UK: Stuck In The Bunker – OW And Retention Of Title

The fallout from the OW Bunker bankruptcy in November last year continues with a number of claims being heard in the English courts. Last month the owners of the vessel "Res Cogitans" appealed to the Court of Appeal against the decision that a contract for the supply of bunker fuel was not a contract of sale within the meaning of section 2(1) of the Sale of Goods Act 1979 (the "Act"). The Court of Appeal however rejected the appeal and upheld the decision of the High Court. The contract, which contained a retention of title clause and permitted the vessel owners to use the bunker fuel for propulsion of the vessel was not a contract of sale within the Act. Instead when considering the commercial context of the transaction, it was a contract for the delivery of fuel to the vessel owners as bailees with a licence to consume, in return for a money consideration.

The credit history

O.W. Bunker Malta Limited ("OWBM"), and ING Bank N.V. ("ING") (which was seeking an assignment of the debt from the appellants to OWBM) were the respondents. In early November 2014, OWBM had supplied fuel bunkers to the appellants under a contract which provided for payment 60 days after delivery and included a retention of title clause, which provided that property passed when OWBM had been paid in full. The contract also expressly provided that upon delivery of the bunkers, the vessel owners take possession as bailee but remain entitled to consume the bunkers for the purposes of propulsion. OWBM had been supplied the bunkers by its ultimate parent company, which in turn obtained them from another supplier, Rosneft Marine (UK) Limited ("RMUK"). The contract between RMUK and OWBM's ultimate parent also contained a retention of title clause, but only provided for a 30 day credit period and expressly forbade the use of the bunkers for propulsion pending payment. However, part of the bunkers had been consumed by the vessel within the 30 day credit period and all of it within OWBM's 60 day credit period.

The vessel owners commenced arbitration proceedings against OWBM and ING seeking, amongst other things, a declaration that they were not bound to pay either of the respondents. The arbitrators however determined that the effect of the contact, given the retention of title clause and the right to use the bunkers in advance of payment, was not to transfer property in the bunkers and accordingly was not a contract for the sale of goods falling within the Act. As a result, OWBM could not sue for the price of the goods under section 49 of the Act, but could recover the sums dues as a simple debt. The arbitrators decision was on appeal affirmed by Males J in the High Court. He looked behind the language of the contract and affirmed that OWBM had not undertaken to transfer property because both parties had specifically contemplated that some, if not all of it, would be consumed by the vessel before time for payment. After consumption, it would become impossible to transfer property.

The appeal

Counsel for the appellants submitted that the parties intended the contract to be governed by the Act, it was an agreement to sell bunker fuel with the property passing on payment. However, because OWBM had never paid RMUK, it never obtained property in the bunkers and could not therefore transfer it to the vessel owners, and so could not recover the price.

Lord Justice Moore-Bick considered a number of authorities advance by the appellants. While these authorities supported the appellants submission that the courts have consistently regarded a contract for the sale of goods which contains a retention of title clause as a contract falling within the scope of the Act, even where the buyer is given a licence to use them before paying, in none of the authorities did the courts need to consider whether the contract provided for property to pass retrospectively at a time when the goods or part of them had ceased to exist. In considering the arguments Lord Justice Moore-Bick thought it appropriate to ask, "What have the parties undertaken to do?". If transfer of property is not of the essence of the contract, what then was the essential benefit for which the owners agreed to pay? He concluded that the contract was a contract under which goods would be delivered to the owners as bailees with a licence to consume the goods, in return for a money consideration. While that may not satisfy the definition of a contract for sale under section 2(1) of the Act, he considered that there was no reason why the incidents of a contract of sale of goods for which the Act provides should not apply equally to such a contract at common law. The owners had contracted for the delivery of the bunkers which they had an immediate right to use but for which they would not have to pay until the credit period expired. For OWBM, the retention of title clause provided an ever diminishing degree of security for the payment due to them. Once the bunkers were delivered the owners were obligated to pay for same and were not released from that obligation by the fact OWBM were unable to (and did not) transfer title before the bunkers were consumed.

Res Cogitans – "mental substance"

The judgment provides a useful reminder that whatever label parties attach to a contract, the courts will still look at the essential nature of the contract and consider what the parties had undertaken to do. Where supplier's contracts include retention of title clauses, periods of credit and a licence to consume, they will still be entitled to payment against the buyer as a simple contractual debt claim even where title to the goods is never in fact transferred.

A copy of the judgment can be found here.

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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