Oil & Gas: Bunker Supply Contracts Revisited

In Cockett Marine Oil DMCC v Ing Bank NV & Anor [2019] EWHC 1533 (Comm) the Commercial Court dealt with the latest round of the OW Bunker saga. (See, for example, our Law-Now from 2016 on PST Energy 7 Shipping LLC and anor. v O W Bunker Malta Limited and anor. [2016] UKSC 23.) The Commercial Court was asked to decide whether an assignment under contracts “relating to the sale of oil products” was sufficiently wide to include bunker supply contracts, notwithstanding the fact that such contracts are not contracts relating to the sale of goods / products (within the meaning of the Sale of Goods Act 1979). Also, whether the seller’s standard terms and conditions were incorporated into the contract through the parties’ negotiations.

Facts

Two companies in the Cockett group of companies (“Cockett Marine Oil”) agreed to purchase bunkers (i.e. fuel oils) from two companies in the OW Bunker group of companies (“OW Bunker”), one for supply to the mv ZIEMIA CIESZYNSKA (a bulk carrier) and the other for supply to the mv MANIFESTO (an LPG tanker). In both cases, OW Bunker ‘subcontracted’ the supply of the bunkers to third parties.

The bunkers were supplied by the third parties in October 2014. The following then happened:

• In early November 2014, OW Bunker collapsed. Pursuant to a security agreement, OW Bunker’s contractual rights under contracts “relating to the sale of oil products” were assigned to ING Bank N.V. (“ING”).

• Cockett Marine Oil did not pay OW Bunker / ING for the bunkers. The matter was referred to arbitration, and an award was issued determining that Cockett Marine Oil was contractually liable to pay OW Bunker / ING.

Cockett Marine Oil challenged the award under section 67 of the Arbitration Act, on the basis that the arbitral tribunal had no jurisdiction. Its arguments for challenging the award included the following:

1. The alleged agreement to refer disputes to arbitration in London was contained in a clause of OW Bunker’s standard terms and conditions (the “T&Cs”). However, Cockett Marine Oil argued that OW Bunker’s T&Cs were not incorporated into, and did not form part of, the relevant bunker supply contracts. As such, the parties had not agreed to London arbitration.

1. In light of the above Supreme Court judgment in PST Energy, an assignment of rights under contracts “relating to the sale of oil products” did not capture bunker supply agreements, which were not contracts relating to the sale of goods / products (within the meaning of the Sale of Goods Act 1979).

Decision

As detailed below, the Commercial Court rejected both arguments and dismissed Cockett Marine Oil’s challenge to the arbitral tribunal’s jurisdiction.

Incorporation of Standard Terms & Conditions

As is not uncommon, the relevant bunker supply contracts were made by way of an exchange of emails / by telephone and instant messaging.

In relation to both vessels, Cockett Marine Oil communicated a desire to purchase bunkers of a certain quantity and quality. OW Bunker replied with a proposed price for the supply of those bunkers, and Cockett Marine Oil accepted the proposal. Cockett Marine Oil subsequently issued its nominations, which included provisions on payment, bunker delivery receipts, sanctions, and a request to be sent a copy of OW Bunker’s latest terms and conditions of sale. OW Bunker’s reply / sales order confirmation acknowledged the nominations and stated that the delivery of the bunkers was subject to OW Bunker’s T&Cs.

Cockett Marine Oil argued that a legally binding contract was formed in both cases when it accepted OW Bunker’s quotation, as this constituted ‘acceptance’ of OW Bunker’s ‘offer’ to supply bunkers at a specified price. As OW Bunker’s communications referring to its T&Cs were issued after the contracts were formed, these T&Cs were not incorporated into the contracts.

