Key takeaways
Retention of title
These clauses should be drafted carefully to avoid unintended financial consequences.
Due diligence
Bunker supplier’s financial standing and market reputation should be checked.
Action for price
S.49 Sale of Goods Act 1979 not complete code for recovering price.
The collapse of the OW Bunker Group in 2014 had worldwide consequences for the global bunker trade because the group held about 7% of the market share of the global bunker trade at the relevant time.
The parent company, OW Bunker A/S (OW Bunker), was a Danish incorporated company that filed for bankruptcy in November 2014. However, its network of traders and physical bunker suppliers operated across 29 countries and almost all of them also filed for bankruptcy in their own jurisdictions after the parent company did so.
The OW Bunker Group was financed by ING Bank N.V. (ING) and, after the bankruptcies, they entered into an agreement whereby OW Bunker assigned a number of its debts to ING.
The bankruptcies led to numerous bunker supply disputes in many jurisdictions. Very often, vessel owners were faced with competing claims for payment for bunkers:
many physical bunker suppliers remained unpaid due to the bankruptcies of their contractual counterparty and they, therefore, sought to recover sums due to them by arresting or threatening to arrest the vessels for which the bunkers were supplied.
at the same time, ING, as assignee, also sought to recover sums owed to the OW Bunker Group under the OW Bunker contracts for the bunkers supplied to their vessels.
The key English litigation arising out of the OW Bunker bankruptcies was the Res Cogitans case, which resulted in a Supreme Court decision that had significant impact on issues relating to title, including whether there was any breach of the implied conditions as to title in s.12 of the Sale of Goods Act 1979 (SoGA) and whether an action for the price of the bunkers was available under s.49 of SoGA.
This article looks at the Res Cogitans case and considers the impact of the Supreme Court decision from a practical but also legal perspective.
Sale of Goods Act 1979 (SoGA)
Pursuant to s.2(1) of SoGA, ‘a contract of sale of goods is a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price.’
S.12 of SoGA deals with implied terms as to title and related matters. S.12(1) provides, among other things, that there is an implied term that the seller has a right to sell the goods.
S.49 of SoGA addresses an action for the price. S.49(1) provides that where, under a contract of sale, the property in the goods has passed to the buyer who has wrongfully not paid for them, the seller may maintain an action against the buyer for the price of the goods.
The significance of s.49(1) is that a claim in debt for the price is more straightforward than a claim for damages, which requires proof of loss, causation, mitigation, foreseeability etc.
In F G Wilson (Engineering) Ltd -v- John Holt & Co (Ltd) [2014] (Caterpillar), the majority of the Court of Appeal had held that, where goods were delivered under a contract of sale, but title was reserved pending payment of the price, the seller could not claim for payment of the price. In the Court of Appeal’s view in Caterpillar, s.49 was a complete code for recovering the price under a contract of sale.
The background facts
In October 2014, the Owners of the Res Cogitans (Owners) ordered bunkers from OW Bunker Malta Ltd (OW Malta), a subsidiary of OW Bunker.
The bunker supply contract was governed by English law and incorporated OW Bunker's standard terms and conditions (STCs), including:
payment on credit within 60 days after delivery,
permission to use the bunkers before payment; and
a retention of title (ROT) clause which provided that property in the bunkers would not pass to the shipowner/charterer until the bunkers had been paid for in full - even where the bunkers were mixed with fuel from other suppliers in the vessel's tanks.
OW Malta ordered bunkers from its parent company OW Bunker. OW Bunker ordered the bunkers from a physical bunker supplier, Rosneft Marine (UK) Ltd (Rosneft). Rosneft contracted with its Russian affiliate, RN-Bunker Ltd, to provide the bunkers to the vessel.
The contract between OW Bunker and Rosneft provided for payment within 30 days of delivery and was subject to Rosneft's STCs that, like the contract between OW Malta and OW Bunker, also incorporated a ROT clause. All the bunkers were consumed by the vessel.
In November 2014, OW Bunker filed for bankruptcy. Most of its subsidiaries also filed for bankruptcy in their own jurisdictions. The Owners had not yet paid OW Malta, and OW Bunker had not yet paid Rosneft.
The OW Bunker Group’s bankruptcy constituted an event of default under the group’s financing arrangements with ING, and ING, as assignee, sought to claim the sums owed by the Owners to OW Malta. However, Rosneft claimed that it retained ownership of the bunkers (under the ROT clause) and that it could claim payment for them, as the physical bunker supplier, from the Owners. The Owners were, therefore, facing competing claims in respect of the bunkers from Rosneft and ING.
The matter went to arbitration and then, on appeal, to the English courts. Ultimately, the dispute ended up before the Supreme Court. The Owners’ case throughout the litigation was principally as follows:
the bunker supply contract was a contract for the sale of goods, to which SoGA applied.
pursuant to s.2(1) of SoGA, a contract for the sale of goods is one where the seller transfers or agrees to transfer property in the goods to a buyer for the agreed price.
although the bunkers had been delivered to and consumed by the vessel, Rosneft retained title to the bunkers because they had not been paid for them. OW Bunker had not acquired title to the bunkers and could not, therefore, have transferred title to OW Malta and in turn to the Owners.
therefore, the Owners’ primary case was that, per the Caterpillar decision referred to above, OW Malta (via ING) could not maintain an action for the price of the bunkers pursuant to s.49(1) of SoGA because title had been reserved and property in the bunkers had not passed to the Owners.
alternatively, the Owners sought damages for breach of contract on the basis that OW Bunker (and, as such, OW Malta too) had misrepresented that they had the right to sell the bunkers, when they did not.
