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The fallout from Res Cogitans and expected changes to bunker supply contracts

The recent English Supreme Court judgment in the Res Cogitans case, in effect a test case arising from the financial collapse and insolvency of OW Bunker & Trading A/S and its associated companies (OWB), has set the tone for dozens of pending claims on the international scene, with decisions largely coming down in favour of OWB receiving payment from the buyer. Here we explore the recent developments in the on-going OWB saga as well as the potential changes to future bunker supply contracts driven by the Baltic and International Maritime Council (BIMCO) as they review their standard contract.

Until their collapse in 2015, OWB had been the largest bunker supplier in the world. OWB supplied bunkers under contracts subject to English law, which allowed buyers credit terms of up to 60 days. Under a retention of title (ROT) clause, title to the bunkers remained with OWB until payment was made but, in the interim, shipowners were permitted to consume the bunkers for the propulsion of the ship. In the vast majority of cases, all or most of the bunkers were consumed before payment was made and legal title to the bunkers never passed to the shipowner (nor, commercially, did such title need to pass).

To finance their operations, OWB had substantial borrowings from a syndicate of banks (the Lenders) and had granted security over the bunker debt receivables in favour of the Lenders. Following the collapse of OWB, the Lenders proceeded against various shipowners in order to recover outstanding bunker debts. The Res Cogitans proceedings were brought by a shipowner in the hope of establishing that, because title in the bunkers had never passed to the buyer, the combined effect of sections 2(1) and 49(1) of the Sale of Goods Act 1979 (SOGA), was that OWB were in breach of contract and neither OWB, nor the Lenders, were entitled to recover the contract price. In summary, the original arbitration tribunal, and the three English courts through which appeals were pursued by the shipowner, all held that SOGA did not apply and that the parties had contracted on a different basis, under which technical points about title to the bunkers were largely irrelevant. Section 55 of SOGA makes it clear that it is open to parties to enter into valid and enforceable contracts, relating to goods such as bunkers, on terms which are not governed by SOGA. As a result, OWB and/or the Lenders were entitled to recover bunker debts from buyers.

A key issue arising from the Res Cogitans judgment was the risk that shipowners would have to pay for bunkers twice, once under their contract with OWB and again to the entity which carried out the physical supply to the ship. The likelihood of physical suppliers succeeding in an independent non-contractual claim depends on whether the act of supplying bunkers to a ship gives rise to a maritime lien under local law. Under English law, the supply of bunkers to a ship never gives rise to a maritime lien, and, in the case of a non-contractual supply, the physical supplier does not even acquire a right of arrest. In recent decisions in other jurisdictions, physical suppliers have failed to establish independent rights of recovery. The courts have upheld the right of the contractual supplier (OWB) to recover the contractual debt, but have ruled against third-party subcontractors doing so. For example, in two separate US cases, the physical suppliers Rouke and Valero, having contracted solely with OWB, did not meet the criteria for a maritime lien under US law. The difficulty in a physical supplier establishing a lien makes it unlikely that shipowners will have to pay twice. However, the risk remains and it may arise in certain cases due to the particular facts and/or issues of local law – for example, there may be instances where the physical supplier can establish a maritime lien if the shipowner had directed the selection of the physical supplier.

Contractual changes in the future

The uncertainty that has arisen from the OWB litigation has prompted BIMCO to consider revisions to their standard bunker supply contract. The review team comprises some of the world's largest bunker suppliers, including World Fuel Services and Dan Bunkering, and shipowners, who are represented by Denmark-based J Lauritzen Norden. There is also input from the P&I sector including the North of England P&I Club. The team will present their revised draft to the BIMCO Documentary Committee and it is likely that the bunker suppliers (i.e. the contractual suppliers) will be keen to reinforce the position established by Res Cogitans. It is likely bunker suppliers will opt for certainty, by including express wording to the effect that SOGA will not apply to the bunker contract, whether the bunkers are consumed or not. This will enable any money owed under the sale contract to be recovered as a simple debt claim and avoid any potential arguments that the contractual supplier should not be able to recover the price from the shipowner as a result of title not passing from the physical supplier. This further allows the supply of bunkers to continue to operate on credit terms, a key feature of the bunker supply industry.

The shipowners involved in the process will be keen to implement contractual provisions which close the gap of legal uncertainty regarding the risk, albeit slim, of double payment. Such changes could include:

a) Representations from the contractual supplier that it has obtained written confirmation from the physical supplier that it has been paid and that it has no claim over the bunkers or the ship. Physical suppliers also contract on credit terms with the contractual supplier, typically being paid 30 days after supply. This representation would therefore have to be made at the expiry of the physical suppliers' credit period which is still useful, provided it is before the expiry of the buyer's credit period. Therefore, if the representation was breached, the shipowners would use this breach as their basis for not paying the contractual suppliers.

b) An indemnity from the contractual supplier in respect of any claim by a physical supplier against the buyer of bunkers and a right to withhold payment. This provision probably provides the strongest protection and comfort to the buyers.

c) Ensuring that the wording used when signing bunker delivery receipts states that this does not establish contractual relations. This will prevent physical suppliers from arguing that, by serving their terms on the shipowners at the time of delivery, they have established a parallel contract with the shipowner (even though this argument has so far been defeated in court, as the chief engineer who usually signs these receipts does not have actual or ostensible authority to establish contractual relations).

Other protective measures that the buyers could take include taking out insurance and ensuring that the BIMCO bunker non-lien clauses are incorporated in their time charterparties (this requires charterers to inform the physical supplier, at the outset, that bunkers ordered are being supplied for their account and that no lien can be created over the ship).

Conclusion

The Res Cogitans decision and subsequent international rulings have exposed the weaker contractual position of the physical suppliers, who have been left with no recourse when their contracting party becomes insolvent. Although many commentators have advocated the need to give greater rights to physical suppliers, the question of whether those suppliers will be able to insist on more favourable terms, for example, shorter credit periods, will depend on their individual bargaining positions on a case-by-case basis.

Once the main claims are settled, the next contentious issue will be dealing with OWB's substantial claims for interest, a step already being taken in the US in relation to M/V Charana, where the total amount being claimed is now double the amount of the original invoice.

Given the various issues that remain unresolved, it is arguable that BIMCO's upcoming review of bunkering contracts will be the first in a series of significant changes for the bunker supply industry.