When is a sale contract not a sale contract?

Most people reading this article would probably say that, even if they could not define a sale contract, they would know one when they saw it.

In short, the Court decided that a contract for the supply of bunkers to a vessel made on the OW Bunker Group 2013 Terms and Conditions of Sale for Marine Bunkers (the "OWB terms") was not a "contract of sale of goods" falling within the definition contained in the Sale of Goods Act 1979. 

The effect of this conclusion is that ING Bank (as assignee of the claim) is entitled to payment for the bunkers despite the fact that OW Bunker did not pay their own supplier and there is a risk that the shipowner may have to pay twice.  This seems at first a surprising result but, on analysis, is the (presumably unintended) consequence of the particular terms which the parties added to a "standard" contract of sale. 

The facts

As is often the case, the supply of bunkers to the vessel was subject to a string of contracts.

• The shipowners ("Owners") contracted with OW Bunker Malta Ltd ("OWBM")
• OWBM contracted with its Danish parent company, OW Bunker & Trading AS ("OWBAS")
• OWBAS in turn contracted with Rosneft Marine (UK) Ltd ("Rosneft"), and
• Rosneft placed an order with its Russian subsidiary, RN-Bunker Ltd, which was the physical supplier of the bunkers 

The contract between OWBM and the Owners was subject to the OWB terms and provided for payment within 60 days of delivery.  The contract between OWBAS and Rosneft was subject to Rosneft's 2012 Marine Fuel Sales General Terms and Conditions (the "Rosneft terms") and required payment within 30 days of delivery.  The contract between Rosneft and RN-Bunker was also on the Rosneft terms. 

The bunkers were delivered to the vessel on 4 November 2014.  Rosneft paid RN-Bunker on 18 November 2014, but neither OWBAS nor the Owners paid their counterparts. 

Since OWBAS are now under Court protection in Denmark, the prospects of them ever paying Rosneft are not good.  As in many other cases, Rosneft have demanded payment from the Owners, who do not deny that they must pay for the bunkers but equally do not want to risk paying twice. 

The contract terms

The key features of the OWB terms on which the case was decided are as follows:

• "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" (Article H.1)
• "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…."  (Article H.2)
• The effect of Article H.2 in the context of the agreed 60-day credit terms was that some or all of the bunkers would be likely to be consumed before the expiry of the credit period 

The Rosneft terms contained a similar retention of title clause but not the express permission for the bunkers to be consumed in the propulsion of the vessel.  

The dispute

ING Bank (as assignee of OWBM) brought a claim against the Owners in London arbitration for the price of the bunkers supplied. 

Owners' main defence was that the contract with OWBM was governed by the Sale of Goods Act 1979 (the "Act") and that ING's claim for the price of the bunkers did not satisfy the conditions in Section 49 of the Act[2].  Owners also argued that the failure of OWBAS to pay Rosneft meant that OWBM were in breach of the term implied by Section 12 of the Act[3]. 

ING's primary case was that the contract between the Owners and OWBM was not a contract to which the Act applied.  

The decision

The arbitration tribunal found in favour of ING that the Sale of Goods Act did not apply.  Hence, ING had a straightforward claim in debt.  The tribunal also held that, if the Act applied, ING's claim would fail. 

The Owners obtained permission to appeal against the arbitrators' award and strongly criticised it as "bizarre", "perverse" and "unworkable".  However, the appeal failed and the award was upheld in glowing terms by the Commercial Court. 

The Owners' main argument on the appeal was that their contract with OWBM was clearly a contract of sale:

• It was described as such
• It identified the parties as buyer and seller
• It used the language of a sale contract, and
• It contained the sort of terms which would be expected in such a contract 

The Judge accepted that was how the contract had been drafted.  However, that was only a starting-point and the question ultimately turned on an analysis of the obligations which the parties undertook.  

In that regard, it was important to keep in mind that consumption of the bunkers before payment would extinguish any property or title in them.  As a matter of law, you cannot own something that does not exist. 

