October 30, 2015

The Res Cogitans – Bunker Supply Contracts (The OW Bunker Case)

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The Res Cogitans – Bunker Supply Contracts (The OW Bunker Case)

(PST Energy 7 Shipping LLC & Anor v (1) OW Bunker Malta Ltd (2) ING Bank N.V. [2015] EWCA Civ 1058).

The Court of Appeal handed down their judgement earlier this week on the widely discussed case of The Res Cogitans, a dispute surrounding a contract for the supply of bunkers by OW Bunker Malta Ltd (OWBM) to the Owners of the vessel RES COGITANS.

The Court of Appeal upheld the decision of the Commercial Court that a bunker supply contract was not considered a contract for the sale of goods under the Sale of Goods Act 1979 (SGA) and the passing of title/property in the bunkers to the Owners was not a requirement for OWBM’s claim for the price of bunkers to succeed against the Owners.

The Facts

On 31 October 2014 the Owners of the vessel placed an order for bunkers with OW Bunker Malta (OWBM), a company that is part of the OW Bunker group, on the standard terms of OW Bunkers. OWBM confirmed physical delivery would take place on 3 or 4 November 2014. OWBM had subcontracted out to their parent company, OW Bunker & Trading AS (OWBAS), who had then contracted with Rosneft Marine (UK) Ltd (Rosneft). Rosneft had in turn contracted with its Russian Affiliate, RN-Bunker Ltd., for the physical supply of the bunkers to the Owners.

• The contract between OWBAS and Rosneft required payment to be made by 4 December 2014 (30 days after delivery).
• Payment from Owners to OWBM/ING in the sum of USD 443,800 was to be made by 3 January 2015 i.e. within 60 days of delivery.
• On 6 November 2014, shortly after the physical delivery of the bunkers, OWBAS announced that it will file for bankruptcy and consequently neither of the above invoices were paid.
• ING as the assignees of OWBAS asserted their right to recover the debts owed to OWBM in respect of the bunker contract.

Rosneft also claimed the price of the bunkers from the Owners given the unlikelihood of them receiving payment from OWBAS.

The Terms of the Contracts

Owners and OWBM entered into a contract on the standard terms of OW Bunkers. The combination of the terms in the contract was of importance here.

The OWB contract was governed by English law and subject to arbitration in London. The contract included:

1. A Retention of Title clause (ROT) which provides that title/property in the bunkers remains with the Seller until full payment has been made.
2. Express permission to the Buyer to consume the bunkers before payment was made for the propulsion of the vessel. Therefore the bunkers could be consumed whilst title remained with the Seller.

The Rosneft contract incorporated the standard terms of Rosneft. This contract was also governed by English law and subject to arbitration in London. Whilst the contract contained an ROT clause it did not give express permission to consume bunkers prior to payment.

Arbitration

The Owners began arbitration proceedings against OWBM/ING seeking a declaration that they were not bound to pay OWBM/ING or alternatively for damages for breach of contract on the grounds that OWBM has not passed title in the bunkers to Owners. Owners contended that the contract which was for the sale of goods was subject to the SGA. As a result, ING’s claim could only be successful if ING could satisfy the conditions of s 49 SGA which includes the following requirements:

• The property in the goods has passed to the buyer or
• The price is payable on a day certain irrespective of delivery

Owners argued that Rosneft held title in the bunkers pursuant to the ROT clause in the contract therefore OWBM never acquired property in the bunkers and could not have transferred property to the Owners. As a result OWBM could not satisfy the above conditions as OWBM (i) never acquired property in the bunkers which meant they could not pass property to the Owners and (ii) the invoice was not payable on an ascertained day as the payment date was based on a future event i.e. date of delivery of the bunkers.

The Owners also argued that OWBM was in breach of the mandatory implied term at s12(1) of SGA that the seller has the right to sell the goods or will have such a right to do so at the time when property is to pass. This was because OWBM had not paid Rosneft for the bunkers and therefore property in the bunkers remained with Rosneft pursuant to the ROT clause. OWBM’s inability to transfer property in the bunkers meant that buyers had a complete defence to a claim for the price of the bunkers.

The arbitrators rejected the Owners argument and agreed with OWBM/ING that the bunker supply contract was not a contract to which the SGA would apply. The contract did not fall within the definition of a contract of sale of goods under section 2(1) of the SGA as the bunkers were supplied on credit and were for immediate consumption. This meant that OWBM/ING did not have to satisfy the conditions set out under s 49 SGA.

The Arbitrators did confirm that OWBM did not own the bunkers and property in the bunkers remained with Rosneft.

Commercial Court

The Commercial Court upheld the decision of the arbitrators that the bunker supply contract was not a contract of sale to which the SGA applied. A contract of sale under the SGA requires the seller to undertake to transfer property in the goods to the buyer and the buyer must pay the price in exchange for property in the goods. Commercial Court agreed with OWBM/ING that this was a straightforward claim in debt.

The Court set out that the combination of the ROT clause, the period of credit before payment fell due, the permission for consumption of the bunkers within this credit period meant that the parties must have understood title would never be transferred to Owners.

When considering the agreement between the parties the Court held that the parties had contracted for the Owners right to consume the bunkers not for a transfer in property in the bunkers. The contract ensured OWBM’s delivery of the bunkers, for it to be possible for Owners to make immediate use of the bunkers and to pay OWBM’s invoice in return. The Court explained that although this resembled a contract of sale it did not fall under the SGA definition of a contract of sale.

Additionally, the Court set out that Rosneft had given permission to the Owners to consume the bunkers during the credit period as Rosneft would have known that OWB was not the end user but a trader and that a contract would be entered into (directly or indirectly) with the vessel’s Owners. Rosneft would have known that the contract with the Owners would permit them either expressly or by implication to consume the bunkers within the credit period.

Court of Appeal

The Court of Appeal dealt with the Owners’ appeal only as to whether the SGA applied to the contract. On consideration of the arguments presented the Court of Appeal upheld the decision of the Commercial Court that the passing of property in the bunkers was not fundamental to the contract between the parties and therefore the SGA was not applicable.

The Court of Appeal determined the true effect of the contract to be

“a contract under which goods are to be delivered to the owners as bailees with a licence to consume 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.”

The Court of Appeal dismissed the Owners’ appeal and concluded that the failure of OWBM to transfer title in the bunkers to Owners did not release the Owners from their obligation to pay.

Our Observations

This judgement has come as a surprise considering the fact that the terms used by the parties are the norm in the bunker supply industry. Not only will the decision have far reaching effects in the maritime industry but also other industries where goods are supplied on similar terms within the English legal jurisdiction. The consequence is that a buyer will not benefit from the protections/defence set out under the SGA. The other issue relevant here is that the Owners will be obliged to pay OWBM/ING for the sums due under the contract and may also have to pay the physical supplier of the bunkers, resulting in Owners paying twice for the bunkers.

It is important to note that each case will need to be considered on its own merits with consideration to the facts and the applicable law. It appears likely that Owners will apply for leave to appeal to the Supreme Court. We will report further in due course with developments made.

Sarah Mokhtari
Tel: +44 (0) 20 73750002
sarah.mokhtari@pacifics.co.uk

www.pacifics.co.uk

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