The OW Bunker struggle – round three

(1) PST Energy 7 Shipping LLC and (2) Product Shipping & Trading S.A. .v. (1) O.W. Bunker Malta Ltd. and (2) ING Bank N.V. [2015] EWCA Civ 1058

Publication November 2015

The credit squeeze

Many readers will be aware of the continuing legal fall-out from the financial collapse of the OW Bunker group (OWB) in November 2014. In short, OWB was the world’s largest contractual supplier of bunkers to ships. The supplies were invariably made on credit terms of up to 60 days. Mostly, OWB used sub-contractors (the physical suppliers) to deliver the bunkers to customers’ ships. OWB’s standard terms of sale therefore included a retention of title (ROT) clause, clearly providing that the bunkers remained the property of OWB until payment in full was received, but authorising the buyer, as bailee of the product, to use the bunkers for the propulsion of the ship. Typically, all or most of the bunkers would have been consumed by the time payment was received by OWB. With a bunker supply often costing between US$0.5m and US$1.0m, and with buyers having the benefit of a 60-day credit period, OWB required a substantial financing line – in this case, from ING Bank. As security, ING took a charge over the English-law receivables of OWB (the debts due from OWB’s customers).

Reactions to the collapse

Until OWB collapsed, the physical suppliers had been content to rely on their evaluation of OWB’s creditworthiness. Some physical suppliers had also tried to elevate their delivery receipts (usually signed by the Chief Engineer of the receiving ship) into parallel supply contracts, by adding contractual wording. These attempts were not persuasive as a matter of English law, partly because Chief Engineers lack actual or ostensible authority to enter into bunker supply contracts, and partly because the purported parallel contracts could not be reconciled with the two pre-existing contracts (the OWB supply contract, and the sub-contract between OWB and the physical supplier). The physical suppliers have therefore resorted to claiming, in a very small number of suitable jurisdictions (such as Dubai), that the fact of supply created a maritime lien over the ship. Some shipowners, fearing that they might be forced to pay twice, have responded by denying liability to OWB. One such case (involving the ship Res Cogitans) has been the subject of an arbitration, followed by successive appeals to the High Court and the Court of Appeal in London. All three tribunals have held that the OWB supply contract is valid and enforceable.

The Court of Appeal

Owners argued that the supply contract must entail a sale of goods within the meaning of the sale of Goods Act 1979 (SOGA). SOGA requires that the seller must have the right to sell the goods. If the seller is unable to pass title, a total failure of consideration pursuant to section 49(1) will usually arise, relieving the buyer of its obligation to pay. Owners contended that the sale price never became due, because OWB was unable to transfer property in the bunkers to the owners, having never paid its supplier and, therefore, did not have good title to transfer.

Although the supply contract described itself as a sale agreement, the Court refused to accept that the contract should necessarily be construed as a contract to which SOGA applied. The starting point must be an objective analysis of what the parties had actually agreed. On that basis, the Appeal Court agreed with the two previous tribunals, both of which held that title was largely irrelevant. Bunkers were supplied and the buyers, as bailees, were licensed to use them to propel the ship. That arrangement fulfilled the commercial needs of the parties. SOGA did not apply.

Reactions to the decision

The Appeal Court decision has attracted criticisms from some shipowners and their insurers, some of which we paraphrase, as follows:

  • The judgment is uncommercial and buyers regard it as paramount to obtain title to the bunkers. The OWB standard terms of sale expressly provided that, until OWB was paid in full, the buyer did not obtain title and was merely a bailee of the product. It is not surprising that the court gave effect to the plain wording of the supply contract in relation to title. Shipowners’ arguments, if accepted, would have resulted in hundreds of supply contracts, in fairly standard industry terms and in use for many years, being held to be unenforceable by the supplier.

  • Uncertainty is created because initially SOGA does not apply but, when and if title passes to the buyer, SOGA will apply. The legal position identified by the Court has existed for many years, but has not previously been regarded as giving rise to uncertainty. Bunker supply contracts invariably contain detailed provisions dealing (for example) with the quality of the product. Any problems which arise from the Court’s findings are ultimately attributable to the desire, on the part of buyers, for credit terms. Because buyers had the benefit of up to 60 days’ credit, the OWB terms needed to include the ROT clause and OWB required bank financing which, in turn, gave rise to the charge over receivables in favour of the bank. It remains open to the buyers of bunkers to pay upon delivery and to obtain title in the bunkers from the outset.

  • Buyers may be forced to pay twice. In most jurisdictions, the physical suppliers have no entitlement to obtain arrest orders in respect of ships to which supplies were made. Some physical suppliers have reportedly succeeded in forcing shipowners to put up security, by arresting ships in Dubai, but it seems that none of these cases has so far been pursued to a successful conclusion by a physical supplier. It remains possible that some shipowners may be forced to pay twice, on the basis that a physical supplier will be held to have the benefit of a maritime lien. Presumably, the proportion of ships at risk will be small, because, in many cases, the physical suppliers will be unable to arrest the relevant ship in one of the few jurisdictions willing to entertain such an application, within the required period of time. But, if the Court had held that the OWB supply contracts were unenforceable, what would the consequence have been for the many shipowners whose ships will never be arrested by a physical supplier? Those shipowners would have no contractual obligation to pay the physical supplier. And what would the consequence have been for suppliers (such as existing bunker suppliers) who need substantial bank finance in order to give credit terms to buyers of bunkers? If the OWB contracts were held to be unenforceable, banks, in general, would be unlikely to continue financing the sale of bunkers on credit terms.

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