Sale of goods and retention of title: PST Energy 7 Shipping LLC v O W Bunker Malta Limited

Following the Supreme Court’s decision in OW Bunkers in May this year, industry standard terms in bunker supply contracts may well need to be re-visited to consider whether the Sale of Goods Act 1979 (SOGA) will apply to them. However, the decision could also have wider implications for retention of title clauses generally.

In October 2014, PST Energy 7 Shipping LLC and Product Shipping and Trading S.A. (together, the Owners) entered into a contract to purchase marine fuel (or ‘bunkers’) from OW Bunker Malta Ltd (OWB).

OWB’s standard contract terms included a credit period requiring the Owners to make payment within 60 days. The terms also included a retention of title clause, which provided that title would not pass until payment and also that the Owners were permitted to use the bunkers for the propulsion of their vessel during the 60 day credit period. The contract was the first in a chain of supply contracts, each of which contained various credit periods and retention of title clauses.

The Owners received and consumed the bunkers, but did not make payment. In turn, OWB did not make payment to its parent from which it had purchased the bunkers. In November 2014, OWB’s parent encountered financial difficulties. Concerned that they would be liable to both OWB and OWB’s parent under the retention of title provisions, the Owners commenced arbitration proceedings seeking a declaration that they were not bound to pay OWB for the bunkers or damages for breach of contract. They claimed that the contract was a contract of sale within the definition of section 2(1) of SOGA which, they argued, meant that one of the circumstances set out in section 49 of SOGA would need to apply in order for OWB to recover the price of the bunkers.

The arbitral tribunal rejected the Owners’ arguments and held that OWB would be entitled to payment, a decision with which the High Court and the Court of Appeal subsequently agreed. In May, Lord Mance handed down the Supreme Court’s unanimous judgment, rejecting the Owners’ appeal and upholding the previous decisions in favour of OWB – the result being that the price under the contract could be recovered as a simple debt at common law.

The Supreme Court addressed three central questions.

Was the contract a contract of sale of goods within the meaning of section 2(1) SOGA?

Section 2(1) 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 Supreme Court held that although the basic form of contract was one of sale (i.e. it was a straightforward agreement to transfer the property in the bunkers to the Owners for the price), it was not a contract of sale within the definition of section 2(1) and so the SOGA did not apply.

Instead, the contract was a unique agreement with two key features:
(i) it permitted consumption prior to payment, without title ever passing in the bunkers consumed; and (ii) only
if and so far as the bunkers remained unconsumed, it transferred the property in the remaining fuel. Consequently, the price was not the price of the bunkers in respect of which property was passing; it was the price payable for all of the bunkers, whether or not consumed at the time of payment.

As the contract was not one of sale, the Owners could not seek to rely on section 49 of SOGA as a defence to a claim for the price.

If the contract was not one of sale, was there an implied term that OWB would perform its obligations to its parent, in particular by making payment in good time?

The Supreme Court held that OWB’s only implied undertaking in respect of the bunkers was that it was entitled to give the Owners permission to consume the bunkers before payment was made. OWB did not need to acquire title to the bunkers; it only needed to have acquired the right to authorise the use under the contractual supply chain which, the Supreme Court held, it had.

Should the Supreme Court overrule the Court of Appeal decision in FG Wilson (Engineering) Ltd v John Hold & Co (Ltd) [2014] 1 WLR 2365 (Caterpillar)?

Although the contract was not one of sale, because the case had been fully argued and has general significance, Lord Mance considered in his judgment whether he agreed with the Court of Appeal’s decision in Caterpillar.

In Caterpillar, it was held that section 49 of SOGA constituted a code which precluded an action for the price outside the section’s terms. Section 49(1) provides that where, under a contract of sale, the property in the goods has passed to the buyer but payment has not yet been made, the seller may bring a claim against the buyer for the price. Consistent with its general findings, the Court of Appeal found that the seller could not enforce payment of the price against the buyer because title to the goods had been reserved pending payment.

Lord Mance, however, disagreed. He considered a number of early authorities in support of his view that section 49 does not provide a complete code of circumstances where the price may be recoverable under a contract of sale. He also noted that in OWB’s case, the price would have been recoverable in any event due to the supply contract’s express terms, namely the complete consumption of the bunkers supplied.

While Lord Mance counselled that courts should be cautious about recognising claims to the price of goods in cases not falling within section 49 of SOGA, he said there was at least some room for claims for the price in circumstances other than those covered by the section. In respect of the scope for such claims though, in particular where a retention of title clause is combined both with physical delivery of the goods and the transfer of risk, he said the limits were to be left for “determination on some future occasion.”

At the beginning of his judgment, Lord Mance acknowledged that “many similar cases worldwide await our decision with interest”. Though no doubt his comment was a reference to the many other owners and charterers also facing claims from the OWB Group on the same terms, the case will also have implications for owners and charterers more generally. Many parties had been operating on the (now mistaken) understanding that SOGA applied to supply contracts with similar terms to those in OW Bunkers.

While the decision that SOGA did not apply assisted OWB to recover the purchase price, parties may nevertheless prefer the relative certainty afforded by the application of SOGA. Whether they seek to achieve this by including terms in their contracts to state expressly that SOGA applies, by re-visiting the relative merits and de-merits of retention of title clauses or by some other means, remains to be seen.

More broadly still, the decision is potentially significant in the context of many other SOGA claims. Standard industry terms and conditions – not just those relating to bunker supply contracts – may need to be re-considered in order to manage risk in commodity transactions and to protect the position of buyers.

Finally, although the Supreme Court has not overruled the Caterpillar decision, the next court to consider these issues will want to take into account the detailed and considered comments made by Lord Mance. Until that time, the uncertainty as to the application of section 49 of SOGA and the possibility of any claims outside of its scope will remain.