The issues for the Supreme Court
The Supreme Court was asked to consider three principal questions:
was the bunker supply contract a contract of sale within the meaning of SoGA?
was it subject to any implied term that OW Malta would perform its obligations to the party directly above it in the contractual chain, specifically by paying its supplier for the bunkers upon expiry of the credit period?
if the bunker supply contract was a contract of sale within SoGA, was the relief available to OW Malta limited to the circumstances prescribed in SoGA? In other words could OW Malta only recover the amounts owed to it in an action for the price under s.49(1), which required it to have passed on the property in the bunkers to the Owners?
The Supreme Court decision
Was the bunker supply contract a contract of sale under SoGA?
The Supreme Court held that the Owners’ contract with OW Malta was a sui generis transaction, differing from a traditional contract for the sale of goods because it granted a liberty to the Owners to consume all or part of the bunkers supplied without first acquiring title in them or having paid for them. OW Malta’s obligation to pass property in any unconsumed bunkers against payment of the price for all the bunkers did not make the bunker supply contract a contract of sale.
Consequently, the Owners’ claim for damages on the basis that OW Malta did not have title to the bunkers sold failed. The Owners had to make payment to OW Malta (i.e. to ING as OW Malta’s assignee).
Was there an implied term that OW Malta would pay for the bunkers upon expiry of the credit period?
The Supreme Court held that OW Malta’s only implied undertaking was that it was legally entitled to give the Owners permission to use the bunkers prior to payment. That did not require OW Malta to have or to acquire title to the bunkers. It just needed to have the right to authorise such use under the chain of supply contracts.
It was not argued that OW Malta did not have the right to permit use of the bunkers. Therefore, the Court concluded that the Owners were liable for the price under the bunker supply contract with OW Malta.
What if the bunker supply contract had been a contract of sale under SoGA?
The Supreme Court clarified that, if the bunker supply contract had been found to be a contract of sale under SoGA, it would have held, contrary to the Court of Appeal decision in Caterpillar, that SoGA was not a complete code of situations in which the price may be recoverable under a contract of sale. The Supreme Court stated that, had it been necessary, it would have overruled Caterpillar, in which the majority of the appeal judges had decided that, where goods were delivered under a contract of sale, but title was reserved pending payment of the price, the seller could not claim for payment of the price and s.49 was a complete code in that it specified the only circumstances in which a seller could maintain an action for the price.
However, in circumstances where the Supreme Court found that the bunker supply contract was not a contract of sale under SoGA, the price was recoverable from the Owners under the express terms of the bunker supply contract in the event that the Owners had completely consumed the bunkers supplied.
Legal implications
As the Supreme Court in the Res Cogitans case did not actually overrule the Caterpillar decision, the Court of Appeal decision in that case remains binding on the lower courts.
The Res Cogitans case was an example of a relatively common situation of a contract incorporating a retention of title clause, payment on credit terms and the right to consume the goods. The majority of bunker supply contracts were structured similarly to those in the Res Cogitans case and the common understanding in the bunker industry was that these were contracts of sale. As a result of the OW Bunker litigation and the Supreme Court ruling, the industry took practical steps to redress the situation.
Practical implications
The practical outcome was that buyers of bunkers, in the position of the Owners in the Res Cogitans, case potentially faced the risk of having to pay twice for the same bunkers (i.e. pay both the contractual supplier and the physical supplier). However, the multi-jurisdictional nature of the OW Bunker bankruptcies meant that the courts of different jurisdictions took divergent views of the legal liabilities, and the differing facts of the various disputes meant that the outcomes were not uniform.
Nonetheless, the OW Bunker collapse highlighted the importance of performing due diligence on the bunker supplier’s financial standing and market reputation, with increased risk being perceived if the counterparty is an intermediary, such as a broker or trader, rather than the direct physical supplier.
Following the Res Cogitans case, many standard bunker supply contracts were revised to incorporate express warranties that the seller has already paid (the physical supplier) for the bunkers and that the buyer may be entitled to ask for proof of such payment before settling the seller’s invoice.
The BIMCO Bunker Terms 2018 were also expressly adopted as a result of the OW Bunker collapse and highlighted the importance of risk management and due diligence before entering into a bunker supply contract. BIMCO formulated eight questions regarding a potential counterparty, including: (i) the terms and conditions of the agreement; (ii) whether the counterparty has credit insurance and/or product liability and/or professional indemnity insurance in place; (iii) the legal entity with which the buyer is dealing; and (iv) whether the buyer has obtained a market/credit report on the counterparty.
Additionally, incorporating the BIMCO Bunker Non-Lien Clause into a time charterparty may provide protection from a claim relating to bunkers used by defaulting charterers.
Our Marine team can advise on all matters relating to bunker supply contracts, including retention of title clauses and due diligence measures. Get in touch with the team.
