PST Energy 7 Shipping LLC & Anor v OW Bunker Malta Ltd & Anor [2016] UKSC 23

Ship owners received bunkers from OW Bunker Malta under terms allowing consumption before payment, with title reserved pending payment. Following OWB Group’s insolvency, owners disputed liability. The Supreme Court held the contract was sui generis, not a sale, and owners were liable for the price.

Facts

The vessel ‘Res Cogitans’ was supplied with bunkers (gasoil and fueloil) at Tuapse in November 2014 by OW Bunker Malta Ltd (‘OWBM’), pursuant to a contract with the appellant owners. OWBM obtained the bunkers through its parent OW Bunker & Trading A/S (‘OWBAS’), which had purchased them from Rosneft Marine (UK) Ltd (‘RMUK’), with physical delivery effected by RMUK’s associate RNB. The total contract price was USD 443,800, payable within 60 days from delivery.

OWBM’s general terms included a retention of title clause (clause H.1), providing that title remained with OWBM until full payment, and clause H.2, providing that the buyer held the bunkers as bailee until payment but was entitled to use them for propulsion of the vessel. Clause G.12 provided that risk passed on delivery.

Shortly after delivery, on 6 November 2014, OWBAS announced insolvency restructuring. RMUK was never paid by OWBAS but itself paid its supplier RNB. RMUK demanded payment directly from the Owners on 17 November 2014, asserting it retained title. The Owners commenced arbitration seeking a declaration of no liability to OWBM/ING (ING Bank as assignee), fearing double exposure. On the assumed facts, all bunkers were consumed in propulsion without any payment having been made up the chain to RMUK.

Issues

The principal issues before the Supreme Court were:

• Whether the contract between OWBM and the Owners was a contract of sale of goods within section 2(1) of the Sale of Goods Act 1979, such that section 49 (read in light of F G Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [‘Caterpillar’]) would bar a claim for the price because property had not passed.
• Whether the contract was subject to an implied term that OWBM would perform its obligations to its supplier, in particular by making timeous payment.
• If the contract were one of sale, whether Caterpillar was correctly decided in treating section 49 as an exhaustive code precluding recovery of the price where property had not passed.

Arguments

Owners (Appellants)

Mr Crow QC submitted that the nature of a contract is a matter of substance, determined at the date of contracting, by reference to the statutory test in section 2(1). The contract was in form and language one of sale; alternatively, it was a conditional sale within sections 2(3) and 2(6). If it was a contract of sale, section 49 (per Caterpillar) precluded a price claim because property never passed. Alternatively, there was an implied term requiring OWBM to perform obligations in the contractual chain above it.

OWBM/ING (Respondents)

Mr Bright QC submitted that the contract was not a contract of sale within the Act but sui generis, having two aspects: a licence to consume bunkers before payment without property passing, and a transfer of property in any remaining unconsumed bunkers upon payment. Alternatively, if it were a sale contract, Caterpillar was wrongly decided and section 49 was not a complete code precluding all price claims outside its terms.

Judgment

Lord Mance, giving the leading judgment with which Lord Neuberger, Lord Clarke, Lord Hughes and Lord Toulson agreed, dismissed the appeal.

Nature of the contract

The contract was not a contract of sale within section 2(1) of the Sale of Goods Act 1979 but was sui generis. Although it used the language of sale, its essential character involved two aspects: first, permitting consumption of bunkers before payment without property passing in the bunkers consumed; second, transferring property only in any bunkers remaining unconsumed at the time of payment, in return for the price payable for all the bunkers supplied. The liberty to consume bunkers prior to payment was ‘a vital and essential feature of the bunker supply business’ (para 27).

Lord Mance rejected the Owners’ attempts to characterise the contract as conditional sale under sections 2(3) and (6), noting that there was no condition governing the transfer of property in bunkers consumed before payment, and that the agreement was a single indivisible contract for a single price. He approved the arbitrators’ observation that, in the ordinary course, when paying the invoice it would not have crossed anyone’s mind to enquire what bunkers had been consumed.

The reasoning was supported by analogy with Harry & Garry Ltd v Jariwalla, where Kerr LJ had characterised a similar arrangement as sui generis. Lord Mance also rejected the Court of Appeal’s analysis that the contract was a sale to the extent of any unconsumed bunkers at the time of payment, holding the contract to be indivisible.

Implied term

There was no basis or need for any implied term that OWBM would perform obligations higher up the chain or pay its supplier. OWBM’s only implied undertaking regarding bunkers permitted to be used was that OWBM had the legal entitlement to give such permission. OWBM did not need to acquire title to the bunkers; it merely needed to have acquired the right to authorise such use under the chain of contracts (para 39).

Section 49 and Caterpillar (obiter)

Although the conclusion that the contract was not one of sale made it unnecessary to decide the point, Lord Mance addressed the correctness of Caterpillar, holding that it had been wrongly decided. Section 49 was not an exhaustive code precluding all claims for the price outside its express terms. Drawing on Castle v Playford (1872) LR 7 Ex 98, Martineau v Kitching (1872) LR 7 QB 436, and Harry & Garry, Lord Mance concluded that the price may be recoverable where goods remain the seller’s property but are at the buyer’s risk and are destroyed, or where the buyer is contractually permitted to consume them. Had the contract been one of sale, the price would have been recoverable.

Implications

For bunker supply contracts

The decision provides authoritative clarification of the legal nature of bunker supply contracts containing retention of title clauses combined with an express licence to consume. Such contracts are not contracts of sale within the Sale of Goods Act 1979 but are sui generis. Suppliers can recover the contract price upon consumption of the bunkers, irrespective of whether title passed, and without needing to rely on the price provisions of section 49.

Section 49 and the Sale of Goods Act

Although strictly obiter, the Supreme Court’s disapproval of F G Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [2014] 1 WLR 2365 is highly significant. Section 49 is not a complete code: claims for the price may be available in circumstances outside its express terms, particularly where goods remain the seller’s property but are at the buyer’s risk and are destroyed, or where the buyer is contractually permitted to consume them. Lord Mance expressly left for future determination ‘the precise limits of such circumstances’ (para 57).

Limits and unresolved points

The decision does not address what would have happened had the Owners sought to terminate the contract for breach (eg an inability of OWBM to pass title to unconsumed bunkers), nor whether the Owners might still face risk of double exposure from RMUK or others up the chain. The Court noted such issues were not before it. The agency analysis in Caterpillar was also left for future consideration.

Wider significance

The judgment is of substantial importance to the international shipping industry and to commercial lawyers advising on supply contracts where goods are consumed before payment and title is reserved. It eliminates concerns that vessel owners might be unable to settle their immediate supplier’s claim because of the structural features of the bunker supply chain. It also marks an important re-examination of the scope of section 49 of the Sale of Goods Act 1979, opening the door for price claims in circumstances previously thought foreclosed by Caterpillar.

Verdict: The Supreme Court unanimously dismissed the Owners’ appeal. The contract between OWBM and the Owners was not a contract of sale within the Sale of Goods Act 1979 but was sui generis; it contained no implied term as alleged by the Owners; and the Owners had no defence to OWBM’s claim for the agreed price. Obiter, had the contract been one of sale, section 49 would not have barred recovery of the price, and the Court of Appeal’s decision in F G Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd (‘Caterpillar’) was wrongly decided on that point.

Source: PST Energy 7 Shipping LLC & Anor v OW Bunker Malta Ltd & Anor [2016] UKSC 23