UK: Res Cogitans – A Class Of Its Own

Bunker Supply Contracts, Retention of Title Clauses, The Sale Of Goods Act 1979 and One Highly Publicised Insolvency Combine to Give Vessel Owners a Global Headache

The Supreme Court's ruling in this already notorious case may have a significant impact on the bunker supply industry and be somewhat unsettling for vessel owners and charterers (as purchasers of bunkers).

Its decision that bunker sale contracts on standard terms are not contracts for the sale of goods under the Sale of Goods Act 1979 ("SOGA") means that an assumption that no-one had questioned prior to the Tribunal's decision of April 2015 is now turned on its head. Its impact both on the many disputes which have been awaiting this decision and on the future of this industry may take some time to unfurl. We take a look at the decision and give some pointers as to what the future may hold.

The Facts

The owners of the vessel "Res Cogitans" (the "Vessel") placed an order with OW Bunker Malta Ltd ("OWBM") for the supply of bunkers.

Key terms Owners/OWBM contract:

  • Seller: OWBM
  • Delivery date: 3-4 November 2014
  • Physical supplier: Rosneft
  • Payment terms: 60 days from date of delivery upon presentation of OWBM's invoice
  • Subject to OWB terms
  • Retention of title:

    "H. Title

    H.1 Title in and to the bunkers delivered and/or property rights in and to such bunkers shall remain vested in the seller until full payment has been received by the seller of all amounts due in connection with the respective delivery...

    H.2 Until full payment of the full amount due to the seller has been made... the buyer agreed that it is in possession of the bunkers solely as bailee for the seller, and shall not be entitled to use the bunkers other than for the propulsion of the vessel..."

Assumed fact:

  • Bunkers entirely consumed before date of payment fell due.

OWBM assigned its right to payment of the price for the bunkers to its bank, ING Bank NV ("ING").

OWBM did not supply the bunkers itself but placed an order for their supply with OW Bunker & Trading A/S ("OWBAS"), which in turn contracted with Rosneft Marine UK Ltd ("Rosneft"), which in turn contracted with RN-Bunker Ltd ("RN Bunkers"), the physical supplier of the bunkers to the Vessel.

Key terms OWBAS / Rosneft contract:

  • 30 days payment terms
  • Retention of title:

    "10. Risk/Title

    Risk in the marine fuels shall pass to the buyer once the marine fuels have passed the seller's flange connecting the vessel's bunker manifold with the delivery facilities provided by the seller. Title to the marine fuels shall pass to the buyer upon payment for the value of the marine fuels delivered, pursuant to the terms of Clause 8 hereof. Until such time as payment is made, on behalf of themselves and the vessel, the buyer agrees that they are in possession of the marine fuels solely as bailee for the seller. If, prior to payment, the seller's marine fuels are commingled with other marine fuels on board the vessel, title to the marine fuels shall remain with the seller corresponding to the quantity of the marine fuels delivered. The above is without prejudice to such other rights as the seller may have under the laws of the governing jurisdiction against the buyer or the vessel in the event of non-payment."

The bunkers were accordingly supplied to the Vessel.

Rosneft paid RN Bunkers.

OWBAS did not pay Rosneft.

Owners did not pay ING, OWBM, Rosneft, or indeed anyone.

The contract between Owners and OWBM contained contractual provisions to the effect that the Owners would receive bunkers, and be entitled to use them for the propulsion of the ship, but that they would not be obliged to pay for those bunkers until a credit period (being 60 days after delivery) had expired. OWBM had a certain amount of comfort afforded to them by a retention of title clause, which stated that OWBM would retain title in the bunkers until payment in full was made.

OWBAS unfortunately then entered bankruptcy proceedings.

Against that background, the Owners wanted to know: who should they pay?

