UK: When Is A "Contract For The Sale Of Goods" Not A Contract Of Sale Of Goods?

A recent decision in the English Commercial Court has potentially significant ramifications for the shipping and trading industry.

This decision will be of interest to:

  • Those involved in the fallout from the recent bankruptcy of OW Bunker A/S
  • Parties entering into any contracts with the characteristics identified below who assume they are contracts of sale of goods to which the Sale of Goods Act 1979 (the Act) applies

The court has determined the impact of retention of title clauses in contracts on credit terms and provided important guidance on deciding whether a contract for the supply of bunkers is a sale of goods contract.

Contracts for the supply of bunkers Participants in the shipping and trading industry will be familiar with the typical contract terms under which a supplier of bunkers contracts with a shipowner or operator. Such a contract often includes the following:

a. A retention of title (ROT) clause in favour of the supplier until payment

b. A provision that payment will be due a fixed number of days after delivery (or a credit period)

c. Express permission for the shipowner to consume the bunkers in the meanwhile as the vessel goes about its business

Parties entering into such contracts are aware that, due to the very nature of what is being supplied and the purpose of the bunkers, the subject matter of the contract (i.e. the bunkers) may well be consumed in whole or in part before payment is due.

The following question therefore arises: is this type of contract a contract of the sale of goods?

This is important because the Act, which as its name suggests only applies to contracts of the sale of goods, imposes certain requirements that must be satisfied before a seller can sue for the price of goods, as well as other important obligations such as the implied terms regarding title, description, quality and fitness for purpose and other rights. In many cases, the parties assume that the Act will apply, so avoiding the need for express clauses. This may now need re-evaluation.

The facts The dispute concerned a contract entered into between the owners of the vessel "Res Cogitans" and OW Bunker Malta Ltd (OWBM), a company within the OW Bunker group, for the supply of bunkers to the vessel.

The contract was governed by English law and included a retention of title clause. Payment was due to be made within 60 days of the date of delivery upon presentation of OWBM's invoice. OWBM's right to receive payment had been assigned to ING Bank NV.

As is common for such contracts, OWBM did not supply the bunkers itself but entered into a similar contract with another company (a subsidiary of OW Bunker A/S), which in turn placed an order with Rosneft Marine (UK) Ltd, which contracted with its subsidiary in Russia. It was this subsidiary that ultimately supplied the bunkers to the vessel. Rosneft paid its subsidiary but no other payments in the chain were made.

Following the collapse of OW Bunker A/S in November 2014, a dispute subsequently arose where the owners found themselves faced with competing demands for payment from ING and Rosneft (not a party to this action). The owners' position was that while they did not object to paying for the bunkers, they did not want to have to pay both ING and Rosneft.

London arbitration The contract was subject to English law and included a clause referring all disputes to London arbitration.

Owners argued that OWBM/ING could not claim for the price because the requirements under section 49 of the Act were not satisfied. These are that (1) property in the goods has passed to the buyer or (2) the price is payable on a day certain irrespective of delivery.

In the arbitration, heard in February, the tribunal found that the contract was not a contract for the sale of goods to which the Act applied and that OWBM/ING therefore had a claim under the contract for a debt.

The tribunal also found that if the Act had applied, the conditions under section 49 of the Act had not been satisfied primarily because:

  • Property had not passed to the buyer because of the ROT clause and could not be passed as the bunkers had been consumed before payment was due
  • OWBM/ING could not pass title under section 25 of the Act
  • The price was not payable on a day certain because it depended on the date of delivery, which was uncertain

The owners appealed the tribunal's decision that the contract was not one of the sale of goods to the Commercial Court.

Judgment in the Commercial Court The Commercial Court heard the appeal in July and agreed with the tribunal's decision on the key issue, dismissing the owners' appeal.

Conditions to qualify as contract of the sale of goods The court set out the conditions that a contract must satisfy to be one of the sale of goods as follows:

  1. The contract must be for "goods"
  2. One party, the seller, must undertake an obligation to transfer the property in the goods (i.e. good title to them) to the other party, the buyer
  3. There must be a money consideration payable by the buyer to the seller
  4. There must be a link between the transfer of title and the money consideration, such that the consideration for the payment is the transfer of title to the buyer as distinct from some other benefit

In its analysis, the court held that the contract did not fulfil conditions 2 and 4 (as above) to qualify as a contract of sale within the scope of section 2 of the Act.

