12 May 2016

The shipping world from London to Sydney has been eagerly awaiting for the decision of the English Supreme Court in the matter of RES COGITANS and yesterday it arrived!1.

We appreciate that many of our readers will know the facts of this case but for those that do not:

Owners sought to rely on sections 12 and 49 of the UK Sale of Goods Act 1979 (the Act)2 to avoid paying OW Bunker Malta Limited (OWB) on the grounds that when title is retained by the physical supplier, the third party supplier OWB fails to transfer property in the bunkers to Owners. Owners asserted that in such circumstances there is a total failure of consideration on the part of OWB which provides Owners with a complete defence to a claim by OWB for the price.

We can report that the English Supreme Court has agreed with the first instance LMAA tribunal, High Court and Court of Appeal in finding that the Act does not apply to the bunker contract and as such OWB is not restrained by the terms of section 49 of the Act and can recover the price of the bunkers from Owners as a debt due.

Was the bunker supply contract “a contract for the sale of goods“?

The Supreme Court considered the question of whether the contract for the sale of bunkers was a “contract for the sale of goods” to which the provisions of the Act applied. Section 2(1) of the Act provides: “A contract of sale of goods is a contract by which the seller transfers or agrees to transfer the property in the goods to the buyer for a money consideration, called the price“. If the bunker contract did not fall within this definition then the Act did not apply and Owners’ defences fell away.

The bunker contract contained 60 day payment terms which permitted the bunkers to be burned by the ship pre-payment and for title to be retained pending payment. In the circumstances the bunkers had all been consumed pre payment and as such title and property in the goods was never in fact transferred to Owners.

The Supreme Court commenced its analysis by observing the commercial reality that a bunker supplier knows that bunkers will be consumed in whole or part before payment or passing of title because the vessel will simply have to consume them for propulsion. For this very reason the contract expressly permits such consumption – “This is a vital and essential feature of the bunker supply business“.

The Supreme Court accepted that it was possible that some of the bunkers may be consumed pre-payment and some post with the effect that title may pass in respect of some of the bunkers but refused to treat a single agreement as divisible.

The Supreme Court concluded that the contract was complex providing for a sui generis transaction which, in its essential nature, offered a feature quite different from a contract of sale.

As such the Act did not apply and Owners could have no possible defence under section 49 to the claim for the price.

Did Section 49 provide Owners with a defence in any event?

Lord Mance also considered whether, if it had applied, section 49 of the Act constituted a code which precluded any action for the price outside its terms.

Lord Mance referred to the fact that: a) the bunkers had been delivered; b) they were at the buyers’ risk as regards damage and destruction; and c) they were also expressly permitted to be destroyed by Owners for their commercial benefit.

Lord Mance held3 that section 49 is not a complete code of situations in which the price may be recoverable under a contract of sale.

If you have any questions, or would like our advice on the impact of this important decision on you, do not hesitate to contact us.

Article written by Joe Hurley, Partner, Chris Sacré, Senior Associate and Jesper Martens, Special Counsel.

1 PST Energy 7 Shipping LLC and another v OW Bunker Malta Limited and another [2016] UKSC 23

2 see equivalent sections 17 and 51 of the Sale of Goods Act 1923 (NSW)

3 Over-ruling the decision in FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd (the Caterpillar case)

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