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Web alert: OW Bunker ‘test’ case – A disappointing UK judgment handed down yesterday (14 July 2015)

15 July 2015

Background

The judgment delivered by Mr Justice Males yesterday, regarding the Res Cogitans [i], was an appeal from an arbitration award [ii] delivered on 16 April 2015. The hearing before the arbitrators proceeded on the basis of the following assumed facts:

  • A bunker supply contract was entered into between the owner and manager of the ship (the Owners) and OW Bunker Malta Ltd (OWBM) on OW Bunkers’ standard terms.
  • OW Bunker’s standard terms included an assignment of the right to payment to ING Bank NV (ING) and a retention of title clause, so that title would not pass to the buyer (Owner) until the bankers had been paid for in full, but also allowed the bunkers to be consumed upon delivery (and prior to payment).
  • The supply of bunkers was subject to a number of further contracts, but was eventually physically supplied by a subsidiary of Rosneft Marine (UK) Ltd (Rosneft), and was subject to Rosneft’s standard terms. 
  • Rosneft’s standard terms also included a retention of title clause.
  • Payment from OW Bunkers to Rosneft was due 30 days after delivery and payment of the bunkers by the Owners to OWBM, which was in turn due 60 days after delivery. To date neither payment has been made.

The arbitrators found that all parties were aware that the bunkers supplied were for consumption and that some, or indeed all, of the bunkers supplied may well have been consumed prior to the expiry of the credit period.

Arguments

The Owners primary basis for disputing liability to ING was that OWBM never paid Rosneft for the bunkers and, therefore, were never in a position to transfer property and title in the bunkers to the Owners.

The Owners sought to characterise the bunker supply contract as a contract subject to the Sale of Goods Act 1979 (the Act) and specifically argued that OWBM was in breach of the mandatory implied term (s. 12 of the Act) that the seller has the right to sell the goods, or will have such a right, at the time when property is to pass.

Conversly ING contended that the bunker supply contract was not a contract to which the Act applied, or alternatively that if the Act applied there was no such breach of warranty. Thus, the monies under the OWBM contract were due from the Owners regardless of the fact that OWBM never acquired title to the subject bunkers.

Arbitration Award

The arbitrators found in favour of ING, deciding that the bunker supply contract was not a contract to which the Sale of Goods Act applied and, therefore, OWBM did not need to bring their claim within the requirements of the Act. Rather, the claim to payment was a straightforward debt claim, which was not subject to any requirement as to the passing of property in the bunkers to the Owners at the time of payment.

High Court Appeal

The Owners appealed the arbitrators’ findings regarding the application of the Act. Whilst Mr Justice Males considered that, at first glance, the OWBM contract appeared to be drafted as a contract of sale (to which the Act would naturally be assumed to apply), the real determination would depend on an analysis of the obligations the parties had undertaken and not the form of the contract.

The case presented a unique combination of retention of title clauses and an allowance for the imminent consumption of the goods which was not sufficiently addressed in previous case law. This combination of terms means that property in the bunkers may often cease to exist before payment is due and it was accepted that this represented a common industry practice.

On the construction of the contract, Mr Justice Males found that OWBM was not contracting to transfer title to the Owners, which may never actually occur prior to consumption, but rather OWBM simply contracted to obtain the necessary permission from the owner of the bunkers for the bunkers to be consumed. In Mr Justice Males’ opinion, OWBM had successfully obtained the necessary permission from Rosneft, as the latter knew they were selling to a trader not an end user, and that the Owners would be entitled to consume the bunkers. As such, Mr Justice Males found there was no breach of the contract by OWBM.

Critically for Owners in this case Mr Justice Males also acknowledged that the above conclusion arose as a matter of English law and that he could not exclude the possibility that the Owners might be exposed to liabilities to Rosneft under other systems of law (by virtue of maritime liens) and that the ship may therefore be exposed to arrest in other jurisdictions. However, in his view, these considerations should not impact on the construction of the OWBM contract; and exposure to arrest was a risk which the Owners must have implicitly accepted.

Although not impacting on the result of this case, Mr Justice Males largely agreed with the arbitrators’ opinion that had the contract been subject to the Sale of Goods Act, OWBM would not have satisfied the requirements to advance a claim for payment.

Conclusion

This English High Court decision will be of concern to owner members who are facing multiple claims from ING and the physical bunker supplier for payment of fuel supplied to a ship before the OW collapse. The decision confirms (at least for the time being) the legitimacy of claims being made by ING and OW Bunkers under English law, without offering an owner member with any protection from competing claims made by a physical supplier.

We understand that the Owners have been granted leave to appeal and the appeal is to be heard on an expedited basis. It is therefore hoped that this judgment will not stand as the ‘final word’ on the subject (at least under English law) for too long.

Ultimately each case will need to be considered on its individual merits, taking into consideration the facts, local law and parties involved. ​We will continue to watch developments on the OW Bunkers fiasco with interest and will issue further publications and guidance wherever possible. In the meantime members should not hesitate to contact the authors, or their usual club contact for further information.

Defence cover is, by its very nature, discretionary in that the club must be satisfied as to the merits and quantum of the claim in question and the likelihood of achieving a successful outcome, if it is to lend support. Essentially, the club wants to ensure that the actions proposed are appropriate, proportionate and financially viable.

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[i] PST Energy 7 Shipping LLC & Anor v OW Bunker Malta Ltd & Anor (Res Cogitans) [2015] EWHC 2022 (Comm)
[ii] Tribunal consisting of David Farrington, Ian Kinnell QC and Bruce Harris as chairman