This is of crucial importance to understanding the decision because the passing of property is key to the application of the Sale of Goods Act.  Section 2 of the Act defines a contract of sale of goods as "a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price".  

The question was therefore whether the contract between the Owners and OWBM was one by which OWBM transferred or agreed to transfer the property in the bunkers to the Owners.  The answer given by the arbitrators and the Judge was "no". 

The Judge relied on four factors:

• The retention of title until payment was made
• The period of credit before payment fell due
• The permission given to the Owners to consume the bunkers, and
• The fact that some or all of the bunkers were likely to be consumed before expiry of the credit period 

In those circumstances, the Judge held (at paragraph 42) that "the parties must be taken to have understood that it was likely that title would never be transferred to the Owners.  It was possible that it would be, but not likely.  It was certainly not an essential part of the transaction that it should be." 

Both parties knew that it was unlikely that property would ever be transferred because the bunkers would be consumed (and property in them extinguished) before payment was made.  The Judge therefore found it difficult to conclude that OWBM undertook any obligation to transfer property in the bunkers to the Owners. 

Accordingly, "what the Owners were paying for was not a title which they were not going to get but something else".  

So what exactly were Owners were paying for?  In the Judge's view (at paragraph 46):

• "… the true nature of the parties' bargain was that OWBM would deliver or arrange for delivery of the bunkers, which the Owners would be immediately entitled to use for the propulsion of the vessel"
• "… what the Owners were paying for was the right to consume the bunkers and not an unlawful possession which exposed them to the risk of an action at the suit of the true owner" 

The primary obligation on OWBM was therefore to obtain permission from the true owners of the bunkers for their consumption by the vessel.  The question arose whether OWBM had done so in this case.  That was not a question answered by the arbitrators.  However, the Judge considered that he needed to do so. 

The Judge also answered that question in ING's favour.  As a matter of English law, the Judge held that Rosneft gave permission for Owners to consume the bunkers before title passed because Rosneft knew and accepted that:

• OWBAS was not an end-user but a trader
• OWBAS would contract either directly or indirectly with Owners, and
• That contract would authorise Owners to consume the bunkers immediately 

Comment

The consequences of this decision for shipowners and charterers who contracted with OW Bunker are potentially far-reaching.  The Commercial Court declared in the clearest terms that OW Bunker (or ING Bank claiming as assignee) are entitled to be paid for bunkers supplied, irrespective of whether OW Bunker themselves have paid for them.  

The one caveat to this is the need in each case to show that OW Bunker did in fact obtain permission from the true owner of the bunkers for their consumption by the vessel.  Where OW Bunker contracted with the physical supplier on terms similar to the Rosneft terms and subject to English law, it is likely to be held that the physical supplier did give such permission.  However, where the physical supplier's terms are materially different and/or are subject to a different governing law the issue remains open. 

The Judge recognised that Rosneft might have a claim against the Owners in some other jurisdiction, with the potential that Owners might have to pay twice for the bunkers.  However, in a comment that will bring little comfort to shipowners, the Judge stated that "exposure to claims with the possibility of arrests is one of the risks which shipowners run". 

It is likely that the Owners will seek to appeal this decision so a final resolution of the issue may still be some time off.

[1] PST Energy 7 Shipping LLC v. O.W. Bunker Malta Ltd (The "RES COGITANS") [2015] EWHC 2022 (Comm) 

[2] S.49 provides "(1) Where, under a contract of sale, the property in the goods has passed to the buyer and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may maintain an action against him for the price of the goods.  (2) Where, under a contract of sale, the price is payable on a day certain irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may maintain an action for the price, although the property in the goods has not passed and the goods have not been appropriated to the contract." 

[3] S.12(1) provides "… there is an implied term on the part of the seller that in the case of a sale he has a right to sell the goods, and in the case of an agreement to sell he will have such a right at the time when the property is to pass."