When is a sale not a sale? When it’s OW Bunker!

Stephen Hofmeyr QCStephen Du

What do you see?

What do you see?

When is a sale not a sale?

PST Energy 7 Shipping LLC v OW Bunker Malta Limited (Res Cogitans)

Res Cogitans

“For all that I am a thing which is real and which truly exists (res extensa). But what kind of a thing? As I have just said, a thinking thing (res cogitans)”

- Descartes, The Philosophical Writings

Res Cogitans• The collapse of OW Bunker has spawned a

flurry of litigation and arbitration across the world

• PST Energy 7 Shipping LLC v OW Bunker Malta Limited (Res Cogitans) is one of those decisions

The parties and their relationship

PST Energy 7 Shipping LLC

Product Shipping& Trading SA

OW BunkerMalta Ltd

The Owners

Sales Order Confirmation dated 31.10.14:110mt gas oil1,000mt fuel oil

Sales Order Confirmation

• Delivery date: 3 or 4 November 2014• Physical supplier: Rosneft• Payment: 60 days from the date of delivery• Subject to OWB Bunker Group’s 2013 Terms

and Conditions for sale of Marine Bunkers

The parties and their relationshipThe Owners

OW BunkerMalta Ltd

OW Bunker& Trading AS

Rosneft Marine (UK) Ltd

RN-Bunker Ltd

ING Bank NV

Retention of title

Retention of title

Retention of title

Retention of title

assignment

Physical delivery

Bunker stem

Bunkers were stemmed at Tuapse in the Black Sea on 4 November 2014 by RN-Bunker Ltd, Rosneft’s Russian subsidiary.

As a consequence• Payment to ING was due by 3 January 2015• Payment to Rosneft was due by 4 December

2014

Collapse of OW Bunker

• 5 November: OW Bunker & Trading AS uncovers major fraud committed by senior employees

• 6 November: OW Bunker & Trading AS files for commencement of in-court-restructuring in Denmark

Insolvent

The parties and their relationshipThe Owners

OW BunkerMalta Ltd

OW Bunker& Trading AS

Rosneft Marine (UK) Ltd

RN-Bunker Ltd

ING Bank NV

Retention of title

Retention of title

Retention of title

Retention of titlePayment

assignment

Physical delivery

The Proceedings

• ING (as assignee) commences arbitration against Owners and claims payment for bunkers

• Rosneft not a party to the arbitration and not bound by its decision

• Owners willing to pay, but only once!

Consumption of bunkers and extinction of title

• Obvious to all that bunkers would be consumed following stem

• Obvious to all that title to bunkers would cease to exist on consumption

Consumption of bunkers and extinction of title

• Two key clauses in the Owners’ contract• Retention of title clause:

“Title… shall remain vested in the Seller until full payment has been received…”

• Permission to use bunkers:“the Buyer…shall not be entitled to use the Bunkers other than for the propulsion of the Vessel…”

ING’s case

• OW Bunker Malta has honoured its side of the bargain – to deliver bunkers

• The Owners must honour its side of the bargain – to pay the price

• Simple claim in debt• NOT claim for damages for wrongdoing

The Owners’ Case

• The Sale of Goods Act (“SOGA”) applies.• The claim is for the price, and the seller

cannot show (as required by s.49) either:– the property has passed; or– The price is payable on a day certain

irrespective of delivery

Was this a contract of sale of goods?

• Owners: the contract looks like a contract of sale of goods, so it must be one!

• In particular:– “Sale Order Confirmation”– “OW Bunker Group’s 2013 Terms of

Conditions of Sale for Marine Bunkers”– “Buyer”– “Seller”

Was this a contract of sale of goods?

Males J agreed that

“… the parties’ contract is drafted as a contract of sale and contains numerous terms appropriate to such a contract.”

Was this a contract of sale of goods?

• Previous cases:

– The Saetta [1994] 1 WLR 1334

– The Fesco Angara [2010] EWHC 619 (QB), [2011] 1 Lloyd’s Rep 61

Was this a contract of sale of goods?

Males J decided that, although the contract is labelled as a contract of sale of goods, that does not necessarily mean it is a contract of sale of goods (paragraph 28).

Was this a contract of sale of goods?

• SOGA s.2(1):

“A contract of sale of goods is a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price.”

Exception?

• Contract of sale of a chance?– Benjamin on Sale of Goods para 1-112

• No– Bunkers existed and were delivered– If not delivered, Owners would not have had to

pay for bunkers– Therefore, exception does not apply

Was this a contract of sale of goods?

• OW Bunkers Malta Ltd were under no duty to pass title to Owners– Retention of title clause– Period of credit before payment fell due– Permission given to the Owners to consume

the bunkers– The bunkers were likely to be consumed

• Therefore, contract not a contract of sale within meaning of SOGA 1979

What was the Owners paying for?

• Permission to use the bunkers.• Rosneft gave such permission. It knew that:

– OW Bunker & Trading AS was a trader– OW Bunker & Trading AS would enter

further contracts– Owners would be authorised to use the

bunkers immediately

What was the Owners paying for?

• How did Rosneft give owners permission to consume the bunkers when it was never in contact with the Owners?– Bailment– Agency

• Therefore, Rosneft cannot sue Owners in conversion

Implied Term?

• Owners argued, in the alternative, that there was an implied term, similar to that of section 12(1) of the SOGA 1979, which required the sellers to transfer property or title to the goods to the buyers; and that, as OW Bunker Malta Ltd was not able to transfer property or title to Owners, the claim for the price failed.

• No. No scope for the implication of term.

Result

• Owners ordered to pay ING for the bunkers

• Not under section 49 of the SOGA 1979

• But as straightforward obligation in debt

What if the agreement was a contract of sale of goods?

Assumption

• OW Bunkers Malta Ltd undertook, in terms of section 2(1) of the SOGA 1979, “to transfer the property in the goods to the buyer”.

What if the agreement was a contract of sale of goods?

• First argument: Construction/Implied term – property transferred to the Owners a nanosecond before consumption

• No– ROT clause states that title passes upon payment– Alleged implied term would contradict the ROT

clause

What if the agreement was a contract of sale of goods?

• Second argument: OW Bunker Malta Ltd was a “buyer in possession” within the meaning of section 25 of the SOGA 1979 and was therefore able to pass good title to Owners

• No. ROT clause fatal to operation of section 25

What if the agreement was a contract of sale of goods?

• Price payable on a “day certain irrespective of delivery” – SOGA, s.49(2)?

• Two views– Date must not depend on the actions of any party– Payment within a fixed period is sufficient

• Males J adopted wider view but decision doubly obiter

Conclusion

• Contract was not a contract of sale of goods within the meaning of SOGA 1979

• If it were otherwise:– O would take delivery of bunkers– O would not need to pay for bunkers (s. 49)– O could nevertheless consume the bunkers– O would not face an action for damages under

section 50 of the SOGA 1979– Specific performance – makes little sense– Quantum meruit – artificial and uncommercial

Conclusion

When is a sale not a sale?

• Have regard to “The Res Cogitans”

• Not to the Res Extensa!

Stephen Hofmeyr QCshofmeyr@7kbw.co.uk

Stephen Dusdu@7kbw.co.uk

7 King’s Bench Walk, Temple, London EC4Y 7DS+44 20 7910 8300

www.7kbw.co.uk