Share it

Summary

The Supreme Court has unanimously dismissed the appeal in PST Energy 7 Shipping LLC & Anor v OW Bunker Malta Ltd & Anor [2016] UKSC 23, upholding the judgment of the Court of Appeal in a case that may have far-reaching implications for marine fuel supply contracts and disputes involving retention of title clauses.David_Whitehead_ph[1]

It concerned proceedings arising out of the insolvency of the OW Bunker Group (OWB), the world’s largest contractual supplier of marine fuel (“bunkers”) to ships. The Supreme Court was asked to consider whether or not the bunker supply contract in question, which incorporated OWB’s standard terms and conditions, was a contract for the sale of goods within the meaning of the Sale of Goods Act 1979.

Background

The original dispute related to a contract entered into on 4 November 2014 between the owners of the vessel and OW Bunker Malta Limited (OWBM) for the supply of bunkers to the owners’ vessel, the “Res Cogitans”. This was made on the standard OWB 2013 Terms and Conditions of Sale for Marine Bunkers, which were governed by English law and provided for London arbitration. The agreed credit period was 60 days.

OWB mostly used sub-contractors to physically deliver the bunkers to customers’ ships. OWB’s standard terms of sale therefore included a retention of title (ROT) clause, providing that the bunkers remained the property of OWB until payment in full was received, but authorising the buyer to use the bunkers for propulsion from the moment of delivery.

OWBM placed an order for the supply of bunkers with its Danish parent company, OW Bunker & Trading AS (OWBAS) and that contract was also subject to the OWB Terms and Conditions. OWBAS in turn placed an order with Rosneft Marine (UK) Ltd, who then placed an order with its Russian affiliate, RN-Bunker Ltd, who physically supplied the bunkers to the vessel on 4 November 2014.

OWB filed for bankruptcy on 7 November 2014, before the bunkers had been paid for, and ING, as assignees of OWBM’s rights, claimed payment for the bunkers from the owners. Rosneft also claimed the price of the bunkers from the owners and asserted that it retained title to them. The owners argued that they were not obliged to pay ING/OWBM for the bunkers because Rosneft had not been paid and therefore Rosneft retained property in the bunkers pursuant to the ROT clause in the Rosneft/OWBAS contract. Consequently, OWBM never acquired property in the bunkers and could not transfer such property to the owners.

The owners contended that the bunker supply contract was a contract for the sale of goods, and therefore subject to the provisions of the 1979 Act. ING’s claim could therefore only be maintained if the conditions of s 49 of the 1979 Act were satisfied, specifically: (1) property in the goods has passed to the buyer, or (2) the price is payable on a day certain irrespective of delivery.

The panel of arbitrators held that ING/OWBM did not undertake to transfer the property in the bunkers to the owners under the bunker supply contract. The contract was therefore not a contract of sale to which the 1979 Act applied. As a result, ING’s claim was a straightforward debt claim.

Commercial Court decision

Males J upheld the arbitral tribunal’s finding that the bunker supply contract did not fall within the 1979 Act regime. In order to qualify as a contract of sale to which the 1979 Act applies, the seller must undertake to transfer title in the goods to the buyer, and the buyer must pay the price in exchange for title to the goods.

In this case, the effect of the permission to consume the bunkers immediately coupled with the 60 day credit period meant that the contract was not in essence a contract for the transfer of property in the bunkers, because some if not all of the bunkers would have ceased to exist by the date of payment (the date on which title would have passed). The owners were not paying for any transfer of title, but rather the right to consume the bunkers. The Court therefore ruled that the contract was akin to a licence for the use of the bunkers.

Court of Appeal decision

Males J granted the owners leave to appeal to the Court of Appeal under Section 69(8) of the Arbitration Act 1996 on the sole issue of whether or not the bunker supply contract was a sale of goods to which the 1979 Act applied. The Court of Appeal upheld the Commercial Court’s decision finding that although the contract contained references to sale, it did not fall within the scope of s 2(1) of the 1979 Act, Moore-Blick LJ commenting that the essential nature of the contract was “reasonably clear”:

“It is a contract under which goods are to be delivered to the owners as bailees with a licence to consume them for the propulsion of the vessel, coupled with an agreement to sell any quantity remaining at the date of payment, in return for a money consideration which in commercial terms can properly be described as the price.”

Appeal to the Supreme Court

On 11 May 2016 the Supreme Court unanimously dismissed the owners’ appeal, ruling that the contract between OWBM and the owners was not one of sale but sui generis. First, it permitted consumption prior to any payment and without any property ever passing in the bunkers consumed. Second, if and so far as bunkers remained unconsumed, it allowed the remaining property in the bunkers to be transferred to the owners in return for the owners paying the price for all of the bunkers, whether consumed before or remaining at the time of payment.

Furthermore, the Court found there to be no implied term that OWB would perform its obligations to its supplier by paying for the goods timeously, Lord Mance finding that: “OWBM’s only implied undertaking as regards the bunkers which it permitted to be used, and which were used by the owners in propulsion prior to payment, was that OWBM had the legal entitlement to give such permission.”

On an alternative ground, although it was held that the contract was not a contract of sale, the Court discussed whether the Court of Appeal’s decision in Caterpillar (NI) Ltd (formerly FG Wilson (Engineering) Ltd) v John Holt & Company (Liverpool) Ltd [2013] EWCA Civ 1232 should be overruled. The Court in Caterpillar concluded that where goods are delivered under a contract of sale, but title is reserved pending payment of the price, the seller cannot enforce payment. The Court considered that had the contract been one of sale it would likely have overruled Caterpillar as s 49 of the 1979 Act is not a complete code of situations where the price may be recoverable. In the present case, the price was recoverable due to the express terms in the event that the bunkers were consumed entirely.

Comment

Given that this has been widely viewed as a test case, confirmation that the contract in question was not governed by the 1979 Act will doubtless prompt redrafting of similar contracts.

Some commentators have expressed fears that the judgment leaves buyers potentially liable to pay for the same fuel twice- first to ING as the assignee of the insolvent OW Bunker Group under the contractual agreement, and secondly to the physical suppliers of the actual fuel, who may claim rights under a reservation of title or maritime lien.