The OW Bunker bankruptcy – bunker supply contract is not a contract for the sale of goods

The shipowners’ bid to avoid the risk of having to pay twice for bunkers supplied has been thwarted by the English High Court which held that a contract for the supply of bunkers is not a sale contract falling within the English Sale of Goods Act. (PST Energy 7 Shipping LLC v OW Bunker Malta Ltd [2015] (“Res Cogitans”) EWHC 2022 (Comm))

The owners of the “Res Cogitans” had contracted with OW Bunker Malta Ltd (“OWBM”) for the ­supply of bunkers to the vessel. OWBM had, through a series string contracts, arranged the bunkers to be physically ­supplied by the Russian subsidiary of Rosneft Marine (UK) Ltd (“Rosneft”). All of the contracts in the chain provided for payment on credit with retention of title clauses in favour of the supplier on terms typically found in many bunker supply contracts. One such term was that the owners had permission to consume the bunkers before payment fell due.

No payment was made by the owners to OWBM prior to OWBM becoming insolvent and no payment had been made by OWBM to Rosneft. The owners’ concern was that if they paid OWBM then they risked a claim being made against them by Rosneft and they would have to pay for the same bunkers twice. Owners denied any liability to pay OWBM on the grounds that since OWBM had not paid for the bunkers, property in them could not be transferred to owners for the purposes of section 49 of the Sale of Goods Act. That in turn meant that OWBM could not sue for the price. OWBM’s response was that the contract was not one to which the Sale of Goods Act applied but rather was a claim for a contractual debt. As such OWBM did not need to demonstrate that they could pass property in the bunkers at the time of payment.

At first glance, it seems obvious that a contract for the ­supply of bunkers is a contract for the sale of goods – what else could it be? However, the London ­arbitrators held that it was not a contract falling within the Sale of Goods Act, and on appeal Mr Justice Males agreed with the arbitrators’ view.

The judge’s reasoning

The starting point in the judge’s ­analysis was the permission given to owners to consume the bunkers prior to payment being made. Once bunkers are consumed then the property in them is extinguished and cannot be transferred. In circumstances where a sale takes place on terms that the seller retains title to the goods, but nevertheless gives permission for those same goods to be consumed, then the judge held that the ­parties must be taken to have understood that title to the goods may never be transferred to the buyer.

In order for a contract of sale to fall within the Sale of Goods Act four ­conditions must be met. First the ­contract must be for “goods”; second the seller must undertake to transfer good title in the goods; third the goods must be paid for by the buyer and fourth there must be a link between the payment and the transfer of title. In other words what the buyer is paying for is title to the goods.

If a contract contemplates payment for the goods being made without title to those goods being transferred because property in the goods has been extinguished by consumption of the goods in question then the requirements of the Sale of Goods Act have not been met and the Act does not apply. In answer to the question of what an owner is paying for under a bunker supply contract if not title in the bunkers being purchased, the judge’s answer was that it was not necessarily so. Where, in a bunker supply contract, there is a combination of a retention of title clause and permission to consume then the owners are not paying for title to the bunkers being supplied but rather a lawful right to consume those bunkers.

The judge made it clear that it was not the existence of the retention of title clause alone which prevented the ­bunker ­contract from being a contract of sale within the Sale of Goods Act. Nor was it the delivery of goods to a person with ­permission to use them in a way which will result in their ­consumption, as this will usually infer that property in them was intended to pass to that person. Rather, it was the combination of the retention of title clause, the period of credit before payment fell due, the permission to consume the bunkers and the imminent consumption or destruction of some or all of the goods that resulted in this being a contract that fell outside the provisions of the Sale of Goods Act.

The judge’s conclusion

OWBM’s obligation under its contract with the owners was to deliver bunkers on board the vessel with permission to use those bunkers before payment was made. In its contractual arrangements with Rosneft, OWBM had secured permission for owners to consume the bunkers and so had fulfilled its ­contractual obligations for which it was entitled to be paid. Rosneft had no claim under English law against the owners since it had given permission for them to be consumed without payment being made. The fact that Rosneft could arrest the vessel in other jurisdictions by asserting a maritime lien to secure payment did not trouble the judge. His view was that the exposure to foreign claims linked to the possibility of arrest was one of the trading risks which shipowners run.

The decision is an important one since as the judge recognised the ­contract terms in this case are “typical of hundreds or even thousands of such transactions carried out every year”. Not surprisingly therefore the decision was appealed to the Court of Appeal who have now provided their decision.

The Court of Appeal

The Court of Appeal agreed with the judge’s reasoning, holding that the combined effect of the retention of title clause, the period of credit, the per­mission to consume and the fact that some or all of the bunkers would be consumed before the credit period expired meant that the contract was not a contract for the sale of goods within the Sale of Goods Act. This was the case even though it was “commercially” understandable for the parties to have described the agreement as a contract for the sale of the bunkers. The Court of Appeal held that what owners were purchasing was the right to consume the goods, although OWBM was still under an obligation to transfer title in what remained at the end of the credit period. However, unlike the judge, the Court of Appeal declined to express a view on whether or not Rosneft had given permission to OWBM to allow consumption of the bunkers by owners stating that that question ought to have been left to the arbitrators.

The case may yet go further to the Supreme Court but for now it is clear that a bunker supply contract is not a contract for the sale of goods within the Sale of Goods Act. This decision is likely to come as a surprise to many in the commercial world.