The Commercial Court was not sympathetic to this view. It could not overlook the fact that after Cockett Marine Oil confirmed their order, they added additional terms and requested a copy of OW Bunker’s T&Cs. This, the Commercial Court considered, strongly suggested that Cockett Marine Oil did not think a binding agreement had already been reached. On that basis, it concluded that although Cockett Marine Oil’s communication was expressed as confirmation of an order and therefore perhaps appeared to reflect the reaching of some kind of agreement, it was actually, strictly speaking, a counter-offer. Further, by sharing its T&Cs, OW Bunker identified the conduct which would amount to acceptance (namely, the acceptance of the bunkers by the vessel), and Cockett Marine Oil, by accepting the bunkers without objection, accepted OW Bunker’s T&Cs.

The T&Cs were therefore held to be incorporated into the bunker supply contracts, and, accordingly, the arbitral tribunal was held to have had jurisdiction.

Assignment of Rights

Cockett Marine Oil then argued that the assignment in favour of ING was not sufficiently broad to transfer OW Bunker’s cause of action under the bunker supply contracts to ING, so that ING had no right to refer this dispute to arbitration, and that the arbitral tribunal therefore did not have jurisdiction.

Cockett Marine Oil’s argument may be summarised as follows:

• OW Bunker only assigned rights under contracts “relating to the sale of oil products” to ING in accordance with the relevant security agreement.

• The Supreme Court confirmed in PST Energy that Bunker supply contracts are not contracts relating to the sale of goods / products (within the meaning of the Sale of Goods Act 1979) – see above.
• Therefore, the wording of the assignment did not capture bunker supply contracts.

The Commercial Court considered that, while this argument had the “attraction of beguiling simplicity”, it could not be right. First, it would have meant that ING had no security attaching the sums due to OW Bunker under its many bunker supply contracts, which would be a surprising and unlikely result. Second, there was “nothing incongruous” about a security agreement describing bunker supply contracts as ‘contracts for sale’. It concluded that:

“…in commercial terms [bunker supply contracts] had many of the features or characteristics of a sale, notwithstanding the fact that they were not contracts of sale within the meaning of the Sale of Goods Act because they did not envisage the passing of property before payment was due.”

Therefore, OW Bunker’s rights under the bunker supply contracts were validly assigned to ING, ING was entitled to refer this dispute to arbitration, and the arbitral tribunal therefore had jurisdiction.

Comment

This judgment aptly identifies the risks associated with making legally binding agreements by exchanging a series of messages. It also indicates ways in which such risks may be mitigated. Key to the mitigation of risk in this case was the provision by OW Bunker of its standard T&Cs.

However, it is easy to see how things could have turned out differently. For example, if Cockett Marine Oil had not continued to negotiate, had not suggested further terms, had not requested a copy of the supplier’s terms and conditions, or had expressly rejected or objected to provisions in the supplier’s terms and conditions when it received these, the case may have been decided differently.

As such, the key ‘take-away’ is the importance of establishing the framework under which the parties are negotiating price, quantity and quality. This might be done in several ways, such as: (i) a master sales/framework agreement between the parties governing all sales leaving key price, quantity and quality terms to be decided on each trade; or (ii) standard template wording to be used in any offer that state that the relevant party’s standard terms and conditions apply.

That said, the practical reality is that in the context of supplying bunkers, it is common practice for the sellers’ terms and conditions to apply to the supply contracts at each stage of the contractual chain. It is therefore perhaps not surprising that Cockett Marine Oil requested a copy of OW Bunker’s T&Cs in its nomination, and not surprising that the Commercial Court considered these T&Cs to apply.

With regards to the assignment of rights to ING, this judgment clarifies the reach of the Supreme Court Judgment in PST Energy. Just because a bunker supply contract does not constitute a contract relating to the sale of goods within the meaning of the Sale of Goods Act 1979, as was decided in that case, this does not mean that bunker supply contracts cannot be described, in commercial terms, as a contract relating to the sale of certain goods for other purposes.

Cockett Marine Oil DMCC v Ing Bank NV & Anor [2019] EWHC 1533 (Comm) (17 June 2019) – before Mr. Justice Teare