Sale of Goods Act 1979: Most spectacular shipping legal imbroglio this century

In an oil products case that Lloyd’s List has described as “the most spectacular shipping legal imbroglio so far this century” the Court of Appeal affirmed the previous High Court decision that bunker supply contracts containing a retention of title clause in favour of the supplier, where the relevant supply contract provides that the goods can be used or consumed before payment becomes due, do not fall within the scope of the Sale of Goods Act 1979 (the “SOGA”) (PST Energy 7 Shipping And Product Shipping LLC And Trading SA v. OW Bunker Malta Limited And ING Bank N.V [2015] EWCA Civ 1058).

Also, in an unprecedented move for an arbitration case, the Court of Appeal granted a third party, the owner of the goods, permission to intervene as an interested party to seek to overturn the element of the High Court decision directly impacting it.

This case is likely to have broad implications for all contracts that contain retention of title clauses where some of the goods may be consumed before payment. It remains to be seen whether the recent Court of Appeal decision will be the last word in this matter.

Facts

PST Energy 7 Shipping LLC and Product Shipping and Trading S.A (together the “Owners”) entered into a bunker supply contract with OW Bunker Malta Limited (“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, as the supply contract granted permission to consume and an extended payment period.

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 OW Bunker’s standard terms. OWBAS in turn placed an order with Rosneft Marine (UK) (“Rosneft”), while Rosneft placed an order with its Russian related company, RN–Bunker Ltd.

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

The Owners disputed liability, arguing that OWBM had not paid for the bunkers and was therefore 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. If section 12 of the SOGA applied, a failure to pass title would allow the Owners to withhold payment.

Arbitration and High Court

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, and that ING/OWBM’s claim was therefore a straightforward claim in debt. The High Court upheld the tribunal’s finding and concluded that the bunker supply contract fell outside of the ambit of the SOGA, as the fact that the bunkers could be lawfully consumed before payment (or passing of title) meant that the contract was not one for payment in exchange for passing of title in goods.

Significantly, and whilst Rosneft was not a party to the proceedings, the High Court also found that OWBM had succeeded in obtaining the permission of Rosneft for the Owner’s consumption of the bunkers.

The Owners were granted permission to appeal. Rosneft was also granted permission to intervene as an interested party.

Court of Appeal Decision

The Court of Appeal affirmed the High Court’s decision that the contract between the Owners and OWBM was not a contract falling within the SOGA.

In reaching its decision, the Court of Appeal considered the following factors relevant:

1. Whilst the language of OWBM’s standard terms had suggested that the parties were thinking in terms of a sale and purchase of the bunkers that were to be supplied under the contract, the starting point of any analysis should be to consider what the parties had in fact undertaken to do and to consider whether the characterisation by the parties of the contract as one of sale adequately reflected the substance of the obligations to which it gave rise.
2. The Owners’ argument that they had contracted for the transfer of title to the bunkers, and an agreement to sell within the meaning of section 2(1) of the SOGA, was based on the descriptive language used in OWBM’s standard terms.
3. Although the decision in Arnold v Britton [2015] UKSC 36 had cautioned against making too free a use of business common sense and commercial context in order to give a contract a meaning that its language cannot properly bear, the critical terms in the bunker supply contract were those which provided that property in the bunkers was not to pass until they had been paid for in full but that the Owners had the right to consume them for the propulsion of the vessel from the moment of delivery.
4. In this regard, the commercial context was relevant in so far as the parties contemplated that a large part, if not all, of the bunkers would or might be consumed, and therefore cease to exist, within the 60 days extended period of credit for which the contract provided. It follows that the goods in question would likely cease to exist by the time of payment, when title was due to pass (due to the retention of title clause).
5. The courts have consistently assumed that a contract for the sale of goods which contains a retention of title clause is a contact of sale falling within the scope of the SOGA, however, this was an uncontested assumption in previous cases. The court was not concerned in those cases with the question whether the contract provided for property to pass retrospectively at a time when the goods or part of them had ceased to exist.
6. Taking into account the provision concerning permission to consume, and the commercial background of the bunker supply industry, the essential features of OWBM’s bunker supply contract was one under which goods were to be delivered to the Owners as a bailees with a licence to consume them for the propulsion of the vessel, coupled with an agreement to sell any quantity remaining at the date of payment, in return for the price.
7. The above description does not satisfy the definition of a contract of sale of goods in section 2(1) of the SOGA.

However, the Court of Appeal went on to explain that there is no reason a non - SOGA contract could not contain an implied term similar to that in the SOGA - save to the extent that it is inconsistent with the parties’ agreement. In that context, the Court of Appeal emphasised that the issues on appeal were preliminary issues and it was not for it to answer questions that did not form a preliminary issue under appeal.

The Court of Appeal considered that difficulties in the case stemmed entirely from the Owner’s attempt to establish that the consideration for the payment of the price was the transfer of property in the whole of the goods to which the contract related, despite the fact that that the Court of Appeal considered it did not correspond to the express terms of the contract relating to the use of the goods and the passing of title. In effect, the retention of title clause provided an ever diminishing degree of security for the payment of the sum due.

Somewhat confusingly the Court of Appeal did add that “Since the contract provided for the transfer to the owners of property in any part of the bunkers remaining at the time of payment, it was to that extent a contract for the sale of goods to which the SOGA, including the implied condition in section 12, applied. A failure to pass title to any residue remaining at the time of payment would therefore involve a breach of contract, but it would not be one which entitled the owners to treat the contract as a whole as discharged, unless (contrary to all expectations) it represented such a large proportion of the quantity originally delivered that there could be said to have been a total failure of consideration”.

In relation to Rosneft’s intervention, the Court of Appeal held that the High Court was wrong to hold that it was necessary to decide whether OWBM had succeeded in obtaining the permission of Rosneft for the Owners to consume the bunkers, effectively authorising the Owners to consume the bunkers so as to bind Rosneft. It was not apparent to the Court of Appeal that the arbitrators had been asked to give an award on whether the nature of the contract was such that the Owners were not bound to pay as OWBM had not authorised the Owners to consume the bunkers in a manner that bound Rosneft. It was therefore not properly a subject for the court to consider.

Comments

This case is of significance to a broad range of industries that adopt similar terms to those found in the bunker supply contracts. The logical conclusion of the Court of Appeal’s decision as it stands is that where goods are supplied under contracts which include a retention of title clause, a credit period, together with the right to consume some of the goods during the credit period the contract may not be covered by the SOGA – at least so far as the goods are consumed prior to payment being due.

The Court of Appeal’s suggestion that implied terms analogous to the provisions of the SOGA will apply to such contracts under the common law (as long as there is no conflict with the terms of the agreement), and non-consumed goods might still be subject to the SOGA, means that it will remain to be seen how the decision of the Court of Appeal will be applied. In addition, the Court of Appeal expressly raised an alternative argument to those seemingly advanced by the Owners that OWBM might be in breach of a term requiring it to have given the Owners a permission to consume that was binding on Rosneft. As a result, the consequences of the decision are not entirely clear. Parties should continue to consider very carefully how their obligations are drafted in what they consider to be a contract of sale, and also the protections that they may need to include.

From an arbitration law perspective, the appeal also seems to represent a historical first for a third party being granted permission to be heard in as an ‘interested party’ in the Court of Appeal concerning an arbitration related case. The Supreme Court has clearly defined procedures for such events, but the Court of Appeal does not.

CMS acted for RMUK

PST Energy 7 Shipping LLC Product Shipping & Trading S.A. v O.W. Bunker Malta Ltd & Ors [2015] EWCA Civ 1058