OW decisions create uncertainty
It is now just over one year since the dramatic collapse of OW Bunker, which has led to considerable hardship for creditor companies and wide-scale legal action. There has been criticism not only of legal judgments handed down in cases arising from the collapse of the company in 2014 and also comparisons between different jurisdictions as to how they handle proceedings.
One of the recent cases to reach the English Court of Appeal was the dispute between the owners of the Res Cogitans and OW Bunker and ING.
The reaction to the outcome of the latest judgment in the case has in some respects been critical. The UK Defence Club, for example found that the ruling raised “more questions than answers”.
At issue was the question of whether the Sale of Goods Act (“SOGA”) applied to the contract between the owners of the ship, and OW Bunker. Although the court acknowledged that there were many references to sale in the contract, it ruled the Sale of Goods Act did not apply.
The Appeal Court found that:
“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.”
According to Kieron Moore, Senior Director of Claims for the UK Defence Club:
“Under this reasoning, as the bunkers had been consumed, the member was obliged to pay for the bunkers as licensee, notwithstanding a retention of title clause in the underlying contract.
As a consequence, an owner may be obliged to pay twice for the same bunkers. What the judgment fails to positively address is what occurs if some of the bunkers remain unconsumed: does the Sale of Goods Act apply in those circumstances?
The Court of Appeal judgment seems to suggest that it would in certain circumstances. What if the bunkers are found to be defective after some have been consumed?
What we have here is a decision which, far from providing clarity, raises more questions than answers and we believe the industry deserves better.”
As P & I Club Gard pointed out following the judgment:
“The key concern of owners remains the uncertainty that bunkers consumed are not clearly free from third party proprietary or lien rights.
“It is important to underline the case only deals with the English law position on whether the bunker contract was intended to transfer property and title in bunkers. The appeal court decided it was not – it was a supply agreement, granting owners the licence to consume the bunkers supplied. The court was unwilling to state whether such a licence automatically prevents third party claims, but doubted whether such term operates by implication.”
The owners had gone to arbitration in this particular case arguing that they were not liable to make payment to OW Bunker Malta’s security assignee ING because OW was unable to transfer the bunkers’ ownership as the supply of bunkers had been sub-contracted a number of times and not all the sub-contractors in the chain had been paid.
The successful arbitration hearing for OW and ING was followed by a High Court ruling in their favour as well as the most recent Court of Appeal judgment.
The arbitration tribunal agreed with the argument by ING that the bunkers had been supplied on credit and all members of the trading chain knew this would be the case, and the owners were obliged to pay OW Malta at the end of the 60 day credit period. As Gard explained, the High Court argued that a bunker supply contract which included a retention of title clause coupled with a permit to consume the bunkers supplied was not a sale of goods.
The matter has been appealed to the Supreme Court and will be heard sometime early in 2016. In the interim owners and charterers who contracted directly with the OW group will have to decide whether to pay ING or fight on.
Further, the judgment fails to answer questions whether vessels may yet be arrested by physical suppliers who, whilst they may lodge claims in the OW Bunker insolvency, have no realistic prospect of receiving any dividend payment out.
Lawyers who acted for the owners meanwhile commented that the decision was a very disappointing one for the maritime industry:
“If the essential nature of the contract was that the buyer would acquire only a licence/permission to use the bunkers, it is surprising that this is not expressed in much clearer terms in the bunker supply contract. The judgment does not address why the parties are presumed to have intended that the permitted consumption would turn what on its face appears to be a contract of sale into a radically different arrangement. Commercially, it is doubtful that shipowners and charterers would knowingly agree to pay the amounts involved in bunker purchases for a mere licence to use the bunkers.
This decision is not peculiar to the OW Terms & Conditions since they are based on the BIMCO standard terms used throughout the bunker industry. If the decision is not reversed, it seems likely that the standard industry forms will have to be amended to make it clear that the permitted consumption of bunkers during the credit period is not intended to take the transaction outside the scope of SOGA.”
The implied term found by the Court of Appeal also creates scope for considerable uncertainty where the physical suppliers contract is likely to be governed by the law where the bunkers were supplied. The buyer may find himself exposed to a liability that he wasn’t expecting and has no contractual control over.
Many commentators argue as to whether the approach adopted by the English courts is the most commercial approach to the issue. Rather than upholding OW’s entitlement to claim the full invoice amount for the bunkers, they argue that other jurisdictions have adopted a more commercial approach.
For example, in Canada charterers who had ordered bunkers from OW were not obliged to pay the company directly, but paid the physical suppliers of the bunkers. Judgment in the Federal Court was made on behalf of a Canadian bunker supplier in Canpotex Shipping Services Limited v. Marine Petrobulk Ltd., 2015 FC 1108.
Mr Justice Russell rejected arguments that OW Bunker was entitled to funds previously paid into court. Instead he concluded that the local bunker supplier was entitled to full payment directly from the charterer. This is the first case where a Canadian necessary supplier has obtained judgment based, in part, on a maritime lien established under s. 139 of the Marine Liability Act according to barristers Bernard LLP which acted for the bunker suppliers.
In delivering his judgment Mr Justice Russell said “There is no residual contractual obligation that requires Canpotex to also pay the purchase price to OW UK after it has paid MP, and it would be bizarre and unconscionable if there were. In my view, MP’s Standard Terms and Conditions clearly contemplate a situation such as the present where, if OW UK goes bankrupt and cannot pay the full purchase price for the bunkers, then MP can look to Canpotex for payment on the basis of joint and several liability.”
“ My conclusion is that Canpotex is directly liable to MP for the full purchase price of the marine bunkers delivered to the vessels by MP and that, upon payment of that purchase price to MP, Canpotex is not obliged, contractually or otherwise, to pay any amount representing the purchase price for the marine bunkers to OW UK or the receivers.”
Similar approaches involving payments to physical suppliers have been adopted in courts in Antwerp and Israel, although Singapore’s approach has been closer to the English view of the issues involved.
In the US it is reported that US lawyers have obtained interpleader relief for an owner where there was no US involvement save that the underlying physical supplier contracts provided for US jurisdiction for maritime liens. That may pave the way for similar relief backed up by restraining orders preventing arrest elsewhere in the world.
Meanwhile in a decision delivered on 11 September 2015, the Federal Court of Australia upheld the arrest of the Sam Hawk in respect of a claim for a foreign maritime lien arising from the supply of bunkers to the vessel.
According to Australian law firm Holding Redlich:
“This decision is significant because it reverses the prior law in Australia and paves the way for the recognition and enforcement in Australia of foreign maritime liens, even where such liens do not exist independently under Australian law.
The practical effect of this decision is that the claims in respect of which vessels can be arrested in Australia has now expanded significantly, meaning that Australia is an even more arrest and enforcement-friendly jurisdiction.”
As cases involving OW Bunker and its suppliers continue to reach the courts, more diverse legal judgments are to be expected although they will be determined on their facts which may distinguish them from the Res Cogitans case in London.