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23 December 2015
In PST Energy 7 Shipping LLC v OW Bunker Malta Ltd (Res Cogitans),(1) the High Court held that a contract to supply bunkers on credit terms, with a retention of title clause in favour of the sellers until full payment but with permission to consume the bunkers (or some of them) before payment was due was not a contract for the sale of goods under the Sale of Goods Act 1979. According to the High Court, on a true construction of the contract, OW as seller did not agree to transfer title to the buyer. Therefore, the fact that it could not do so did not excuse the buyer from paying. Instead, the bargain was that:
The seller had therefore done everything it had agreed to do and was entitled to payment. The buyer appealed the decision.
On October 22 2015 the Court of Appeal upheld the decision.(2)
The court held that although the contract was described as a contract for the sale of goods in terms consistent throughout, the combined effect of the retention of title clause, the credit period and permission to consume during that period meant that transferring title in the bunkers was not of the essence of the contract. The true nature of the contract was in fact one for the delivery of the bunkers to the buyer as bailee, with a licence to consume them in the vessel, plus an agreement to sell whatever proved to be unused at the time payment became due, in return for that payment.
It followed that, as transfer of title was incidental, the seller's failure to transfer title did not prevent it from receiving full payment – by action for a simple debt, rather than one for the price under the Sale of Goods Act. The court did recognise a de minimis exception, stating that where the parties contemplate that the overwhelming majority of the goods will continue to exist at the date when property is to pass, the ability to transfer property in the remainder is of critical importance, such that an inability to do so would amount to a total failure of consideration or a breach going to the root of the contract. However, that was not the case in Res Cogitans.
Leaving aside the implications for bunker supply and for other industries where consumable goods are supplied on credit, there are several difficulties with the Court of Appeal's judgment.
First, although the court acknowledged settled jurisprudence that it should not by interpretation alter the parties' bargain in order to avoid an odd result and stated that it was not rewriting the contract, this decision could be considered a complete recasting of the entire nature of the contract, citing and attributing concepts that the parties would surely not have recognised – terms that they did not choose and intentions that they nowhere articulated.
Second, it is odd to reach the conclusion (vital to the decision) that the passing of property was at best peripheral to the bargain, when it contained common and industry-standard wording (ie, the retention of title clause) regulating the very circumstances under which that would happen. With full payment as the contract's express precondition, it is hard to say that "transfer of property… was not the essential subject matter of the contract". More likely, surely, close and common regulation of how and when property will be transferred makes that one of the key elements.
Third, many such contracts are – or perhaps were – concluded daily worldwide; if the court's analysis was indeed the bargain, one would expect to see at least one example of parties to a contract actually expressing it as such.
All supply chains involving goods that can to some extent be consumed (or perhaps just incorporated into other goods) before full payment could be affected by this decision. At its very core is the notion that one cannot hold, and thus transfer, property in goods that have been consumed – so no longer exist – and resistance to concepts such as the retrospective passing of property being applied here. If the Supreme Court does not tackle that head on, it may have to endorse the current legal sleight of hand by which a standard, widely understood and highly descriptive type of contract has been turned into something not previously contemplated.
For further information on this topic please contact Clare Calnan or Tim Stephenson at Wikborg Rein by telephone (+44 20 7367 0300) or email (firstname.lastname@example.org or email@example.com). The Wikborg Rein website can be accessed at www.wr.no.
(1)  EWHC 2022 Comm. For further details please see "Bunker supply contract not contract for sale of goods".
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