.  The price should be the price payable for all the bunkers, whether consumed before or remaining at the time of its payment.  Having considered the approach taken by the Court of Appeal in Harry & Garry Ltd v Jariwalla [1988] WL 1608652, the Court ruled that the Contract was a sui generis transaction, offering features quite different from a sale of goods contract, namely the Owners have the liberty to consume the bunkers without having acquired or paid for them.  Therefore, the Court rejected the Owners’ argument that the Contract as a whole should be categorised as a sale of goods contract within the meaning of the SOGA simply by referring to one possibility that some bunkers surviving unused after the 60-day credit period were covered by an agreement for sale.  

Since the Contract was not one of sale within the meaning of the SOGA, the Owners would not be entitled to any defence provided in the SOGA.  It followed that so long as the Contract remained enforceable, the Owners would be liable for the price under the express terms, pursuant to the fact that the Owners consumed all the bunkers supplied to the vessel.

Implications

This long awaited decision affirms the present view that the Contract is not a sale of goods contract under the SOGA.  As most bunker supply contracts worldwide contain similar terms to the Contract, this would mean most ship owners, which are the end users in the supply chain of bunkers, need to pay for the immediate supplier, regardless of whether the immediate supplier has paid the physical supplier.  While this Supreme Court decision is the final word to the dispute between OWBM/ING and the Owners, this does not mean that the OW Bunker Crisis Saga would end here.  It remains uncertain whether the Owners also have to pay for the physical supplier because the Supreme Court has not made a ruling on this issue, and RMUK, (i.e. the physical supplier) may bring a claim for conversion against the Owners for consuming the bunkers without their consent.     

As mentioned in our previous newsletters, the Sale of Goods Ordinance (Cap. 26) in Hong Kong closely resembles the SOGA.  Thus, it is likely that the Hong Kong courts would adopt this decision in cases where similar disputes or issues arise.  When there are concerns over or doubts about the effect of a bunker supply transaction, the potential contracting party should seek legal advice promptly.

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

E: shipping@onc.hk

T: (852) 2810 1212

W: www.onc.hk

F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

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.