OW Bunker – Fact and fiction

Publication July 2016


Introduction

The Supreme Court, in London, has recently issued its judgment in the Res Cogitans case which was, in effect, a test case arising from the financial collapse and insolvency of OW Bunker & Trading A/S and its associated companies (OWB). Until their collapse in 2015, OWB had been the largest bunker supplier in the world. OWB supplied bunkers under contracts subject to English law, which allowed buyers credit terms of up to 60 days. Under a retention of title (ROT) clause, title to the bunkers remained with OWB until payment was made but, in the interim, shipowners were permitted to consume the bunkers for the propulsion of the ship. In the vast majority of cases, all or most of the bunkers were consumed before payment was made and legal title to the consumed bunkers never passed to the shipowner (nor, commercially, did such title need to pass).

To finance their operations, OWB had substantial borrowings from a syndicate of banks (the Lenders) and had granted security over the bunker debt receivables in favour of the Lenders. Following the collapse of OWB, the Lenders proceeded against various shipowners in order to recover bunker debts outstanding. The Res Cogitans proceedings were brought by a shipowner in the hope of establishing that, because title in the bunkers had never passed to the buyer, the combined effect of sections 2(1) and 49(1) of the Sale of Goods Act 1979 (SOGA), was that OWB were in breach of contract and neither OWB, nor the Lenders, were entitled to recover the contract price. In summary, the original arbitration tribunal, and the three English courts through which appeals were pursued by the shipowner, all held that SOGA did not apply and that the parties had contracted on a different basis, under which technical points about title to the bunkers were largely irrelevant. Section 55 of SOGA makes it clear that it is open to parties to enter into valid and enforceable contracts relating to goods, such as bunkers, on terms which are not governed by SOGA. As a result, OWB and/or the Lenders were entitled to recover bunker debts from buyers.

Public comment

As soon as OWB collapsed, many of the sub-contractors who had agreed with OWB to effect supplies to ships in ports where OWB did not operate, attempted to persuade or coerce buyers into making payment directly to the sub-contractors. Shipowners realised that, if the sub-contractors did indeed have separate and direct rights of enforcement, many shipowners faced the prospect of being forced to pay twice. A great deal of comment ensued as to the perceived inadequacies of English law and the outcome was said to be uniquely unfair to shipowners and to the physical suppliers.

All insolvencies result in losses for parties such as creditors and shareholders and every insolvency might be regarded as “unfair”, for that reason. The OWB collapse was undoubtedly sudden, unexpected and, in financial terms, large-scale. Much as one sympathises with shipowners who may suffer loss as a result of the OWB insolvency, the question is whether there is anything uniquely unfair or inequitable in the outcome of the Res Cogitans litigation. As a matter of law, it is difficult to see that any different outcome was available.

Shipowners’ position

On behalf of shipowners, a considerable amount of criticism has been directed at the terms of the OWB supply contract (which is largely based on the 2015 standard form produced by the Baltic and International Maritime Council (BIMCO)). It was argued that the supply contract should have been a more straightforward document, to which SOGA applied, and under which title to the bunkers passed to the buyer. Those arguments are somewhat perverse, in commercial terms, because key provisions in the contract exist only because buyers evidently prefer credit terms to cash payment. If the bunker market operated on a “cash on delivery” basis, ROT clauses and licences to consume bunkers belonging to the seller, would all be unnecessary. Likewise, the involvement of the Lenders probably also resulted from these credit arrangements. If OWB sold an average of US$20m of bunkers each day and gave buyers a credit period of up to 60 days, the volume of bunker debt outstanding at any one time could amount to about US$1.2 billion. It is not surprising, therefore, that OWB needed, first, to retain title to unconsumed bunkers and, secondly, to grant security over its receivables as part of the arrangements for financing the credit it extended to buyers.

Shipowners’ case was that OWB were in breach of the supply contracts, because OWB had failed to pass title in the bunkers. As stated above, this argument depended upon the premise that SOGA applied to the supply contracts. However, parties are free to contract upon terms other than these provided for in SOGA. Further, there have presumably been thousands of bunker supply contracts entered into, and performed, on OWB’s terms, or similar terms, within the past 10 or 15 years. It always seemed unlikely that many, or most, of those contracts would be found, belatedly, to have been flawed and that SOGA would often have prevented a supplier from recovering the price from the buyer, even in cases where the buyer had consumed all the bunkers and had no cause for complaint.