The court's decision was based on the reasoning 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 the expiry of the credit period with the consequence that property therein would cease to exist, was such that it was "difficult to conclude" that (a) OWBM undertook an obligation to transfer property in the bunkers to the owners and (b) that what the owners were paying for was the transfer of title to them. As a result, the contract was outside the scope of the Act.

Rather, the consideration paid by owners was for OWBM to "deliver or arrange for delivery of the bunkers, which the owners would be immediately entitled to use for the propulsion of the vessel". The owners were paying for "the right to consume the bunkers" and the provision of such right by OWBM to the owners (given by express permission to consume the bunkers immediately upon receipt) was a condition of the contract.

The court disagreed with the tribunal's finding that provision for payment to be made within a fixed period after delivery was insufficient to satisfy the requirement in section 49 of the Act, but this did not have any effect on the court's overall decision.

The owners have since been given permission to appeal the Commercial Court's decision to the Court of Appeal. A supplier has also sought to intervene in the proceedings, on the basis that they are also affected by the outcome of the current decision.

What is the wider impact of this decision and why does it matter?

In respect of the continuing OW saga, the result of the first instance decision in The Res Cogitans is that the owners continue to face a real risk of having to pay twice for the same bunkers (or at least paying OW/ING and running the risk that a physical supplier (remaining unpaid) will look to arrest the ship to obtain payment).

Parties to any contracts similar to that in The Res Cogitans (i.e. contracts on credit terms with retention of title clauses where it is likely the goods will be consumed before payment is due) should consider carefully any representations as to quality, specification, condition etc. that the seller is giving, as it is unclear whether analogous terms will be implied at common law to those usually implied by the Act (assuming satisfactory wording to exclude these terms has not been used). In the light of The Res Cogitans, it may be necessary to make express reference to such terms.

When considering whether to add a ROT clause to a contract, consider what you are trying to achieve and consider the wording used. The cost of the ROT clause may not be worth the hoped for benefit, or the problems may be avoided by some express wording. For example, an express right to claim the price is recommended (rather than relying on the Act).

Finally, it should not be forgotten that some ROT clauses have been held to constitute charges, and therefore in the case where the seller is a UK-registered company, such charges need to be formally registered, failing which a liquidator/administrator may look to have them set aside.

Unresolved matters

  1. A conditional sale agreement (i.e. an agreement for the sale of goods where property remains with the seller until specified conditions are satisfied) is expressly brought within the Act. However, the distinguishing factor in The Res Cogitans appears to be that the effect of the ROT clause was that it was likely (but not invariably) to prevent the passing of property until such time as it could not pass from seller to buyer, since the bunkers would likely have ceased to exist at the time payment became due. It is questionable whether this factor should be determinative of whether the Act applies to a contract for the sale of goods.
  2. In general terms, the categorisation of a contract is determined by reference to the situation as it existed at the date of the contract and not by reference to subsequent events. To this end, in The Res Cogitans, the court held that those matters within the contemplation of the parties at the date of the contract included the likelihood of consumption of the bunkers within the period of credit. How would this apply when bunkers are supplied in such a quantity that it is clear that not all will be consumed by the expiry of the credit period? Does the Act apply to the entirety of the bunkers supplied, only those that are unlikely to be consumed at the end of the period, or does it simply not apply at all?
  3. What is the position between the shipowner and the physical supplier who are not in a direct contractual relationship? Although the shipowner would, from an English law perspective, be able to rely on the doctrine of bailment to justify consuming bunkers during the credit period, what is the position in respect of the remaining bunkers? Previous case law suggests that the shipowner could rely on section 25 of the Act (buyer in possession after sale). However, if the Act does not apply because the contract is not a contract of sale, section 25 of the Act equally cannot apply. How then does the shipowner justify its conduct vis-à-vis the physical supplier after the expiry of the credit period if he pays his supplier, who does not in turn pay the physical supplier?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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