UK: "RES COGITANS" – Court Of Appeal To Decide Whether Bunker Supply Contracts Are Covered By SOGA 1979

On 17 September 2015, the Court of Appeal (Lord Justices Moore-Bick, Longmore and McCombe) heard Owners' appeal of the decision of Mr Justice Males (sitting in the Commercial Court) that a standard form bunker supply contract did not amount to a "contract for the sale of goods" for the purposes of the Sale of Goods Act 1979.

The Court of Appeal's decision, which will have a far-reaching impact on (at the very least) the maritime world, is expected within the coming months. Whatever the decision, an application for leave to appeal to the Supreme Court by one of the parties seems highly likely given the importance of the issue.

Background

The original dispute related to a contract between vessel owners (Owners) and OW Bunker Malta Limited (OWBM) for the supply of bunkers to the Owners' vessel. This was made on the standard OW Bunker Group 2013 Terms and Conditions of Sale for Marine Bunkers.

As is common in the bunker supply industry, OWBM did not supply the bunkers itself but rather subcontracted with its now bankrupt parent, OW Bunker & Trading AS (OWBAS), to do so. OWBAS then contracted with Rosneft Marine (UK) Ltd (Rosneft) for the supply of the bunkers, which in turn contracted with its subsidiary RN-Bunker Ltd (RN), which apparently was the physical supplier of the bunkers to the Owners.

The bunkers were delivered on 4 November 2014 and Rosneft paid RN on 18 November 2014. Owners were due to pay OWBM within 60 days of delivery (3 January 2015) whilst payment from OWBAS to Rosneft was due within 30 days of delivery (4 December 2014). However, following OWBAS' filing for bankruptcy in early November, neither payment was made.

Arbitration

In arbitration proceedings, Owners sought a declaration that they were not liable to pay ING Bank S.A. (ING), in its capacity as assignee of OWBM's rights to payment, on the basis that the contract was a sale of goods governed by the Sale of Goods Act 1979. They argued that the requirements in Section 49 of the Act had to be satisfied in order for ING to maintain an action for the price of the bunkers supplied under the contract. Amongst these requirements was the need for either:

a) Property in the goods to have passed to the buyer; or

b) The contract price to have been payable on a "day certain".

Owners maintained that neither of these requirements was satisfied: first, the contract between Owners/OWBM had not identified a payment date that was fixed and ascertainable at the date of the contract and, second, property had not passed from OWBM to the Owners as OWBM had not at any point had title to the bunkers. Owners argued this was because OWBAS had not paid Rosneft for the bunkers, and Rosneft had, therefore, retained property in them pursuant to a retention of title clause in the OWBAS/Rosneft contract.

The arbitrators rejected this argument and agreed with ING's contention that the Sale of Goods Act 1979 did not apply to the Owners/OWBM contract as it only covered "contracts of sale of goods" as defined in Section 2(1) of the Act. The Owners/OWBM contract did not come within the Section 2(1) definition because the goods were supplied on credit and were for immediate consumption, meaning that ING's claim to payment did not have to be brought within the requirements of Section 49.

Appeal of the arbitrators' award to the Commercial Court

Owners appealed the arbitrators' decision to the Commercial Court, maintaining their argument that the Owners/OWBM contract was a contract for the sale of goods to which the Sale of Goods Act applied, and that ING, therefore, had to satisfy Section 49 of the Act in order to succeed in their claim.

The Court, however, agreed with the arbitrators that the Owners/OWBM contract was not subject to the Sale of Goods Act because it was not a "contract of sale of goods" by which "the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration". Males J found that OWBM had not undertaken to transfer property in the bunkers to Owners on the basis of the following provisions of the Owners/OWBM contract:

a) It contained a retention of title clause allowing for property in the bunkers to remain with OWBM until payment had been made;

b) It provided for a credit period before payment was due;

c) It gave Owners permission to consume the bunkers whilst payment remained pending.

The Court determined that it would have been within the contemplation of Owners and OWBM when they contracted that all the bunkers might be consumed before payment fell due under their contract. Given that consumption of the bunkers would extinguish any property in them, Males J found that the parties must therefore have realised that it was likely that property in the bunkers would never pass to Owners.

In the Court's view, the contract between Owners and OWBM was, therefore, not a contract for the sale of goods, but rather a contract under which Owners would pay OWBM for arranging the delivery of bunkers which Owners would have the right to consume immediately on delivery. Rosneft's retention of property in the bunkers (under the retention of title clause in the OWBAS/Rosneft contract) was not an obstacle to Owners' right to immediately consume the bunkers, as the Court determined that Rosneft had given permission for Owners to do this. Males J found that such permission had been given by Rosneft as it knew and accepted that OWBAS was not the end consumer of the bunkers, but rather a trader who would contract directly or indirectly with Owners, and that the contract with Owners would permit them to consume the bunkers.

On this basis, the Court found that, as the Sale of Goods Act 1979 did not apply to the Owners/OWBM contract, ING's claim to payment was a straightforward debt claim not subject to any requirements as to the passing of property in the bunkers to Owners at the time of payment.

Appeal of the Commercial Court decision to the Court of Appeal

At a consequential issues hearing on 15 July, Males J granted Owners leave to appeal to the Court of Appeal under section 69(8) of the Arbitration Act on whether or not the bunker supply contract is a contract for the sale of goods to which the Sale of Goods Act applies. At the same time he also dismissed OWB/ING's application to cross-appeal.

Owners' appeal was heard on 17 September 2015 by Lord Justices Moore-Bick, Longmore and McCombe. The hearing was expedited and took place during the Court's usual vacation period, which suggests that senior members of the judiciary recognised the importance of the issue to the maritime industry and international trade generally.

Comment

The Court of Appeal's decision, which will have a far-reaching impact on (at the very least) the maritime world, is expected within the coming months. Primarily, it will have important consequences for shipowners that have contracted with certain OW group companies for the supply of bunkers on their standard terms, and who are currently facing competing claims for payment from ING and physical suppliers.

That said, depending on the outcome, it will likely also have a (probably unexpected) impact on any other industry which manages contractual risk in a similar way to the bunkering industry, for example the chemicals and manufacturing industries.

Whatever the decision, an application for leave to appeal to the Supreme Court by one of the parties seems highly likely, given the importance of the issue, and the requirement for certainty on the respective parties' rights and obligations.

As to the rest of the world, as in England, it seems that the various strands of litigation are progressing slowly towards a conclusion. The Singapore courts recently rejected applications brought by shipowners for interpleader relief, but it is not clear at this stage how other claims will end.

It also remains unclear to what extent the English courts' (final and unappealable) decision (when given by the Court of Appeal or the Supreme Court) will prevent physical suppliers from claiming against shipowners and seeking to arrest. That will likely depend on: a) what the English courts decide, b) the judicial weight given to that decision in the relevant jurisdictions across the world, and c) the terms of the bunkering chain of contracts in question. It seems that certainty on that point remains some way off.

Clyde & Co remains able to utilise its extensive network of offices in all the key maritime jurisdictions to monitor and advise upon the wide range of issues raised by the OW Bunker insolvency.

Further Clyde & Co updates on this topic will follow, including in relation to any application for leave to appeal which may be made following the handing down of the Court of Appeal's judgment.

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.