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Shipping fuel supply agreement was at no time 'sale of goods', Supreme Court confirms

Out-Law News | 12 May 2016 | 9:50 am | 3 min. read

The supply of 'bunkers' of marine fuel on credit for immediate use was not governed by the 1979 Sale of Goods Act, leaving the shipping company in debt to the bank which has taken over the liabilities of the insolvent bunker supplier, the UK's highest court has confirmed.

The decision potentially leaves PST Energy Shipping, the owners of the vessel, and other shipping companies in similar positions at risk of double claims: both from ING Bank, the assignee of OW Bunker's rights under the contract; and from the oil company that physically supplied the fuel on OW Bunker's behalf, according to complex commercial disputes expert Richard Dickman of Pinsent Masons, the law firm behind Out-Law.com.

Dickman said that the 2014 collapse of the OW Bunker group of companies, which were at the time the world's largest suppliers of marine fuel, had "convulsed the shipping industry and spawned a raft of arbitration disputes in London, as well as claims in numerous other jurisdictions".

"Courts in some other jurisdictions have held that payment to the physical supplier discharges the shipowner's liability to OW, but some of these decisions remain subject to appeal," Dickman said.

"The Supreme Court's decision essentially re-affirms the novel analysis of the arbitrators, the judge at first instance and the Court of Appeal: that a transaction which looks in all respects like a sale of goods is in fact something entirely different, an agreement to supply with a licence to use. The result will delight ING Bank but leaves the shipowners in this case and many others in a similar position at risk of potential claims by physical suppliers and arrest of their vessels in other jurisdictions," he said.

The issues in this case arose because, under OW Bunkers' standard terms of contract, ownership of the fuel did not transfer to PST until payment was made, 60 days after delivery. However, the contract permitted PST to use the fuel "from the moment of delivery". OW began the restructuring process two days after supplying the fuel to PST. Legal ownership of the fuel, which the court assumed for the purposes of this case had now been fully consumed, cannot now pass to PST.

PST had sought a declaration that it was not now bound to pay for the bunkers on the grounds that it had no title in the fuel, in breach of the 1979 Sale of Goods Act (SOGA). However, SOGA only applies to contracts for the 'sale of goods', under which a seller transfers or agrees to transfer title to goods to a buyer for money consideration. The Supreme Court has now confirmed that this was not the case here.

Giving the unanimous judgment of the court, Lord Mance said that although the "basic form and language of the contract is that of sale", the contract itself allowed for the use of the term "in an expanded sense", and contained "special features" setting it apart from the typical contract of sale.

"In these circumstances, [OW's] contract with the owners cannot be regarded as a straightforward agreement to transfer the property in the bunkers to the owners for a price," he said. "It was in substance an agreement with two aspects: first, to permit consumption prior to any payment and ... without any property ever passing in the bunkers consumed; and, second, but only if and so far as bunkers remain unconsumed, to transfer the property in the bunkers so remaining to the owners in return for the owners paying the price."

The judge dismissed as "metaphysical" a suggestion by PST's lawyers, expanded on in the Court of Appeal, that the contract could be analysed as one for sale of goods "to the extent that it provided for the transfer of property in any part of the bunkers remaining at the time of payment". He also rejected an attempt by PST to argue that the contract contained an implied term requiring OW to have paid its own suppliers.

"The Court of Appeal's 'hybrid' analysis, under which the contract was construed as a sale of goods to the extent that it provided for the transfer of property in any fuel remaining at the time of payment, meant that the nature of the contract was constantly changing," said complex commercial disputes expert Richard Dickman. "However, the Supreme Court removed any uncertainty by holding that the agreement was indivisible, and at no time a contract of sale."

"The physical suppliers who cannot recover as a result of this decision will be left to seek to prove as unsecured creditors in the liquidation of the OW Bunker group," he said.