Expert commentary: IMO sulphur cap highlights OW Bunker collapse lessons

This article first appeared in Lloyd’s List on 12 March 2020 and has been reproduced here with kind permission of the publication. This article was authored by Hill Dickinson marine partners Beth Bradley, Shanna Ghose and Damien Laracy. 

Introduction of the International Maritime Organization’s sulphur cap should remind shipowners that some of the legal issues which arose from the OW Bunker bankruptcy remain unresolved, Hill Dickinson says.

Assessing counterparty risk remains one of the better protective steps that can be taken, as is checking supplier contracts and seeking to renegotiate them

Higher costs, tightening of available credit and the prospect of claims against suppliers arising from very low sulphur fuel oil, creates an environment where insolvencies in the supply chain may once again be a prospect

The introduction of a mandatory lowering of the sulphur content of marine fuel used on board vessels not fitted with exhaust gas cleaning systems to 0.5% from 1 January 2020 has raised questions around the quality of very low sulphur fuel and the increased cost of shipping.

The increased costs of supplying compliant very-low sulphur fuel oil (VLSFO) bunkers, being both the financing needed to purchase for on-sale and to ensure liquidity given buyer payment terms, has been estimated as being in excess of $20 billion across the supply sector.

Following a spate of high-profile bankruptcies in the marine sector, obtaining financing has been more difficult. The number of banks willing to lend has decreased and credit risks are more closely scrutinised.

Higher costs, tightening of available credit and the prospect of claims against suppliers arising from VLSFO, creates an environment where insolvencies in the supply chain may once again be in prospect.

Two of the more high-profile insolvencies in recent memory, that of OW Bunker in November 2014 and Hanjin Shipping in 2015, provide insight into the legal issues that particularly impact on shipowners.

Those are first, the question of who to pay for bunkers supplied on credit, the physical or the contractual supplier; and second, the risk of arrest in jurisdictions that recognised the supply of bunkers on credit as creating a maritime lien.

OW Bunkers was the world’s largest bunker trader at the time of its collapse in November 2014. The fallout from OW Bunkers filing for bankruptcy led to litigation in several jurisdictions and was particularly problematic for shipowners in receipt of bunkers contractually supplied by OW, since they faced competing claims from the contractual and physical supplier for payment.

In the UK, a test case was fast-tracked to the Supreme Court, owing to the volume of claims made and the urgency of clarifying which party an owner should pay.

In the Res Cogitans (2016), the Supreme Court held that the bunker supply contract with OW Bunkers was not a straightforward agreement to transfer property to the owners for a price.

It was instead properly to be characterised as an agreement to permit consumption of bunkers before the price was paid, transferring property in the remaining bunkers on payment. Therefore it was not a contract for sale within the meaning of section 2(1) of the Sale of Goods Act 1979.

      As a result, OW Bunkers only needed to have acquired the right to authorise use of the bunkers prior to payment in order to establish their contractual right to receive payment.

The decision, while confirming the nature of a bunker supply contract, did little to relieve the shipowner’s risk of facing competing claims from the contractual and physical supplier.

In practical terms, that left a shipowner seeking to obtain interpleader relief, or to agree to pay the price into escrow while the insolvency estate and the physical supplier fought over the right to receive payment.

In Singapore, the decision in Res Cogitans has been considered (Mitsubishi Corp -v- Kyen Resources (2018)) although not (yet) applied. Similarly to the UK, a shipowner who has doubts as regards who to pay can seek interpleader relief.

By contrast in Greece, owners have had more success in defeating claims advanced against them by the physical suppliers. To date, the majority of decisions from the Greek Court of Appeal have dismissed the physical suppliers’ claims advanced on the basis of the right to receive payment arising from the terms and conditions on the bunker delivery note.

The Greek Court of Appeal has held that chief engineers who sign the bunker delivery receipt do not have authority to bind owners to the physical suppliers’ general terms and conditions.

Consequently, there is not contractual relationship between the physical suppliers and the owners pursuant to which the suppliers could claim payment, although one decision (Court of Appeal No. 148/2018) has ruled in the opposite direction.

This decision along with two others are pending determination by the Supreme Court in Greece, which may clarify the position further.

Consequently, in three of the main maritime jurisdictions engaged in resolving the issue of who a shipowner is to pay following the collapse of OW Bunkers, there were different outcomes. To an extent, the answer in each jurisdiction is not yet fully and finally settled.

In general terms, a maritime lien is a claim against a vessel in relation to goods supplied and not yet paid. It can be used as a basis to arrest the vessel for security for the claim in some jurisdictions. The maritime lien can arise at law or it can be based on a contractual right of lien.

The main jurisdictions which recognise a bunker suppliers’ claim as a maritime lien are the US, Panama and other countries which are signatories to the 1926 Convention on Maritime Liens and Mortgages, principally France and Italy. The UK and most Commonwealth countries, including Australia and Singapore, do not recognise these claims.

It is the jurisdiction in which a maritime lien is exercised that is relevant, since different countries will apply different rules to ascertain whether the lien can be relied upon by the bunker supplier, for instance the law of the vessel’s flag or the law of the contract.

Consequently, it can be difficult to predict whether an owner will be exposed to claims against the fuel on board, and whether those claims will result in disruption as a result of arrest.

In Hong Kong, two interesting issues arise in terms of arrest arising out of bunkers supplied to a vessel.

The first concerns the grounds on which a sistership can be arrested for debts to a bunker supplier. In the Chimbusco litigation (the Decurion [2013] HKCA 180), the Hong Kong Court of Appeal made it clear that when considering a bunker supplier’s right to arrest a sister ship, a crucial consideration is whether the relevant shipowner was the person with actual control over the vessel to which the bunkers were supplied.

In the Decurion, an arrest of a vessel was set aside by the shipowner on the basis that the arresting bunker supplier had not established that at the time of the arrest the arrested sistership was under the control of the owner.

Rather, the Hong Kong Court of Appeal agreed that as the vessel was on time charter, and clause 8 of the NYPE form gave the charterer the right to determine how the ship was operated, the bunker suppliers could not show that the vessel arrested was under the control of their target debtor, the actual shipowner.

Secondly, where there are two competing claims against the vessel arising from the same bunker supply, it is possible for the contractual supplier to ‘piggyback’ on an arrest made by the physical supplier by lodging a caveat against release.

This has the practical effect of preventing the vessel departing if the debt to the contractual supplier has not been paid, unless sufficient monies are deposited into court to cover that claim.

In addition, the contractual supplier will have the opportunity to lodge its own arrest for the margin sum, which is the difference between the physical supplier cost and the contractual supplier cost, such that the shipowner may be exposed to successive arrests arising from the same supply.

The legal issues that the collapse of OW Bunkers and Hanjin shipping unveiled remain problematic today. The competing rights of the contractual and physical supplier when it comes to the question of payment for the fuel still give rise to the risk of double payment for a shipowner as well as the residual risk of arrest, in jurisdictions where it is available.

Accordingly, assessing counterparty risk remains one of the better protective steps that can be taken, although that is limited by quality of information available, as is checking supplier contracts and seeking to renegotiate them.