Yesterday, the English Court of Appeal handed down a eagerly awaited decision. The court had been charged the task to decide whether a OW Bunker contract (in line with most standard type of bunker supply contracts) was a contract within the meaning of the UK Sale of Goods Act (SOGA).

The question may seem academic but has great practical importance. The owners of the RES COGITANS were namely faced by a duplicate claims for the same bunker stem; one from OW Bunker (including ING Bank) and one from the physical suppliers, who had not been paid by OW Bunker. Owners disputed that OW Bunker had a valid claim on the basis that SOGA applied to the OW Bunker contract and, as such, the seller (OW Bunker) must have title to the goods in order to sell them to owners. However, OW Bunker had never paid the physical suppliers and therefore had never obtained title to the bunkers. In essence, owners’ argument was that OW Bunker could not claim payment under the OW Bunker contract since the bunkers had never belonged to OW Bunker.

The arbitration Tribunal and the Commercial Court had held that the OW Bunker contract was not subject to SOGA at all, and that therefore passing of title was not a condition for OW Bunker to claim payment under the contract. As a result, OW Bunker could claim payment despite that the physical supplier had not been paid. However, the Court of Appeal adopted a slightly more refined approach, concluding that the contract was a hybrid under which bunkers are to be delivered to the owners as bailees with a license to use them for the propulsion of the vessel, coupled with an agreement to sell any bunkers remaining at the date of payment after the expiry of the credit period, in return for a money consideration which in commercial terms can be properly described as the price. As a result, SOGA did not apply to the bunkers consumed during the credit period , but it applied to any bunkers that remained after the credit period. This means that the Court of Appeal for all practical purposes confirms the previous decisions allowing OW Bunker to claim owners for the unpaid bunkers.

The decision by the Court of Appeal has onerous implications for the owners who are facing claims from both OW Bunkers (and/or their assignees ING Bank) and physical bunker suppliers, following the collapse of OW Bunkers. Arguably, in a perfect world a claim should follow the contractual chain and to the extent a physical supplier has a contract with a OW Bunker entity they should pursue their claim against that OW Bunker entity in the liquidation proceedings. However, in many jurisdictions an unpaid bunker supplier has a claim against the vessel actually receiving the bunkers. It is quite apparent that this right of “direct action” causes great problems for both owners and physical suppliers when an intermediary such as OW Bunker is used to supply bunkers.

Member Alert is published by The Swedish Club as a service to members. While the information is believed correct, the Club cannot assume responsibility for completeness or accuracy.