UK: OW Bunkers – Is There An End In Sight?

Permission to appeal the "RES COGITANS" to the UK Supreme Court granted.

Is there an end in sight? Are we getting closer to answering the issue of fundamental importance to the market – who pays/gets paid?

There has been a spate of litigation worldwide following the collapse of OW Bunkers ("OW") as ship owners look to protect themselves from the risk of double payment, bunker suppliers seek ways to get paid, and OW's administrators and assignees (ING Bank) attempt to recover receivables claimed by OW.

There have been a number of claims with different winners and losers on what appear to be similar facts in various jurisdictions. For example, most recently, the Greek Courts have rejected claims of physical suppliers against owners, but this decision as with the majority of other decisions is subject to further appeal.

Is there an end in sight? Are we getting closer to answering the issue of fundamental importance to the market – who pays/gets paid?

The short answer is, 'yes' and 'no'. Many parties have been waiting for a decision in the UK test case the "Res Cogitans" for guidance.  Following the decision in October of the Court of Appeal in this matter, the Supreme Court has just granted permission that a final appeal should go ahead and we expect a decision within a few months which may help bring an end to this saga.

The issue being decided

The background to the "Res Cogitans" matter and collapse of OW is well known to the bunker industry. The "Res Cogitans" is in essence a test case brought by owners of the vessel "Res Cogitans" and their P&I/Defence Club ("Owners").

The dispute relates to a contract between Owners and OW for the supply of bunkers to Owners' vessel, the "Res Cogitans" on 4 November 2014 at Tuapse. Like many other matters currently subject to disputes, this was made on the standard OW Bunker Group 2013 Terms and Conditions of Sale for Marine Bunkers. The supply was subcontracted through OW subsidiaries to Rosneft and its subsidiary. 

In arbitration, Owners sought a declaration of non-liability on a preliminary issue that they should not have to pay OW for the price of the bunkers supplied because the contract was one for the sale of goods and property of the goods had not passed to them.

On assumed facts, the arbitrators held that the bunker supply contract before them was not a contract for the sale of goods, by which the seller transfers or agrees to transfer the property in goods to the buyer, within the meaning of the Sale of Goods Act 1979. This meant that the failure of OW to transfer title did not release owners from their obligation to pay. Whilst OW could not claim the price of the goods under s.49 of the Act, OW was entitled to recover the sum due as a simple debt claim.

Owners appealed the arbitrators' decision to the Commercial Court and then to the Court of Appeal. Both appeal courts agreed with the arbitrators that the contract was not subject to the Sale of Goods Act 1979.  Permission has now been granted for a final appeal to the Supreme Court on the issue of whether the bunker supply contract was one for the sale of goods within the meaning of the Sale of Goods Act 1979 and whether OW's failure to transfer title releases Owners from their obligation to pay. We expect a final decision will be made by the Supreme Court within the next few months after further submissions from the parties and any intervening parties.

What does this mean for the bunker industry?

It is too early to say how the Supreme Court will rule, but ideally it will go further than the Court of Appeal and issue some guidance as to the wider consequences of its decision on other chains of contracts relating to the supply of bunkers. 

However, the decision of the Supreme Court may not definitively answer the issue of fundamental importance 'who pays/gets paid?'. It may give some certainty regarding the respective parties' rights and obligations, but the decision's impact may not be that significant to the bunker industry.

In particular, this might not even be the end for the parties involved in the "Res Cogitans" matter. The appeal emanates from a decision of the arbitral tribunal on a single preliminary issue which was based on a number of agreed and assumed facts. Following the decision of the Supreme Court, unless the parties settle, the original arbitrators will still need to determine the facts of the case and make a decision on the other arguments and issues which did not form part of the original preliminary issue.

It is also important to remember that the Supreme Court's decision will not necessarily affect all claims relating to OW. The decisions so far in the Res Cogitans have been confined to assumed facts and the contract terms which may not apply to other claims. For example, other claims may involve different payment, risk and title clauses, different credit period length, different circumstances relating to permission to consume the bunkers, and may not be subject to English law.

The future

In a highly competitive sector which thrives on volatility and risk, the issue of payment following counterparty default is unlikely to be one which will go away in the bunker industry. The Res Cogitans matter and much worldwide litigation following the high profile collapse of both OW and Bunkers International has brought back into focus issues relating to counterparty default.

The experience so far in the fallout from the collapse of OW is that while protective measures are available, none are either singularly or cumulatively a silver bullet which can always guarantee payment or conversely avoid the risk of double payment given the multiple jurisdictions engaged and the varying approaches to interpreting contractual obligations and rights of maritime liens. This suggests that a thorough commercial and legal review is likely to be necessary for the market in order to improve existing measures or use alternative measures.

In a period where the bunker industry is experiencing significant commercial and regulatory changes, these issues will be considered and developed further in a regular series of articles by Clyde & Co bunker specialists.

OW Bunkers – Is There An End In Sight?

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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James Kennedy
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