Court of Appeal: shipping fuel supply agreement was not 'sale of goods'

Out-Law News | 26 Oct 2015 | 12:01 pm | 4 min. read

A contract for the supply of marine fuel on credit was not governed by the 1979 Sale of Goods Act (SOGA), because full legal ownership of the fuel did not pass to the owners of the vessel before it was consumed, the Court of Appeal has ruled.

The decision confirms that of an arbitrator and a High Court judge in favour of Dutch bank ING, acting as assignee of the insolvent OW Bunker Group companies, which supplied 'bunkers' of fuel to various shipping companies. Richard Dickman, an expert in complex commercial disputes at Pinsent Masons, the law firm behind Out-Law.com, said that the decision had significant implications in a wide variety of commercial contexts involving the supply of consumables on credit and the use of retention of title (RoT) clauses.

"RoT clauses are widely used to ensure that a seller of goods retains ownership of the goods, typically until it has been paid; so that if the buyer fails to pay for the goods due to insolvency or some other reason the supplier can recover them," he said. "However, difficulties can arise where the goods are incorporated into other products or pass into the hands of third parties before payment is due."

"In this case, the difficulty arose because the goods ceased to exist before the date of payment arose, and because the seller had sub-contracted the supply down a chain of contracts. The sale and the sub-sales were all on deferred payment terms and incorporated RoT clauses. As it turned out, only the ultimate supplier had been paid by its parent company - so when the seller's parent company, from which the seller had agreed to buy the fuel and which, in turn, had bought the fuel from the supplier's parent, went bust, the supplier's parent demanded payment from the ship owner, relying on the RoT clause. The seller had, in turn, assigned its right to payment to its bank, ING," he said.

SOGA only applies to contracts for the "sale of goods", under which a seller transfers or agrees to transfer title to goods to the buyer for a money consideration. The three courts and tribunals in this case all found that the combination of an RoT clause and a clause giving the purchaser the right to use the fuel in advance of payment meant that the seller "did not undertake to transfer property" in the fuel to the purchaser. This was regardless of the fact that the contract was "couched in language redolent of a contract for the sale of goods", including descriptions of the parties as "seller" and "buyer", Lord Justice Moore-Bick said in the Court of Appeal.

Product Shipping and Trade (PST), a Greek shipping company, had contracted with OW Bunker Malta (OWBM) for fuel for its ship Res Cogitans shortly before the latter's parent company OW Bunker & Trading AS applied to a Danish court for restructuring. The supply was based on a contract incorporating OWBM's standard terms of business, which provided for payment 60 days after delivery and included a RoT clause. The contract also expressly provided that the ship could use the fuel for the purposes of propulsion "from the moment of delivery", which also involved a third party supplier.

In his judgment, Lord Justice Moore-Bick said that while the "language" of OWBM's standard terms "suggests that the parties were thinking in terms of a sale and purchase of the bunkers", this was not in fact what the parties had undertaken to do.

"Just as it is no part of the court's function to remake the parties' contract in the guise of interpretation, so it is no part of the court's function to shoehorn their contract into a category to which it does not properly belong in order to impose on them consequences which they did not intend," he said. "I agree with the judge, therefore, that, however the parties have described the transaction, it is necessary to ascertain what each of them has actually undertaken to do."

"Whatever label one attaches to the contract (and I see nothing incongruous in describing it in commercial terms as a contract for the sale of goods), its essential nature is in my view reasonably clear. It is a contract under which goods are to be delivered to the owners as bailees with a licence to consume them for the propulsion of the vessel, coupled with an agreement to sell any quantity remaining at the date of payment, in return for a money consideration which in commercial terms can properly be described as the price," he said.

Complex commercial disputes expert Richard Dickman said that the supplier in this case had "no contractual relationship" with the ship owner, and therefore could not expect to be paid by it.

"The ship owner and seller had entered into a contract to supply the fuel," he said. "The fuel had been supplied (and consumed). Why should the seller not be paid when the time came for payment - the bank simply standing in the shoes of the seller because of the assignment?"

"The supplier's parent was relying on the RoT to argue that the ship owner should pay the supplier's parent or the supplier's parent would claim damages for conversion - ie unlawful taking - of the fuel. The difficulty for the supplier's parent was that it was clear from the contractual arrangements and well understood that the ship owner's whole purpose in obtaining the fuel was to use it to propel the vessel, and this was clear from the contractual arrangements up and down the chain. As the arbitrators and court held, the contract between the ship owner and the "seller" did not involve the passing of ownership in the fuel.  It was therefore not open to the supplier to use the RoT clause to obtain payment from a third party where its own buyer was unable to pay," he said.

The effect of the judgment was that PST was liable to the bank, while the supplier's parent had to pursue a claim against OWBM's insolvent parent company, he said.