Bunker Supply

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Are you in need of legal advice from expert shipping lawyers regarding the terms of a contract? The expert maritime lawyers at award-winning Bahamas law firm ParrisWhittaker are ready to advise.

Are you in need of legal advice from expert shipping lawyers regarding the terms of a contract?

The expert maritime lawyers at award-winning Bahamas law firm ParrisWhittaker are ready to advise.

For those involved in the shipping and maritime industry, entering into contracts with suppliers can lead to difficulty. Contracts can be complex, with many companies in the supply chain – and expert legal advice is essential if you are to avoid entering deep legal waters. At top Bahamas law firm ParrisWhittaker, our team of expert maritime and shipping lawyers have many years’ experience in dealing with complex contract negotiations and disputes, and are ready to ensure you and your company do not fall foul of contract law.

A recent case in the UK regarding the terms of a bunker supply contract has serious implications for the shipping industry, particularly regarding whether certain contracts fall within the Supply of Goods Act 1979 (SOGA).

Background to the case

The owners had entered into a contract with OWBM for the supply of bunkers (fuel oils used to operate a vessel). The contract included OWBM’s standard terms. A string of transactions to supply the bunkers was included in the contract, with ‘retention of title’ clauses favouring suppliers through the chain of supply. Under these terms, which are common in bunker supply contracts, the bunkers could be consumed before payment had been made.

OWBM placed a supply order with a Danish parent company. There were two subsequent orders in the supply chain: OWBM placed an order with Rosneft, and Rosneft placed an order with Russian subsidiary RN.

On delivery of the bunkers in November 2014 neither OWBAS nor the Owners had paid, though Rosneft had paid its Russian subsidiary. OWBAS filed for restructuring in the Danish courts, with ING, the assignees of OWBAS’ rights, claiming payment for the bunkers from the Owners. Rosneft also made a claim against the owners.

Issues

There were a number of issues. OWBM/ING claimed that the sum owed was recoverable as a debt under the contract between OWBM and the Owners, and that the contract itself was not a ‘sale of goods’ contract to which SOGA applied.

The Owners argued that since OWBM had not paid Rosneft for the bunkers, OWBM could not transfer property and legal title to the Owners; that the contract was in fact subject to SOGA; and that OWBM was in breach of the mandatory SOGA term that the seller has the right to sell goods.

Arbitration and appeal

The terms of the contract provided for arbitration. The arbitrators found that – as OWBM/ING had argued – SOGA did not apply to the bunker supply contract since it was not a contract of sale. As such, ING/OWBM’s claim was a straightforward claim in debt. The Owners appealed this decision at the Commercial Court.

The key issue for the Court was whether the initial bunker supply contract was a contract of sale within the meaning of SOGA. The Arbitrator’s findings were upheld. The Court clarified that the bunkers had been consumed before payment had been received.

Clarifying the scope of SOGA

This case is useful in setting out what is required for a contract to fall within the scope of SOGA. The Court clarified that four conditions must be satisfied:

1. The contract must be for goods;
2. The seller must undertake an obligation to transfer the goods to the buyer;
3. There must be money payable by the buyer to the seller; and
4. The buyer must be paying for the title of the goods.

In this case, the first and third points clearly applied. However a number of considerations including the retention of title clause, the consumption of the bunkers before payment was due (ie credit), indicated that while the bunker supply contract resembled a contract of sale, it did not in fact fall within the definition of a contract of sale in the SOGA. Crucially, the court found that the Owners were actually paying for the right to consumer the bunkers.

The consumption of the bunkers as fuel by the vessel was therefore not an unlawful act on the part of the Owners.

Implications for the shipping industry

The owners may now appeal, but in the meantime the case has significant implications for those in the shipping industry – and indeed for the energy industry.

If a bunker supply contract does not fit within the terms of SOGA there is a risk that buyers of bunkers lack some of the protections which SOGA would have provided, such as the requirement that goods should be of a satisfactory quality.

Where other items are supplied on terms which include both a credit clause and the right to use goods during the period of credit, these may also not be contracts for the sale of goods.

It is crucially important that any parties entering into contracts for bunker supply – or other goods or services contracted on similar terms – give serious consideration to their obligations as set out in the contract. It may be necessary to state clearly in the contract some of the protections which would ordinarily be offered by the terms of SOGA. Those keen to ensure they are adequately protected when entering into a supply contract should contact the expert lawyers at ParrisWhittaker as a matter of urgency.