The physical suppliers

In many cases, OWB employed sub-contractors to supply bunkers to OWB’s customers, especially if the supply was to take place at a port where OWB were not personally represented. The sub-contractors entered into contracts with OWB, agreeing to stem bunkers to the ship in question at a price which (presumably) was somewhat lower than the price per tonne agreed between OWB and the buyer in the bunker supply contract. These sub-contractors had carried out, or should have carried out, their own credit checks on OWB and were evidently content to rely on the creditworthiness of their counterparty. Once OWB collapsed, however, attempts were understandably made by some sub-contractors to seek other sources of recovery. The first step, was to avoid using the term “sub-contractor” because (although wholly accurate) that term signalled the weakness of the physical suppliers’ legal position. The term “physical supplier” therefore became widely used, as if it referred to some recognised category of bunker supplier. In fact, the term has scarcely any legal significance in most jurisdictions. Secondly, it was argued in some quarters, that the underlying contracts needed to be reassessed and viewed in a new light, in which it would be seen that OWB were essentially a mere “intermediary”, probably representing the buyer, and that the true contractual supplier was the physical supplier. The main problem with this argument, is that it is directly contradicted by the wording of the contracts freely entered into by the buyers, OWB and the sub-contractors, prior to the collapse of OWB. The contracts simply would not support any conclusion other than that OWB had contracted with the buyer as principals and had entered into a sub-contract with the physical supplier. After that, there were two further possibilities:

  • try to construct a parallel or “shadow” contract between the ship and the physical supplier, by reference to the bunker delivery receipt, and/or
  • try to pursue a maritime lien claim in any available jurisdiction.

Shadow contracts

When bunkers are delivered to a ship, it is standard practice for the chief engineer to be required, after the stem has been completed, to acknowledge receipt of the actual tonnage delivered. Some sub-contractors have taken the opportunity to add wording to the delivery receipt which is intended to create a separate and parallel contract between the shipowner and the sub-contractor. Often, the wording purports to create an entirely separate supply contract between the ship and the sub-contractor (although the price is usually not mentioned, because it would differ from the price in the OWB supply contract), and/or the wording may seek to impose separate ROT provisions, which are to take effect if the sub-contractor has not been paid by its principal within a stated period of time. In most jurisdictions, sub-contractors are unlikely to have any success with these shadow contracts, because there are too many problems within them. First, a Chief Engineer (or similar crew member aboard a ship) has no actual or ostensible authority to enter into any such contract. Secondly, the terms of the shadow contract are invariably inconsistent with the other documents, in particular the real supply contract and also the sub-contract between the real supplier and the sub-contractor. No doubt, the sub-contractors are well aware of these difficulties, but take the view that, if the bunker supplier becomes insolvent, the shadow contract might conceivably offer a small degree of assistance.

Physical supply – maritime lien

Another possibility is for the physical supplier to find a jurisdiction in which the act of supplying bunkers (even in the absence of a contract with the shipowner, or charterer) gives rise to a maritime claim, in respect of which an arrest can be threatened and, if necessary, carried out. A problem facing physical suppliers is that, in the vast majority of jurisdictions, the claimant must have effected the supply pursuant to a contract with the shipowner (or, in a few jurisdictions, at least with a charterer of the ship). In two recent decisions, states within the US have declined to allow physical suppliers involved in the OWB collapse to arrest the ship to which the supply was made, apparently because the necessaries lien under US law does require that the claimant (the physical supplier) should be acting upon orders from a party associated with the ship, such as the owner, or a charterer (as distinct from the orders of a principal supplier, such as OWB). As far as we are aware, that leaves only the UAE as a jurisdiction in which, potentially, a physical supplier may be able to obtain an arrest order. We understand that a few ships have been arrested in the UAE and that security has been provided, but that none of these cases has yet been pursued to final judgment.

Immediately after the collapse of OWB, many shipowners must have been genuinely concerned that they might be forced to pay twice. In the light of subsequent developments, however, it is questionable whether the risk of double payment applies to anything more than a small proportion of OWB’s customers.


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