OW Bunkers: Sale of Goods Act can’t apply to bunkers consumed at time when payment arises

The Court of Appeal has now given its verdict on the issues referred to it in the “Res Cogitans” matter. The full citation is PST Energy 7 Shipping LLC and others vs O.W. Bunker Malta Ltd and others [2015] EWCA Civ 1058.

In a matter of considerable importance to ship owners, operators and charterers, the Court of Appeal has largely upheld the decision of Males J in the High Court. Males J of course upheld the decision in the earlier arbitration between the owners of the “Res Cogitans” and OW Bunker Malta Ltd.

For those interested in the background, please scroll down to see our earlier report on the High Court decision and the latest situation generally in the OW Bunkers saga. The interesting point raised in the Court of Appeal (which may yet find its way to the Supreme Court) was Lord Justice Moore-Bick’s finding that a bunker supply contract which contains (as they usually do) a credit period, a retention of title clause and a license enabling the party supplied to consume the bunkers for propulsion pending payment is not, in all circumstances, a contract of sale governed by the Sale of Goods Act. Instead it would appear that such contracts are hybrid in nature with the Sale of Goods Act applying only to the proportion of the bunkers unconsumed at the end of the credit period, if any. However, Lord Justice Moore-Bick went on to say that a failure to be able to pass title to the residue remaining on board at the time that payment became due, although a breach of contract, is not a breach that entitles the owners to treat the contract as a whole as discharged, unless the unconsumed portion of the bunkers represents such a large proportion of the quantity originally deliv-ered that there could be said to have been a total failure of consideration.

This decision leaves ship owners, operators and charterers in a difficult situation. There is now uncertainty as to whether a ship owner, operator or charterer may or may not have to pay a bankrupt bunker supplier who themselves may not have paid others down the line and who may not be in a position to pass title to the bunkers. At the same time, ship owners will find themselves facing direct claims from the physical suppliers in many jurisdictions under foreign laws which they invariably are forced to settle or secure in order to prevent the arrest and detention of their vessels.

It seems that the position now is that the ship owner, operator or charterer needs to examine all the circumstances and issues such as the length of the credit period and the quantity of bunkers con-sumed versus unconsumed at the expiry of the credit period in order to make a decision as to whether they can treat the bunker supply contract as discharged for a total failure of consideration.

Whether the matter will end up before the Supreme Court is presently unclear. If the matter does not find its way to the Supreme Court and the Court of Appeal decision stands, then it seems that we could see a number of changes to bunker supply contracts in the future to try to find a way around the current problem.

Interestingly, Lord Justice Moore-Bick appeared to identify an alternative argument that he says might have been raised by the owners but which was in fact never pleaded in the underlying arbitration. That argument was that owners were not liable to pay OW Bunkers Malta because the owners had not been “effectively authorised” to consume the bunkers under the license in a manner which bound the physical suppliers and others in the chain. In the event, Males J held in the earlier High Court decision that the physical suppliers were bound by the license to use the bunkers for the propulsion of the vessel given to the owners by OW Bunkers Malta in their standard terms. However, that aspect of Males J’s decision was not challenged in the Court of Appeal and it would seem that Lord Justice Moore-Bick felt it was wrong for Males J to decide that point, presumably because he felt it should have been raised and decided in the earlier arbitration. Whether it is possible for the owners to go back to the arbitrators on this point now seems unclear.

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