Australia: The fallout from the Res Cogitans case and expected changes to bunker supply contracts

Introduction

The recent English Supreme Court judgment in the Res Cogitans case has set the tone for dozens of pending claims on the international scene, with decisions largely coming down in favour of OWB (OW Bunker) receiving payment from the buyer. Here we explore the recent developments in the on-going OWB saga as well as the potential changes to future bunker supply contracts which may arise when the Baltic and International Maritime Council (BIMCO) review their standard contract this November.

In the July edition of Legalseas we covered the judgment, which held that a bunker supply contract is to be construed as a licence for the consumption of bunkers for the propulsion of the ship to which the Sale of Goods Act 1979 (SOGA) does not apply. Under a licence there is no requirement for the supplier to transfer or be able to transfer title in the bunkers. This left the buyers with no defence to ING's/OWB's claim to the contractual price, even though OWB as the bunker suppliers had, in most cases, not paid the physical supplier.

One of the issues arising from the Res Cogitans judgment was the risk that owners would have to pay for bunkers twice, once for the contractual debt to OWB and again to the physical suppliers for the actual bunkers. The likelihood of physical suppliers succeeding in an independent claim depends on whether local law permits a maritime lien. Under English Law, the lack of privity between the physical suppliers and the buyer prevents the establishment of a maritime lien. Similarly in recent decisions in other jurisdictions, the physical suppliers right to an independent claim has been applied narrowly, reserving the right for a direct contractual party, rather than a third party sub-contractor. For example in two separate US cases, the physical suppliers Rouke and Valero, having contracted through the intermediary of OWB, did not meet the criteria for a maritime lien under US law. The difficulty in a physical supplier establishing a lien makes it unlikely that owners will have to pay twice. However, the risk remains and it may arise in certain cases due to the particular facts and/or issues of local law - for example, there may be instances where the physical supplier can establish a maritime lien if the owners had directed the selection of the physical supplier or retained sufficient control over their performance.

Contractual changes in the future

The uncertainty that has arisen from the OWB litigation has prompted BIMCO to consider revisions to their standard bunker supply contract. The review team comprises some of the world's largest bunker suppliers, including World Fuel Services and Dan Bunkering, and shipowners, who are represented by Denmark-based J Lauritzen Norden. There is also input from the P&I sector including the North of England P&I Club. The team aims to present their revised draft to the BIMCO Documentary Committee in November and it is likely that the bunker suppliers (i.e. the contractual suppliers) will be keen to reinforce the position established by Res Cogitans. It is likely bunker suppliers will opt for certainty, by including express wording to the effect that SOGA will not apply to the bunkers, whether consumed or not. This will enable any money owed under the sale contract to be recovered as a simple debt claim and avoid any potential arguments that the contractual supplier should not be able to recover the price from the shipowner as a result of title not passing from the physical supplier, and this further allows the supply of bunkers to continue to operate on credit terms, a key feature of the bunker supply industry.

The owners involved in the process will be keen to implement contractual provisions which close the gap of legal uncertainty regarding the risk, albeit slim, of double payment. Such changes could include:

  1. Representations from the contractual supplier that it has obtained written confirmation from the physical supplier that it has been paid and that it has no claim over the bunkers of the ship. Physical suppliers also contract on credit terms with the contractual supplier, typically being paid 30 days after supply. This representation would therefore have to be made at the expiry of the physical suppliers' credit period which is still useful, provided it is before the expiry of the buyer's credit period. Therefore, if the representation was breached, the owners would use this breach as their basis for not paying the contractual suppliers.
  2. An indemnity from the contractual supplier in respect of any claim by a physical supplier against the buyer of bunkers and a right to withhold payment. This provision probably provides the strongest protection and comfort to the buyers.
  3. Ensuring that the wording used when signing bunker delivery receipts states that this does not establish contractual relations. This will prevent physical suppliers from claiming that by serving their terms on the owners on receipt they have established privity of contract (even though this argument has so far been defeated in court as the chief engineer who usually signs these receipts does not have actual or ostensible authority to establish contractual relations).

Other protective measures that the buyers could take include taking out insurance and ensuring that the BIMCO Bunker non-lien clauses are incorporated in their time charterparties (this requires charterers to inform the physical supplier at the outset that bunkers ordered are being supplied for their account and that no lien can be placed over the vessel).

Conclusion

The Res Cogitans decision and subsequent international rulings have exposed the weaker contractual position of the physical suppliers who have been left with no recourse when their contracting party is in insolvency. Although many commentators have advocated the need to bolster their position, whether they can insist on more favourable terms, for example, shorter credit periods, will depend on individual bargaining positions on a case-by-case basis.

Once the main claims are settled the next contentious issue will be dealing with OWB's high claims for interest, a step already being taken in the US in relation to the M/V Charana, where the total amount being claimed is now double the original invoice.

Given the various issues that remain unresolved, it is arguable that Bimco's upcoming November review of bunkering contracts will be the first in a series of significant changes for the bunker supply industry.

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