Supreme Court rules in “most spectacular legal shipping imbroglio this century” - Difficulties remain with retention of title clauses

In a case described by Lloyd’s List as “the most spectacular shipping legal imbroglio of the century”, the Supreme Court has confirmed that a bunker supply contract containing a retention of title clause in favour of the supplier, and which allows the purchaser to use or consume the goods before title is passed, will not fall within the scope of the Sale of Goods Act 1979 (“SGA”). As a consequence, the buyer was not entitled to rely on section 49 of the SGA to withhold payment in the event that valid title was not passed.

In a further twist, over-ruling FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd (often referred to as “Caterpillar”) [2014] 1 WLR 2365, the Supreme Court decided that if the contract had been within the SGA payment may still have been required. As a consequence, it seems likely that a failure to pass title in goods will no longer amount to a complete defence for a buyer against the payment of the purchase price.

The implications of the decision are likely to be profound.

Facts

PST Energy 7 Shipping LLC and Product Shipping and Trading S.A (together the “Owners”) entered into a bunker supply contract with OW Bunker Malta Limited (“OWBM”), a company which is part of the OW Bunker Group. The supply contract was on OW Bunker’s standard terms.

OWBM did not itself physically supply the Owners with the bunkers, but instead placed a supply order with its Danish parent company, OW Bunker & Trading AS (“OWBAS”). The contract between OWBM and OWBAS was also subject to OW Bunker’s standard terms. OWBAS in turn placed an order for the bunkers with Rosneft Marine UK Limited (“RMUK”), and RMUK placed an order with its related company, RN-Bunker Ltd.

The bunkers were delivered to the vessel on 4 November 2014, and RMUK subsequently paid RN-Bunker. However, none of OWBM, OWBAS or the Owners paid their counterparts. At around the same time, OWBAS filed for an in-court restructuring in Denmark, which constituted an event of default under OWBAS’ financing arrangements. ING, as the assignees of OWBM’s contractual rights, claimed payment for the bunkers from the Owners for OWBM. RMUK, having become aware that it might not receive payment from OWBAS, sent a demand for payment to the Owners.

The Owners disputed liability to OWBAS, arguing that OWBM had not paid for the bunkers and was therefore not in a position to transfer property and title in the bunkers to the Owners. The Owners maintained that the bunker supply contract was subject to the SGA, arguing that OWBM was in breach of the mandatory implied term (section 12 of the SGA) that the seller has the right to sell goods, or will have the right at the time that the property is to pass. If section 12 of the SGA applied, a failure to pass title would allow the Owners to withhold payment.

The Arbitrators, High Court and Court of Appeal found in favour of OWBM, although on differing interpretations of the nature of the obligations in the contract. All decided that the SGA did not apply.

The Owners appealed to the Supreme Court. Approximately 1,000 parallel arbitrations with approximately £900 million in dispute have been awaiting the result.

Decision

The Supreme Court affirmed the decision of the Arbitrators that the contract was not one to which the SGA applies and held in favour of OWBM/ING. There were two issues before the Supreme Court:

Was the contract within s2(1) SGA?

The Supreme Court held that OWBM’s contract with the Owners was not a straightforward agreement to transfer ownership of the bunkers for an agreed price. Rather, the contract was an agreement with two aspects: (i) it allowed consumption of the bunkers prior to payment and without any property passing in the bunkers consumed, and (ii), insofar as bunkers remained unconsumed, the contract provided that the title to the bunkers must be transferred to the Owners in return for payment of the contract price.

The Supreme Court further reasoned that the contract between OWBM and the Owners fundamentally offers a feature which a contract falling within the scope of the SGA would not offer – the liberty to consume goods before having acquired property in them and without having paid for them. OWBM is obliged to pass the property in the goods not consumed on payment for all of the goods (whether consumed or not), and this does not make the contract a contract for sale. This case was “sui generis”, meaning in a class of its own, and not able to be ‘shoe-horned’ into those cases which would ordinarily fit within the SGA.

As the contract could not be classified as a contract of sale within the SGA, the Supreme Court rejected the application of the SGA to the contract between OWBM and the Owners. It did however accept that, as regards bunkers consumed and remaining at the time of payment, the contract may contain implied terms (implied by common law rather than statute) which would be similar to those found in the SGA regarding description, quality, etc.

The Supreme Court’s reasons differ from those of the Court of Appeal. The latter held, rather confusingly, that the contract could be analysed as a contract of sale to the extent that it provided for the transfer of property in any part of the bunkers remaining at the time of payment, and thus section 12 of the SGA applied to any bunkers not consumed at the time of payment. The Supreme Court rejected this analysis, saying that this is “to divide up a single agreement covering the supply of all the bunkers (gasoil and fueloil) at a single price for each, irrespective of what happened to them”. The Supreme Court held that none of the bunkers fell within the terms of the SGA.

What would the position have been had the contract been one within the SGA?

The Owners argued that, had the contract been classified as a contract of sale within the SGA, authorities on section 49 of the SGA would preclude a claim by OWBM/ING for the price of the bunkers which had been consumed. Section 49 allows a seller to bring a claim against the buyer for non-payment of the price of the property which had been passed in a contract of sale, and the case of Caterpillar held that a claim for the price of goods sold can only be made in accordance with section 49. As set out above, the Supreme Court decided that this was not such a case.

Further, the Supreme Court’s view was that, had the contract between OWBM and the Owners been one of sale, the Supreme Court would have over-ruled the Caterpillar case and held that section 49 does not prevent a claim for payment of an agreed price under a contract of sale.

Comment

The decision of the Supreme Court is significant to a range of industries that adopt similar terms to those found in bunker supply contracts. The logical conclusion of the Supreme Court’s decision is that where goods are supplied under contracts which include a retention of title clause and a credit period, together with the right to consume all or some of the goods during the credit period, the contract may not be covered by the SGA. Contracts on similar terms should therefore be reviewed in light of the fact that the SGA may not apply to them.

The striking commercial consequences of the decision can be seen from its financial result. In the usual course of events the Owners would have paid OWBM, which would have taken a small margin, whilst passing the remainder of the price paid up the value chain to its own seller. However, in the event of insolvency, rather than the price paid being passed through the chain of title, it will be passed to ING bank – as OWBM’s creditor. OWBM and its creditors will have the benefit of the full price of the bunkers – rather than the margin that it would have originally retained under the transaction.

In a perhaps even more striking conclusion, by suggesting that Caterpillar was wrongly decided, the Supreme Court has opened up the prospect of a claim for a price (or damages) in the event of a failure to pass valid title – overturning a proposition that was considered trite law.

Whilst it is important to reiterate that the case was an appeal limited in scope to specific points of law and to a set of assumed facts, other contracts or strings of transactions might well result in similar conclusions.

In the interim two key areas arise for the drafters of commodities contracts: (i) it is critical to consider whether the existence of a retention of title clause along with the fact that the goods may be consumed/used prior to payment might result in the SGA not applying (and the consequences of that for the positions of the parties); and (ii) section 49 of the SGA cannot be relied upon by buyers to mean that the seller will have no remedy if it fails to pass valid title – meaning that express contractual words might be needed to achieve the outcome of Caterpillar.

PST Energy 7 Shipping LLC and anor. v O W Bunker Malta Limited and anor. [2016] UKSC 23