Supreme Court Decision

The following questions were before the Supreme Court: (i) was the contract between Owners and OWBM a contract of sale under SOGA; and (ii) if not, was it subject to any implied term that OWBM would timeously pay Rosneft for the bunkers? OWBM also asked the Supreme Court to consider, if it decided that the contract between Owners and OWBM was a contract of sale under SOGA, whether OWBM was indeed restricted to suing for the price under section 49 only, or whether the salient case on this point, known as "Caterpillar" (F G Wilson (Engineering Ltd v John Holt & Co (Liverpool) Ltd [2014] 1 WLR 2365)), should be overruled.

The anticipation was perhaps not so much that the Supreme Court would overturn the decisions below, but that it would steer a clear course forward.

Was the contract a contract for sale under SOGA? The Supreme Court had little difficulty in upholding the position as originally stated in these proceedings by the arbitrators. This was not a contract for sale as defined by section 2 of SOGA, but a 'sui generis' contract, in a class of its own. The essential nature of the contract was again expounded as being, not an agreement to transfer property for a price, but rather a contract: (i) which permitted consumption prior to payment and without property passing; and (ii) with property in the balance of any bunkers remaining at the time of payment being transferred at that time.

The Owners could not therefore point to section 49 of SOGA and refuse to pay OWBM in reliance upon the fact that OWBM had not passed title in the bunkers to the Owners.

Was the contract a contract of sale to the extent that it provided for the transfer of property in any part of the bunkers remaining at the time of payment? This was an argument with which the Court of Appeal found some favour, but the Supreme Court rejected it. A bunker contract is a single agreement for the supply of bunkers at a single price. It is not necessary to work out which bunkers remain unconsumed at any given moment to determine the nature of the contract. This is eminently sensible given the inherent difficulty with establishing when any particular stem is consumed.

Was the contract subject to any implied terms that OWBM would pay Rosneft timeously for the bunkers? As to the second question, the Owners called upon the Supreme Court to rule that "there must, as a matter of obviousness and necessity, have been an implied term of the contract relating to performance of obligations in the contractual chain above OWBM, by virtue of which OWBM obtained the bunkers it supplied to the owners."

The Supreme Court decided that there was no basis or need for any such implied duty. OWBM's implied undertaking was that it had permission to authorise the Owners to use the bunkers; it did not need title to those bunkers itself.

Is section 49 a complete code? – The "Caterpillar" question The court having decided that the contract between Owners and OWBM was not a contract for sale, OWBM's final argument, by which it requested the Supreme Court to overrule Caterpillar, (which held that section 49 SOGA is a complete code as to when a seller might sue for the price of goods) did not arise.

Nevertheless, as the point was fully explored in argument, the Supreme Court offered a view, and indicated that, had the point arisen, it would indeed have overruled Caterpillar, deciding that there are situations falling outside section 49 in which a seller might sue for the price. These included cases such as the present, where complete consumption of the bunkers had taken place, but the court expressly said that "...I do not suggest that this is the limit of the circumstances outside section 49 in which the price may be recoverable."

While the limits are therefore yet to be determined, this has an impact well beyond the world of shipping.

Conclusion

The Supreme Court therefore ruled that the Owners had no defence to OWBM's claim for the price.

What Does This Decision Mean for Owners/ Charterers?

  • Risk of double exposure: an obligation to pay both the contractual seller and the physical supplier, which will lead to, among other things, further exposure to arrest proceedings.
  • Unavailability of the extensive protection provided to buyers under SOGA (including the implied terms).
  • Payment on account for bunkers/loss of credit terms, with bunker suppliers insisting on payment "up front"?

How Can Owners/Charterers Protect Their Position?

  • Consider the most favourable jurisdictions for bunker claims.
  • Review/revise bunker supply contracts.
  • Review/revise charterparty terms dealing with bunker supply.

Reed Smith can assist with reviewing and drafting T&Cs for bunker supply contracts and charterparties, and work with owners and charterers to develop the best strategy to manage the challenges flowing from the OW bunker collapse.

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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