When is a contract for the sale of goods not a contract for the sale of goods?

The sudden insolvency of OW Bunker & Trading A/S in 2014 continues to vex ship owners and bunker suppliers. The issue is this: Is a ship owner who contracted to purchase bunkers from an OW entity liable to pay that OW entity for the bunkers; or should payment be made to the entity further up the supply chain, which is the party contracted by that OW entity to physically supply the bunkers to the ship; or both? Normally, the ship owner would pay the OW entity with whom it had contracted and the OW entity would in turn pay the physical supplier.1 However, the insolvency of OW meant that the physical supplier could not obtain payment from the OW entity and therefore looked directly to the ship owner for payment for the bunkers that were supplied to its ship. At the same time, the receiver acting on behalf of the assignee of OW’s receivables sought payment from the ship owner under the bunker supply contract between the OW entity and the ship owner.

The situation in Singapore

Faced with demands for payment from OW entities and physical suppliers, certain ship owners commenced interpleader proceedings in the Singapore High Court seeking a judicial determination as to who they should pay for the bunkers that were supplied to their ships. Unfortunately for the ship owners, the rules giving the court the power to deal with such applications very closely circumscribe the power of the court to do so. At the risk of over- simplification, the applicant has to be liable to pay a sum of money but is unsure to which of two or more parties such liability is owed in circumstances where such parties are putting forward competing claims which are adverse to each other. The ship owners took the view that they were liable to pay the OW entities – the party they had contracted with – for the supply of the bunkers. However, faced with competing demands from the physical suppliers, they sought the court’s assistance.

OW’s case was simply a claim for payment under the bunker supply contract with the ship owners. The physical suppliers, on the other hand, did not enjoy any contractual nexus with the ship owners as their contract was with another OW entity further up the supply chain and from whom they could not expect payment due to the insolvency of the OW group. Therefore, the physical suppliers put forward a “potpourri of claims” against the ship owners, such as under the tort of conversion and unjust enrichment, none of which are contractual in nature. Justice Steven Chong held that none of the physical suppliers’ claims were adverse to the contractual claims of the OW entities. The claims of the physical suppliers and the OW entities against the ship owners were for different liabilities and, therefore, interpleader relief was inappropriate. The ship owners’ applications for interpleader relief were therefore dismissed. As part of the learned Judge’s grounds of decision, he explained:

… interpleader proceedings exist to assist applicants who want to discharge their legal obligations (to pay a debt, deliver up property, etc) but do not know to whom they should do so. The essence of interpleader was eloquently summarised by Sir James Wigram VC in Crawford v Fisher (1842) 1 Hare 436 more than half a century before De La Rue (at 441 and 442):

The office of an interpleading suit is not to protect a party against a double liability, but against double vexation in respect of one liability. If the circumstances of a case show that the Plaintiff is liable to both claimants,that is no case for interpleader. It is of the essence of an interpleading suit, that the Plaintiff shall be liable to only one of the claimants; and the relief which the Court affords him is against the vexation of two proceedings on a matter which may be settled in a single suit. [emphasis added in italics and bold italics]

Thus, the learned Judge took the view that the ship owners were potentially liable to both the OW entities (under the bunker supply contracts) as well as the physical suppliers (pursuant to the actual supply of the bunkers by such suppliers to their ships).

The situation in the UK

Unlike the ship owners in Precious Shipping who took the view that they should pay the OW entities and not the physical suppliers, the ship owners of the Res Cogitans took the view that they should not pay the OW entity and, to this end, commenced arbitration proceedings against the OW entity seeking a declaration that they were not bound to pay them for the bunkers supplied to the ship. The arbitrators disagreed with the ship owners and this decision was upheld by Justice Males in the High Court and Lord Justice Moore-Bick in the Court of Appeal with whom the other two Lords Justices agreed.

The ship owners’ argument was that the contract with the OW entity for the sale of the bunkers was a contract for the sale of goods to which the Sale of Goods Act 1979 (the “SGA”) applied. As the OW entity had not transferred title in the bunkers to the ship owners, the OW entity could not recover the price of the bunkers under section 49(1) of the SGA which states:

Where, under a contract of sale, the property in the goods has passed to the buyer and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may maintain an action against him for the price of the goods.

