United States: O.W. Bunker: Some Modest Considerations

Last Updated: June 30 2017
Article by Ji Woon Kim

Vessels cannot sail without fuel. This industry truth is recognized in contracts and under U.S. maritime law. In fact, enabling ship operators to efficiently obtain fuel is so important that U.S. maritime law purports to grant fuel suppliers a maritime lien over the vessels to which fuel is supplied. However, a recent series of cases demonstrates that the U.S. maritime laws establishing fuel suppliers' rights are uncertain, creating risks for fuel suppliers, ship operators and shipowners. An analysis of these cases dictates better contractual practices to mitigate the legal (and consequent market) uncertainties.

Based in Denmark, O.W. Bunker & Trading A/S and its many global subsidiaries and affiliates (collectively, "O.W. Bunker"), supplied shipping fuel, known as bunkers, to ocean-going vessels. In November 2014, after disclosure of fraud at a Singapore subsidiary as well as significant losses stemming from the declining price of petroleum, O.W. Bunker sought bankruptcy protection in Denmark. When O.W. Bunker's reorganization failed in Denmark, its U.S. subsidiaries filed voluntary chapter 11 petitions in Connecticut, where a liquidating chapter 11 plan was confirmed in December 2015.1

The facts of the O.W. Bunker case are not unusual in the bunker supply sector. A shipowner or charterer contracted with O.W. Bunker for the supply of bunkers for its vessels. O.W. Bunker in turn selected and contracted with physical bunker suppliers (Physical Suppliers), who actually delivered the fuel to the vessels. O.W. Bunker also assigned its rights under certain bunker supply contracts, as security, in favor of its creditor, ING Bank N.V. (ING). For ease of review, the diagram below highlights in very simple and condensed terms the various persons and contractual relationships in a typical supply of bunkers scenario involving O.W. Bunker:

While this article is not intended to be an analysis of maritime liens under U.S. maritime law, in order to appreciate the issues presented to (i) the shipowners/ charterers, (ii) O.W. Bunker (and its creditor, ING) and (iii) the Physical Suppliers upon O.W. Bunker's filing for bankruptcy protection, a brief explanation here would be appropriate.

  • Under U.S. maritime law, a maritime lien "is a non-possessory property right of a non-owner in a vessel, its earned freight, cargo or other maritime property giving the lienholder the right in admiralty courts to have the property sold and the proceeds distributed to the lienholder to satisfy an in rem debt of the property."2
  • A person providing "necessaries" to any vessel on the order of the shipowner (or another person authorized by the shipowner) has a maritime lien on that vessel.3
  • The term "necessaries" is broadly construed and generally understood to mean essential supplies and services provided to a vessel, including bunkers.

In layman's terms, a bunker supplier who delivers shipping fuel to a vessel on the order of the shipowner (or another person authorized by the shipowner) has a maritime lien on that vessel.

There was no dispute that the Physical Suppliers delivered the bunkers to the vessels. When O.W. Bunker's financial conditions became public (and payments were not being made to the Physical Suppliers), the Physical Suppliers demanded payments against the shipowners/charterers for amounts owed under their bunker supply subcontracts with O.W. Bunker. Concurrently, O.W. Bunker (and ING, as its creditor) also made payment claims from the shipowners/ charterers for amounts owed under O.W. Bunker's bunker supply contracts with the shipowners/charterers for the same bunkers.

The conundrum for the shipowners/charterers was that they did not know to whom payments should be made for the fuel.

  • If they paid O.W. Bunker (that is, the party with whom they contracted for the supply of bunkers) or ING, as its creditor, the Physical Suppliers would arrest their vessels by asserting maritime liens for the value of the fuel actually provided by the Physical Suppliers under the bunker supply subcontracts.
  • In order to release their vessels from arrest, the shipowners/charterers would have had to pay the Physical Suppliers.
  • In effect, the shipowners/charterers would have had to pay twice for the same fuel (first to O.W. Bunker (or ING) as obliged under their bunker supply contracts and second, to the Physical Suppliers for the release of their vessels from arrest).

Consequently, the shipowners/charterers refused to pay anyone and instituted interpleader actions in the U.S. where they placed the price of the bunkers with the courts and asked the courts to decide which party should be entitled to the payments.

Much has already been written analyzing the various U.S. court decisions since these interpleader actions were instituted in the U.S., and those analyses are beyond the scope of this article. However, in short summary, some courts narrowly and strictly construed what constituted maritime liens as a matter of policy and held that the Physical Suppliers did not have maritime liens as the bunkers supplied by the Physical Suppliers were not provided on the order of the shipowners (that is, the Physical Suppliers' contractual relationships were with O.W. Bunker and not with the shipowners/charterers). This narrow and strict construction of maritime liens led these courts to conclude that O.W. Bunker possessed the maritime liens and were entitled to the payments from the shipowners/charterers. The Physical Suppliers were left with merely a contractual claim against O.W. Bunker for payments owed to them under their bunker supply subcontracts with no recourse against the vessels.4

Other courts took a more lenient view and held that awarding the maritime liens and, consequently, the payments to O.W. Bunker, would amount to a windfall in favor of O.W. Bunker and ING. These courts took a more equitable approach and reached the same results as if there had been no bankruptcy.5 These rulings suggested that the parties should receive the contractual rights for which they originally bargained. O.W. Bunker certainly was earning a margin on its subcontracts with the Physical Suppliers. Therefore, the Physical Suppliers should be entitled to their payments under the subcontracts with O.W. Bunker and O.W. Bunker should be entitled to just the margins. In this case, the shipowners/charterers would make one payment equal to the aggregate amounts paid to the Physical Suppliers and O.W. Bunker.

