Vol 13 (2016) - Issue 3

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Sale or No Sale? An Update on O.W. Bunkers

Introduction and summary
It is often the case that contracts for the sale of goods provide for credit to be extended to the buyer, but with the seller retaining title until payment. As a result of the decision of the Court of Appeal in PST Energy 7 Shipping LLC & Product Shipping and Trading S.A. v OW Bunker Malta Ltd & ING Bank N.V. [2015] EWCA Civ 1058 (the 'Res Cogitans'), which was handed down on 22 October 2015, if the goods forming the subject matter of such a contract are consensually consumed during the credit period, then the contract will not be classified as one of sale.
The appeal was heard on an urgent basis, reflecting the fact that its implications, already far-reaching in the shipping industry, extended far beyond. In essence, the Court of Appeal upheld the conclusion of the Judge below in the Commercial Court (Males J.), who had in turn upheld some of the conclusions of the arbitrators who first heard the matter. Each concluded that a written contract, described as a sale contract and containing all the indicia of a sale contract, would not be a sale contract if the parties contemplated that the goods would physically cease to exist before the time at which property was meant to pass under the contract.
The authors submit that this is a surprising conclusion. In contracts for the sale of pharmaceuticals, foodstuffs, chemicals, raw components for incorporation into other objects, and fuel, it is often the case that the retention of title clause in the contract permits consensual use of the goods. The result of the Court of Appeal’s decision in Res Cogitans is that the numerous cases that have come before the Court concerning the extent to which aspects of such retention of title clauses are enforceable or not, which have proceeded on the basis that the consumption of the goods has no impact upon the nature of the contract (indeed in those cases it has been assumed that contracts permitting consensual use were and remain contracts of sale within the Sale of Goods Act 1979, or its predecessor, the 1893 Act), have all proceeded on an incorrect assumption. The authors believe that this is unlikely. The decision is also open to criticism on a number of other grounds.

The facts
The OW Bunker Group, consisting of a Danish parent company, OW Bunkers & Trading A/S (OWBAS), and different subsidiaries in different jurisdictions, was one of (if not the) largest supplier of marine fuels, known as bunkers, in the world. In December 2013 OWBAS entered into a revolving credit facility under a syndicated loan, with ING Bank N.V. (ING) as lead bank. As security for the loan, the OW Bunker Group entered into an Omnibus Security Agreement, whereby it assigned and charged to ING, as Security Agent, all rights, title and interest in its third party and intercompany receivables.
The bunker supply industry generally uses standard form contracts, and there is usually a string of participants, and thus a string of contracts. Thus when the owner/operator of a ship orders fuel, which may be delivered (stemmed) to the vessel in port, or offshore from a bunker supply vessel, the immediate seller places an order with another party further up the chain, and so on. There may be four or five such participants in the chain, with only one of them physically delivering the fuel. Invariably each participant in the chain regards itself as having entered into a sale contract with the parties immediately below (and above). These contracts are frequently, although not invariably, governed by English Law, are frequently on or adaptions of BIMCO (Baltic and International Maritime Council) standard terms, and more often than not contain a retention of title provision of some description. It is also usual, although not inevitable, that each contract restricts use of the fuel, but permits the same to be consumed for a limited purpose only, namely propulsion of the vessel. Whilst not invariable, it is often the case that the parcel of fuel delivered may have been consumed in whole or in part before the expiry of the credit period. Of course, the more creditworthy the seller, the longer the credit period, and the greater the likelihood of consumption.