The ship owners’ argument was that the bunker supply contract with the OW entity was a “contract of sale of goods” under the SGA which section 2(1) of the SGA defines as “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”. However, due to retention of title clauses, credit terms and the fact that the bunkers were consumed before payment was due meant that property in the bunkers was never transferred to the ship owners. This, the ship owners’ argued, meant that the OW entity could not maintain an action for the price of the bunkers under s 49(1) of the SGA and, additionally, was liable to the ship owners for breach of contract as it failed to pass title in the bunkers to the ship owners.

The Court of Appeal agreed with the reasoning of the arbitrators and Justice Males that the bunker supply contract was not a “contract of sale of goods” under the SGA although it looked very much like one and could be described in commercial terms as a contract for the sale of goods. The key was that the terms of the bunker supply contract showed that there was never an intention to transfer property in the bunkers to the ship owners. The essential constituents of the contract were identified by Justice Males as follows:

… the combined effect of (1) the retention of title clause, (2) the period of credit before payment fell due, (3) the permission given to the Owners to consume the bunkers, and (4) the fact that some or all of the bunkers supplied were likely to be consumed before the expiry of the credit period with the consequence that property therein would cease to exist, means that the parties must be taken to have understood that it was likely that title would never be transferred to the Owners. It was possible that it would be, but not likely. It was certainly not an essential part of the transaction that it should be. As Atkin LJ said in the well- known case of Rowland v Divall [1923] KB 500, ‘the whole object of a sale is to transfer property from one person to another’. In the present case, however, the combination of features listed above means that it cannot have been the object of the contract to transfer property from OWBM to the Owners: both parties knew that this was unlikely ever to happen. Even if it did, because some bunkers remained unconsumed after 60 days, that was not fundamental to the transaction.

Lord Justice Moore-Bick agreed and explained that, “The commercial background and the terms of the contract make it clear that what the owners contracted for was not the transfer of property in the whole of the bunkers, but the delivery of a quantity of bunkers which they had an immediate right to use but for which they would not have to pay until the period of credit expired”.

The ship owners were therefore contractually bound to pay the OW entities, and therefore the receiver of the assignee of OW’s receivables, for the bunkers that were supplied by the physical supplier. This obligation did not arise under the SGA as the contract was not a “contract of sale of goods” but arose as a simple debt. This then begs the question as to how the physical suppliers would be paid, seeing as these physical suppliers would then have an unsecured debt against the OW entity which would rank paripassu with the other creditors of that OW entity. Could they proceed to recover the price of the bunkers from the ship owners? It would appear from the example supplied by Precious Shipping that they may and so ship owners could face further action such as ship arrests even after paying the contractual dues to the OW entity.

Going forward

This result is no doubt unsatisfactory to ship owners who face the possibility of paying twice for bunkers supplied to their ships. It is therefore no surprise that the owners of the Res Cogitans have appealed to the UK Supreme Court. The hearing of the appeal has been scheduled for 22 March 2016 which coincides with the time of writing of this article. If the appeal is allowed, the ship owners will be free from liability to pay the OW entities as the bunker supply contract would be a “contract of sale of goods” and there would have been a failure to transfer property in the bunkers to the ship owners. Therefore, an action under s. 49(1) of the SGA cannot be maintained. The ship owners will still face liability to pay the physical suppliers but at least there will be no risk of having to pay twice for the same bunkers. An update will follow the publication of the judgment of the Supreme Court.

The issue in the Res Cogitans case was briefly discussed during oral arguments before Steven Chong J. in Precious Shipping. Counsel for one of the physical suppliers argued that the OW entities were not entitled to claim payment under s 49(1) of the SGA because the retention of title clauses in the contracts between the OW entities and the ship owners meant that property in the bunkers was never transferred to the ship owners. One of the counsel for the OW entities responded by submitting that the SGA did not apply because such contracts were not contracts for the transfer of property in the bunkers but were instead contracts for the transfer of bunkers for immediate consumption. For the purposes of the interpleader application however the learned Judge did not have to decide the point. A Singapore judge may have to decide this point in the future and, if so, the decision of the Supreme Court will no doubt be referred to as persuasive authority.

Source: Shook Lin & Bok LLP