Bunker supply contracts and the Sale of Goods Act 1979

The Commercial Court has handed down a recent, and arguably somewhat controversial decision, in which it held that standard form bunker supply contracts are not contracts that fall within the scope of the Sale of Goods Act 1979 (the “SOGA”). In the shipping industry bunkers are fuel oils used to operate a vessel.

If upheld on appeal, the decision is likely to have significant and wide-ranging implications not only for bunker supply contracts (and particularly those shipowners and charterers who contracted with OW Bunker), but for all contracts containing retention of title clauses in favour of the supplier where the relevant supply contract provides that the goods can be used or consumed before payment becomes due.

Facts

PST Energy 7 Shipping and Product Shipping and Trading (together the “Owners”) entered into a bunker supply contract with OW Bunker Malta (“OWBM”), a company which is part of the OW Bunker Group. The supply contract was on OW Bunker’s standard terms and included a string of transactions, each with retention of title clauses in favour of the suppliers down the contractual chain. This arrangement is common in bunker supply contracts. The bunkers; could also be consumed before delivery and payment had been made.

OWBM did not itself supply the Owners with the bunkers, but instead placed a supply order with its Danish parent company, OW Bunker & Trading A.S. (“OWBAS”). The contract between OWBM and OWBAS was also subject to the OW Bunker’s standard terms. OWBAS in turn placed an order with Rosneft Marine (UK) (“Rosneft”), while Rosneft placed an order with its Russian subsidiary, RN – Bunker Ltd.

The bunkers were delivered to the vessel on 4 November 2014, and Rosneft paid RN-Bunker on 18 November 2014. However, neither OWBAS nor the Owners paid their counterparts.

Sometime in early November 2014, OWBAS filed for an in-court restructuring procedure in the Danish Court. ING, as assignees of OWBM’s rights, claimed payment for the bunkers from the Owners. Rosneft also claimed the price of the bunkers from the Owners and asserted that it retained title to them.

The Issues

ING claimed, amongst other things, that the sum due under the contract between OWBM and the Owners was recoverable as a debt, and that the contract for the supply of bunkers was not a contract of sale of goods to which the SOGA applied.

The Owners disputed liability, arguing that as OWBM had not paid Rosneft for the bunkers, OWBM was not in a position to transfer property and title in the bunkers to the Owners. The Owners maintained that the bunker supply contract was subject to the SOGA, and also argued that OWBM was in breach of the mandatory implied term (section 12 of the SOGA) that the seller has the right to sell goods, or will have the right at the time that the property is to pass.

The Arbitration

The OW Bunker terms provided for London arbitration. The arbitrators found in favour of ING/OWBM and held that the bunker supply contract was not a contract of sale to which the SOGA applied. The tribunal also found that ING/OWBM’s claim was therefore a straightforward claim in debt and as such was not subject to any requirement as to the passing of property in the bunkers to the Owners at the time of payment. The Owners appealed this decision to the Commercial Court (which they were entitled to do).

The Commercial Court Decision

The most significant issue that the Court had to determine was whether the bunker supply contract was a contract of sale within the meaning of the SOGA. The Court upheld the tribunal’s finding and concluded that the bunker supply contract fell outside of the ambit of the SOGA.

In reaching its decision, the Court emphasised that the bunkers had in fact been consumed before payment had been made. The question in this case, therefore, arose within the context of there being a combination of a retention of title clause, and the imminent consumption of the bunkers before the payment fell due.

The Court provided a detailed analysis of the requirement of a sales contract as defined by the SOGA. It considered that, in order to qualify as a contract of sale within the scope of the SOGA, four conditions had to be satisfied:

• first, the contract must be for goods;
• second, one party (i.e. the seller) must undertake an obligation to transfer the property in the goods (i.e. good title to them) to the other party (i.e. the buyer);
• third, there must be a money consideration payable by the buyer to the seller; and
• fourth, there must be a link between the transfer of title and the money consideration, so that what the buyer is paying for is title to the goods.

The Court maintained that in this case the first and third conditions presented no difficulties, and thus, the main issue that the Court had to resolve was whether the contract between OWBM and the Owners fell within the definition of section 2(1) of the SOGA, namely whether it was “a contract by which the seller transfers or agrees to transfer the property in the goods to the buyer for a money consideration, called the price.”

The Court found that the combined effect of (i) the retention of title clause, (ii) the period of credit before payment fell due, (iii) the permission given to the Owners to consume the bunkers, and (iv) the fact that some or all of the bunkers supplied were likely to be consumed before expiry of the credit period with the consequence that the property therein would cease to exist, meant that it was unlikely that the object of the bunker supply contract was to transfer property from OWBM to the Owners. On this basis, the Court considered that while the bunker supply contract may have resembled a contract of sale, it did not in fact fall within the definition of a contract of sale in the SOGA. Instead, the Court found that what the Owners were in fact paying for was a right to consume the bunkers.

The Court’s reasoning was influenced by the fact that Rosneft knew OWBAS was a trader and not an end user, and that the Owners would consume the bunkers before they were paid for in accordance with the relevant credit terms. On this basis, the Court considered that the vessel’s consumption of the bunkers was not an unlawful act by the Owners, but an act carried out with the permission of Rosneft, the owners of the bunkers being consumed.

The Court also rejected the Owners’ argument that OWBM was under an implied obligation to pass property in the bunkers to the Owners at the time of payment, as the Court found that the supplier did not undertake to transfer title.

Comment

Although the Owners have now been granted leave to appeal to the Court of Appeal, this case has wide implications for the maritime and energy industry, as the vast majority of bunker supply contracts include terms very similar to these.

If a contract for the supply of bunkers does not fall within the ambit of the SOGA, then unless further terms are implied, there will inevitably be a risk that the buyers of the bunkers will not have some of the protections provided by the SOGA. Such protections include implied terms regarding title, description, and the requirement for goods to be of a satisfactory quality.

The decision may also have consequences for other commodities and industries where goods are routinely supplied on terms that include a retention of title clause, as well as a credit period and a right to use the goods during that period. Applying the Court’s reasoning, it would appear that such supply contracts may also not contracts for the sale of goods.

In light of the Court’s decision, and while we await the decision of the Court of Appeal, parties should consider very carefully how their obligations are drafted in a contract which the parties consider to be a contract of sale. Parties should also consider whether it is necessary to expressly include in their contracts some of the statutory protections offered by the SOGA.

PST Energy 7 Shipping LLC & Anor v OW Bunker Malta Ltd & Anor (Res Cogitans) [2015] EWHC 2022 (Comm) (14 July 2015)