OW Bunker claims – new High Court decision

23.07.2015 r.

OW Bunker claims – new High Court decision

Just over a week ago, on 14 July 2015, the English High Court issued an important judgement in what has been described as a test case for shipowners around the world who had their bunkers supplied by the now financially struggling OW Bunker A/S and its subsidiaries.

The judgement’s importance stems from the fact that it is the first time that the Court has so closely analysed and ruled on the merits of a transaction which involves the supply of bunkers to a vessel on terms which can be described as typical of such purchases carried out globally.
These transactions usually include a chain of contracts, each with a retention of title clause in favour of the supplier, a provision that payment will be due a fixed number of days after delivery, permission for the shipowner to consume the bunkers in the meanwhile as the vessel goes about its business, and awareness on the part of all concerned that the bunkers may well be wholly consumed before payment becomes due.

The case of OW Bunker A/S has taught us that such contracts might sometimes prove to be difficult to interpret, and might cause potential problems whenever there is a long chain of supply involved.

The facts of the matter were as follows:

The owners of a vessel – “PST Energy 7 Shipping” LLC (the Owners) and the managers – “Product Shipping & Trading” S.A. entered into contract with OW Bunker group (OW Bunker). The standard terms of this contract provided that the payment for the bunkers shall be made to ING Bank N.V. (the Bank). They also included a retention of title clause, so that title would not pass to the buyer (i.e. the Owners) until the Bank receives the full amount due. The contract however did allow the bunkers to be consumed upon delivery, meaning that they could be utilised by the Owners before the payment for them fell due.

The bunkers were physically supplied by a Russian subsidiary of Rosneft Marine (UK) Ltd (Rosneft), with the delivery being subject to Rosneft’s standard terms, which also included a retention of title clause.

Payment from OW Bunker to Rosneft was due 30 days after delivery, while payment of the bunkers by the Owners to the Bank was due 60 days after delivery. Up until now no payments were made.

The Owners disputed their liability for payment for bunkers, stating that because OW Bunker did not pay Rosneft for the bunkers, Rosneft retained the property in them pursuant to the retention of title clause in the Rosneft/OW Bunker contract, with the consequence that OW Bunker never had such property and was not in a position to transfer property to the Owners. They argued that the contract of supply of the bunkers fell under the Sale of Goods Act 1979 and that OW Bunker's failure to pay Rosneft meant that OW Bunker was in breach of the mandatory implied term in section 12 of the Act that the seller has a right to sell the goods or will have such a right at the date when property is to pass.

On the other hand, OW Bunker and the Bank contended that the bunker supply contract was not a contract to which the Sale of Goods Act applied. Thus, the payment under the OW Bunker contract was due from the Owners regardless of the fact that OW Bunker never acquired title to the subject bunkers.

The High Court sided with the Bank and OW Bunker, stating that in this particular case, provisions of the Sales of Goods Act do not apply.
In the High Court’s reasons, Mr Justice Males cited the arbitrators who have previously adjudicated on the matter and found that:
“Even at the time it was entered into – and even in the absence of the [retention of title] clause – both parties to the contract would have anticipated that some or all of the bunkers supplied would be likely to have been consumed and to have lost their identity before the expiry of the 60 days credit period. So, while this was not inevitable, it was likely that, even had the contract initially met part of the definition of "an agreement to sell", this agreement would never mature into a sale, and the presence of the [retention of title] clause merely reinforces this conclusion. Stripped of all unnecessary detail, the deal between the parties was that OW Bunker would ensure delivery of the bunkers, the use of which would be immediately available to the Owners, who would pay for them according to OW Bunker's invoice.”
The Judge admitted that such an agreement does resemble in some respects a contract of sale, however its terms and their performance do not to any extent rely on property or title or their transfer.

The Court thus recognised that:

• the bunker supply contract is not a contract of sale to which the Sale of Goods Act applies, and
• OW Bunkers’, and consequentially the Bank’s, claim to payment is a straightforward claim in debt not subject to any requirement as to the passing of property in the bunkers to the Owners at the time of payment.

This judgement, delivered by Mr Justice Males, is a strong sign for all the shipowner who were approached by ING Bank with claims for payment for bunker deliveries made by OW Bunker, as the judgement allows the contractual supplier, namely OW Bunker/ING to sue the owner/buyer to whom these deliveries were made.

Mr Justice Males did note also that he cannot exclude the possibility that the Owners may have a liability to the physical supplier (in this case Rosneft) under some system of law other than English law and, if so, that the vessel may be exposed to arrest in some jurisdictions (no such duplicate claim should be possible under English law), however he did state that “Exposure to claims with the possibility of arrests is one of the risks which shipowners run”.