OW Bunker crisis – clarity on shipowners’ bunker payment obligations

The collapse of the OW Bunker group of companies ("OWB") in late 2014 has led to ship owners facing competing demands for settlement of unpaid…

The "Res Cogitans": (1) PST Energy 7 Shipping (2) Product Shipping and Trading SA v (1) O.W. Bunker Malta Limited and (20 ING Bank N.V. [2015] EWHC 2022 (Comm) (Males J.)

Background

The collapse of the OW Bunker group of companies ("OWB") in late 2014 has led to ship owners facing competing demands for settlement of unpaid bunker supply invoices from (i) the receiver/liquidator of OWB seeking to recover OWB book debts, (ii) ING Bank ("ING") as the asserted assignee of OWB's debts, and (iii) physical bunker suppliers (who sold bunkers to OWB but, given the poor prospects of recovery against OWB in any liquidation, have turned their attention to shipowners and their vessels). The issue of which party to pay and the "double jeopardy" risk of being forced to pay more than one party has led to litigation worldwide in which shipowners have sought clarity as to where their payment obligations lie. This Commercial Court decision, on appeal from a London maritime arbitration, has provided some answers (if not assurance) to shipowners.

Facts

The simplified facts were that in late October 2014 the owner of the vessel "Res Cogitans" contracted with OWB for the supply of US$443,800 worth of bunkers to the vessel. In turn OWB (in fact, there were two-back-to back OWB entities in the chain) purchased the bunkers from Rosneft Limited (a UK trader), who had purchased the bunkers from its Russian subsidiary, RN-Bunker Ltd, the end physical supplier. For the purposes of the dispute, Rosneft was treated as the physical supplier having paid its subsidiary.

The bunkers were supplied to the shipowner under OWB terms of sale ("OWB Terms"), and were delivered to the vessel on 4 November 2014, the day before OWB ceased trading. The OWB Terms provided (a) for payment within 60 days of delivery, (b) for title in the bunkers to remain with the seller (OWB) until payment, (c) that pending payment the buyer (i.e. shipowner) would be in possession of the bunkers as bailee and would not be entitled to use the bunkers "other than for the propulsion of the Vessel…", and (d) for disputes to be determined pursuant to English law and arbitration. Accordingly, it was envisaged that ownership of the bunkers would remain with OWB pending payment, even though (somewhat paradoxically) the shipowner had permission in the meantime to consume the bunkers.

Meanwhile, the Rosneft terms of sale provided for payment within 30 days of delivery, and had a similar retention of title clause, but gave no express permission to consume the bunkers.

Issue

The dispute arose because the shipowner had refused a payment demand from ING, since it had also received a competing payment demand from Rosneft for the same bunker supply. The basis of the shipowner's resistance to paying ING was, in essence, that the supply was covered by the Sale of Goods Act 1979 ("1979 Act"). Under s.12 of the 1979 Act there is a mandatory implied term that the seller had the right (in the sense of having title) to sell. It was argued that if OWB had not paid Rosneft it could not, because of Rosneft's retention of title, have title to the bunkers and was in breach of the implied term, thereby relieving the shipowner of any duty to pay. Further under the 1979 Act the unpaid seller's sole remedy was to claim for the price under s.49. However the requirements of s.49 that "the property of goods had passed to the buyer" and that "the price is payable on a day certain irrespective of delivery" were not met. Although other remedies (for example specific performance or restitution) could in theory be available, they could not assist ING, since either would be contingent upon OWB first fulfilling its obligation of passing good title to the bunkers. The shipowner's position was therefore that it had a defence to the claim for payment.

Decision

The Commercial Court agreed with the earlier arbitration tribunal decision, and rejected the contentions of the shipowner set out above. In finding in ING's favour, the starting point to the court's reasoning was s. 2(1) of the 1979 Act, which defines what is meant by a "contract of sale of goods":

"A contract of sale of goods is a contract by which the seller transfers or agreed to transfer the property in goods to the buyer for a money consideration called the price."

Males J. held that:

  • The transaction between the shipowner and OWB was not covered by the 1979 Act. The "sale" label the parties attached to the contract did not define the nature of the contract and it was the parties' obligations which were determinative of that issue. The label "bunker supply contract" would be apt.
  • The key features of the contract clearly did not envisage a transfer of property. OWB was to retain title until payment was made within the 60 day credit period. However, given the permission of the shipowner to consume bunkers after delivery, it was likely that by the time the bunkers were paid for they would have been consumed and therefore incapable of being transferred. It was therefore understood by the parties as being unlikely that title would ever be transferred to the shipowner.
  • The nature of the contract was that OWB would deliver or arrange for delivery of the bunkers, which the shipowner would be immediately entitled to use for the propulsion of the vessel. In this regard the contractual obligation upon OWB was not only to give permission itself, but to give permission on behalf of the entity in the chain who was the owner of the bunkers. Failure to obtain permission would represent a total failure of consideration, since the shipowner would not be receiving what it agreed to pay for, namely a lawful right to possession, the effect of which was that they became exposed to a liability to the true owner i.e. the physical supplier.
  • Although the Rosneft Terms did not give permission to consume the bunkers, Rosneft nevertheless knew that OWB was not an end user and that down the chain a trader would give express or implied permission to consume the bunkers immediately. Accordingly, there was consent and there could be no liability to Rosneft in conversion under English law. Rosneft knew and agreed that the shipowner would immediately consume the bunkers supplied – see The "Fesco Angara" [2010] EWHC 619.
  • The above analysis was sound either by reference to the principle that a head bailor is bound by the terms in his contract between his bailee and a sub-bailee if he has expressly or impliedly consented to those terms, or that in delivering to the vessel knowing the bunkers might be consumed immediately, Rosneft was giving permission and was content to look to OWB as its contractual counterparty for payment.
  • Although there was the possibility that the shipowner could be liable to Rosneft under another system of law and exposed to the threat of vessel arrest, that should not affect the English court's determination of the matter. As the judge put it, "Exposure to claims with the possibility of arrests is one of the risks which shipowners run".
  • ING's claim was therefore a straightforward claim for a debt arising under a contract, for which the shipowner's liability was clear.

Comment

This decision will not be welcomed by shipowners in similar circumstances, where supply contracts with OWB entities are governed by English law, and contain retention of title and "permission to consume" clauses. Where these factors apply, payment claims will fall outside the scope of the 1979 Act and shipowners will not have a potential defence under s.12, namely that if OWB does not have title to sell the bunkers in the first place, it cannot have a valid claim for payment. Of course, the devil is in the detail of trading terms, and careful review may reveal a different position on a case by case basis. Meanwhile, it would be unwise for shipowners to believe that paying physical bunker suppliers to prevent harassment and arrest will necessarily result in it having an answer to proceedings brought in the English courts or maritime arbitration tribunals.

For further information about Weightmans or to discuss any of the issues in this update, please contact Mike Burns, Partner, on 0151 242 6527 or email mike.burns@weightmans.com.

Weightmans LLP
July 2015

Share on Twitter