The divergent outcomes of the U.S. courts in the O.W. Bunker case highlight the problematic state of play as the courts have failed to provide clear and consistent guidance for shipowners/charterers involved. Until the courts can provide better guidance, pre-contractual due diligence and negotiations are more important than ever and should be emphasized more than usual for shipowners/charterers to better protect themselves against multiple claims for payments for the same bunkers supplied to their vessels.

Below are some modest suggestions for shipowners/charterers to consider during the pre-contractual due diligence and negotiations stage:

  • A more thorough due diligence and review of (i) the bunker supply contracts between the shipowners/charterers and the intermediate bunker suppliers and (ii) the bunker supply subcontracts between the intermediate bunker suppliers and the physical suppliers.
  • Written agreement by the physical suppliers for the benefit of the shipowners/ charterers not to assert any claims against the shipowners/charterers or the vessels, in effect preventing the physical suppliers from treating the vessels as a form of credit enhancement.
  • Written confirmation in the bunker supply subcontracts that the selection of the physical suppliers under the bunker supply subcontracts is not to be construed to be a selection by shipowners/charterers but solely by the intermediate bunker suppliers.
  • Written confirmation in the bunker supply subcontracts by the physical suppliers that the bunkers are being delivered at the direction of the intermediate bunker suppliers.
  • Written confirmation in the bunker supply subcontracts by the physical suppliers that they are not looking to the credit of the vessels for payments under the bunker supply subcontracts.
  • Written agreement by the physical suppliers for the benefit of the shipowners/ charterers that the bunkers are being ordered and supplied for the intermediate bunker suppliers' accounts and that no claims or maritime liens may be placed on the vessels.
  • Written agreement by the intermediate bunker suppliers that either (i) they have already paid the physical suppliers the payments owed by them under the bunker supply subcontracts or (ii) if payments have not been made, that the intermediate bunker suppliers will exercise no claim over the bunkers or the vessels until payments are made to the physical suppliers. In the event the intermediate bunker suppliers breach this undertaking, the shipowners/ charterers would seek to withhold payments.
  • Written indemnity by the intermediate bunker suppliers for the benefit of the shipowners/charterers for any losses and costs (including litigation costs) incurred by the shipowners/charterers for claims made by the physical suppliers against the shipowners/charterers or the vessels in the event of nonpayment under the bunker supply subcontracts.
  • Upon the occurrence of nonpayment by the intermediate bunker suppliers of amounts owed by them under the bunker supply subcontracts, shipowners/ charterers would seek to terminate the bunker supply contracts.
  • Written agreement with intermediate bunker suppliers to utilize an escrow account, and payments under the bunker supply contracts will be deposited into that escrow account and released upon (i) payments under the bunker supply subcontracts have been fully made and/or (ii) in the case of any disputes with the physical suppliers, upon resolution of such disputes. The intermediate bunker suppliers would forego any claims to such payments in the escrow account if the physical suppliers were to arrest the vessels for nonpayment under the bunker supply subcontracts.

Whether a shipowner/charterer would be successful in obtaining any of the above suggestions from its counterpart intermediate bunker supplier and/or physical supplier may be open to debate and subject to the negotiating positions of the parties involved. However, even a failed negotiation will help define the parties' expectations in terms of their rights and obligations in a subsequent dispute. Furthermore, the above list of suggestions should not be construed to be exhaustive. However, in light of the divergent decisions in the O.W. Bunker case by the U.S. courts, it behooves shipowners/charterers to raise these types of points during the pre-contractual due diligence and negotiations stage to seek better protections against potential multiple claims for payments for the same bunker.

Click below to download the complete newsletter featuring this article.

Global Transportation Finance Newlsetter - June 2017

Footnotes

1 The history relating to O.W. Bunker is generally taken from UPT Pool Ltd. v. Dynamic Oil Trading (Singapore) PTE Ltd. (O.W.I.), No. 14-CV-9262 (VEC), 2015 WL 4005527 (S.D.N.Y. July 1, 2015).
2 Charles M. Davis, Maritime Law Deskbook (2016 Edition, Compass Publishing Company), 499.
3 Commercial Instruments and Maritime Lien Act, 46 U.S.C. §31342.
4 See, e.g., Clearlake Shipping Pte Ltd v. O.W. Bunker (Switzerland) SA, 14-9287 (S.D.N.Y. Jan. 9, 2017).
5 See, e.g., Martin Energy Services LLC v. M/V Bravante IX, 14-322 (N.D. Fla. Jan. 26, 2017).

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions