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Web Alert - The UK Supreme Court delivers a disappointing judgment for owners in OW Bunker test case

12 May 2016

On 11 May 2016 the UK Supreme Court delivered its judgment in PST Energy 7 Shipping LLC v OW Bunker Malta Limited[1], considered the primary test case in the OW Bunker (OWB) insolvency under English law as to whether an owner is obliged to pay OWB for bunkers supplied even if they themselves didn’t pay for, and therefore acquire title to, the same fuel.  It was a disappointing result for the owner as the Supreme Court dismissed the appeal and found that the owner here was liable to pay OWB/ING for the bunkers supplied, even though OWB haven’t paid the physical bunker supplier down the contractual chain.

The two keys issues before the Supreme Court were the same as those argued before the UK Court of Appeal:

  • Was the bunker supply contract a contract governed by the Sale of Goods Act 1979 (SoGA)?
  • If not, was the contract nevertheless subject to an implied term that OWB had performed its obligations to pay for the bunkers so supplied?  

Was the contract governed by SoGA?

The owner in this test case contended that the basic form and language of the bunker supply contract was that of a contract of sale, even though it included some ancillary special features.  The Supreme Court found that the special features of the contract, specifically the retention of title clause and the liberty to consume bunkers before payment fell due, were essential features of this bunker supply contract. 

The Supreme Court also looked favourably on the judgment in Harry & Garry Ltd v Jariwalla[2] and considered that, as with many contracts in complex situations, this was a unique transaction and not a contract for sale.  Although many of the terms were modelled on those used in a sale of goods contract, the unique features of this agreement set it apart and the Supreme Court ultimately found that this OWB bunker supply was not a contract of sale within the definition of SoGA.

Was there nevertheless an implied term that OWB would perform its obligations to pay for the bunkers?

The owner further argued that it was an implied term of the contract that OWB would perform its obligations to the physical bunker supplier (i.e. pay for the bunkers) in a timely manner, in order to pass good title onto the owner.  The Supreme Court rejected this contention and found that it was not necessary for OWB to be able to pass on title. Rather the OWB supply contract only required that they were able to pass on the liberty to consume the bunkers onto the owner. 

On the assumed facts before the court, there was no challenge to OWB’s right to grant the liberty to consume and, therefore, the owner was liable to pay OWB under the terms of the contract.

Other issues before the court

Although the Supreme Court found that the contract was not subject to SoGA, it did give further consideration to the position if the contract has been a contract of sale.  The court found that SoGA did not contain a complete list of situations under which a seller may claim to recover the price paid under a contract of sale and in the present situation OWB would still have been entitled to recover the price under the clear and express terms of their bunker supply contract.

Conclusions

This decision is unlikely to be the end of litigation in the OWB saga, especially as the Supreme Court here only delivered answers on a limited range of issues which were put to it under the agreed facts in this case.  The court specifically did not address the issue of potential double payments to physical suppliers as no claims had yet been advanced by the bunker supplier in this matter.

Although this is not the outcome which many owners and time charterers were hoping for, it does provide some certainty with respect to the contractual payments due to OWB/ING under English law.

This article intends to provide general guidance on the issues arising as a matter of English law. It is not intended to provide legal advice in relation to any specific query. Members requiring further information on this topic should direct their enquiries to either their usual contact at the club, or to the authors of this article.

Defence cover is, by its very nature, discretionary in that the club must be satisfied as to the merits and quantum of the claim in question and the likelihood of achieving a successful outcome, if it is to lend support. 

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[1] [2016] UKSC 23
[2] [1988] WL 1608652