As discussed in our previous newsletter “The Aftermath of the OW Bunker Crisis – Is Bunker Supply Contract a Sale of Goods Contract?”, the ruling of the English Commercial Court on the OW Bunker Crisis was not the end of the story. The case was subsequently brought to 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, which upheld the Commercial Court’s decision. This newsletter will look at the decision of the English Court of Appeal and discuss its possible implication.

To recap, OW Bunker was once the world’s largest supplier of bunkers until its liquidation in late 2014. OW Bunker used sub-contractors to deliver bunkers to its customers’ vessels. One of OW Bunker’s customers was the owner (the “Owner”) of a vessel called Res Cogitans, who entered into a contract with OW Bunker Malta Limited (“OWBM”), a company which is part of the OW Bunker group, for the supply of bunkers (the “Contract”).   The Contract incorporated OW Bunker’s standard terms and conditions which included a retention of title clause stating that ownership of the bunkers do not pass to the Owner until full payment has been made. However, the Contract did expressly contain the right for the Owner to use the bunkers for vessel’s propulsion from the moment of delivery. A credit period of 60 days was also provided in the Contract.

OWBM then contracted with its Danish parent company, which in turn contracted with Rosneft Marine (UK), which further contracted with RN-Bunker. Ultimately, RN-Bunker was the physical supplier who actually delivered the bunkers to Res Cogitans. Except that Rosneft Marine (UK) had paid RN-Bunker for the bunkers, no other payments were made by any party in the chain.

Subsequently, OW Bunker suffered financial difficulties and ING Bank N.V. (“ING”) became the assignee of the debt. Since the Owner had not yet paid OWBM for the bunkers, which had all been consumed by the end of the 60-day credit period, dispute arose as to whether ING was entitled to demand payments on behalf of OWBM from the Owner. Potentially, the Owner had a defence to ING’s claim if the Contract was within the definition of a contract of sale of goods under the Sale of Goods Act 1979 (the “SOGA”). 

The dispute was first heard before the arbitral tribunal which held that, since the Contract was not a contract of sale within the scope of the SOGA, ING had a good claim for payment against the Owner. Being dissatisfied with the tribunal’s decision, the Owner brought the dispute to the English Commercial Court.

At First Instance 
At the hearing, the key issue to be determined remained whether, at the time it was entered into, the Contract fell within the definition of a contract of sale of goods under the SOGA. Having considered the features of the Contract, in particular the retention of title clause, the period of credit before payment fell due, the permission for the Owner to consume the bunkers in the meantime, and the fact that a portion of the bunkers were likely to have been consumed upon the expiry of the credit period, the Commercial Court found that parties to the Contract had understood that title to the bunkers might never be transferred to the Owner. Therefore, the Commercial Court affirmed the arbitrator’s decision and held that the Contract was merely a “bunker supply contract” but not a contract of sale of goods under the SOGA. Accordingly, the Commercial Court held that ING was entitled to recover payments from the Owner notwithstanding the defect in title.

On Appeal
As mentioned earlier, the Owner did not give up and appealed to the English Court of Appeal. However, the Commercial Court did restrict the Owner’s appeal to the question whether the Contract was a contract of the sales of goods within the meaning of the SOGA, and whether ING, stepping into OWBM’s shoes, could sue for the price under the Contract. These had formed the main issues on which parties had disputed before the Court of Appeal.

Owner’s Arguments
The Owner as the appellant argued that the language used by parties to express their agreement made it clear that that they intended the Contract to be one of sale of goods and their relationship to be that of buyer and seller. It followed that they intended the Contract to be governed by the SOGA. The Owners further submitted that the Contract should be understood as an agreement to sell under which title to the bunkers was to pass to the Owner at a future date, in this case on payment. The fact that by that time the bunkers might have ceased to exist did not matter at all, since the effect of the Contract was that title passed retrospectively. The Owner therefore contended that since OWBM, having never paid its supplier, was unable to transfer title to the bunkers to the Owner, the sale price never became due. As such, any claim by OWBM for the price under the Contract doomed to fail.

Court of Appeal’s Ruling
Although the Court did realize that the language of the Contract seemed to suggest that parties were thinking in terms of a sale and purchase of bunkers, the Court did not accept the Owner’s arguments. In ascertaining the nature of the Contract, the Court opined that the starting point must be an objective analysis of what the parties had actually undertaken to do. In the present case, the Court found that parties had not undertaken to transfer title to another in return for a money payment. Instead, in light of the commercial backgrounds and the particular features of the Contract as mentioned above, parties had undertaken for delivery of the bunkers.

The Court also rejected the Owner’s argument regarding the retrospective transfer of title and held that it was not possible to transfer property in goods once the same had ceased to exist. Even if the bunkers had only been partly consumed, the Court opined that it was still not possible to transfer title to the whole of the bunkers covered by the Contract. In the circumstances, the Court held that OWBM (and hence ING) was entitled to payment for the bunkers that had been supplied to the Owner and, since the Contract was not one of sale of goods, it did not matter that OWBM was never in a position to transfer title to the bunkers to the Owner.

Splitting the Contract?
As to the nature of the Contract, the Court of Appeal did not merely stop at ruling that the Contract was not a contract of sale of goods; rather, the Court went further and held that the Contract is one under which bunkers were to be delivered to the Owner as bailee with a licence to consume them for propulsion of vessel, coupled with an agreement to sell any quantity remaining at the date of payment in return for money consideration. It is interesting to note that this approach of “splitting” the Contract was not first considered by the Court of Appeal, for it had been previously rejected by both the tribunal and the Commercial Court.

With the Court of Appeal affirming the decisions of the tribunal and the Commercial Court, the position that the Contract in the present case is not a contract of sale of goods is further reinforced. Given the possibility that the majority of bunker supply contracts are drafted in a way similar to the Contract in the present case, it would mean that many ship owners will not enjoy the protection provided under the SOGA. What’s more, ship owners might be forced to pay twice for the bunkers, on the basis that both the bunker seller and its subcontractor, being the physical supplier, might have a good claim against them. It is therefore not surprising that the Court of Appeal’s decision has attracted criticism from ship owners as being uncommercial and harsh to bunker buyers.

In addition, under the “split contract” analysis, the bunker supply contract might be treated as one of sale of goods as far as the remaining bunkers at the time of payment are concerned. It therefore creates uncertainty as to the extent to which and the time from which the SOGA is applicable to those bunker supply contracts.

Furthermore, as mentioned in our previous newsletter, the Sale of Goods Ordinance (Cap. 26) in Hong Kong closely resembles the SOGA. As such, this decision would affect ship owners which have dealings in Hong Kong and legal advice should be sought if they have concerns over the nature of the bunker supply contracts they enter into.

We shall wait and see whether the Owners will further appeal against the Court of Appeal’s decision to the English Supreme Court.

The law and procedure on this subject are very specialized 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.
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Published by ONC Lawyers © 2016