PST Energy 7 Shipping LLC v O W Bunker Malta Ltd: A case on the statutory definition of a sale of goods

By Dr Mark Campbell, Teaching Associate (University of Bristol Law School).

AAEAAQAAAAAAAAZkAAAAJDY3NzMyZTA3LTYzZDEtNGFhNi05ZDFlLWI0YWE0NjZjNGNlYgSection 2(1) of the Sale of Goods Act 1979 (the ‘Act’) defines a sale of goods 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.’ There are, accordingly, three reasons why a contract may fall outside that definition and, thus, the Act’s jurisdiction. First, there may be no transfer of property in the goods, as in a bailment where there is transfer of possession but not ownership. Second, the transfer may relate to subject matter other than goods: e.g. an assignment of intangible property such as copyright or debt. Third, there may be an absence of money consideration: e.g. a gift or a contract involving goods given wholly in exchange for other goods.

In PST Energy 7 Shipping LLC v O W Bunker Malta Ltd [2016] UKSC 23, [2016] 2 WLR 1193 the UK Supreme Court has recently examined the reach of s 2(1) and, in particular, the requirement for a transfer of property in the goods. The transaction in question involved the supply of bunkers (marine fuel) by O W Bunker Malta Ltd (‘OBWM’) to PST Energy 7 Shipping LLC (‘PST’), the owners of a vessel, Res Cogitans. That agreement contained a retention of title clause. Where goods are supplied on credit terms, a retention of title clause allows the seller to retain ownership of the goods pending payment by the buyer. OBWM had been supplied with the bunkers by its parent company, O W Bunker & Trading A/S (‘OWBAS’), which in turn had been supplied by Rosneft Marine UK Ltd (‘RMUK’). The contract between OWBAS and RMUK also contained a retention of title clause. Physical delivery of the bunkers to the vessel was made by RN-Bunker Ltd, an associate company of RMUK and the supplier to RMUK. The legal proceedings arose following an application for restructuring by OWBAS, an event which would allow ING Bank NV to claim the contract price from PST as assignee of debts owed to OWBM. Concerned that it may not recover the contract price from OWBAS, RMUK indicated that it would seek payment from PST on the basis that RMUK remained the owner of the bunkers.

As Lord Mance observed, the central issue was PST’s concern ‘that they may be exposed to paying twice over, once to their immediate bunker supply group now insolvent, and again to the ultimate source of the bunkers who may claim rights under a reservation of title or maritime lien.’ (para. 2) PST attempted to mitigate the risk of double liability by denying that it was obliged to pay the contract price to OWBM. There were, in effect, two limbs to PST’s argument. First, the agreement between PST and OWBM was a sale of goods contract governed by the Act. Second, however, OWBM had no right to bring an action for the price under s 49(1) because property in the goods had never have passed to PST; as the fuel was consumed before payment, there was no point at which it could be said that property had been transferred to PST. Section 49(1) states that: ‘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.’

PST’s position was rejected at each stage of the dispute: in the arbitration proceedings commenced by ING Bank and in appeals to the Commercial Court, the Court of Appeal and the Supreme Court. In the Supreme Court, Lord Mance, with whom the others agreed, confirmed that the contract between OWBM and PST was not one governed by the Act. That conclusion followed from the fact that OWBM had reserved title to the bunkers and the realistic expectation that the bunkers would be consumed (completely or at least in large part) prior to the expiration of the 60-day credit period. In that respect the contract ‘in its essential nature … offered a feature quite different from a contract of sale of goods—the liberty to consume all or any part of the bunkers supplied without acquiring property in them or having paid for them.’ (para 34). While the arrangement may have been ‘closely analogous to a sale’ of goods, in legal terms the contract was ‘sui generis’ (paras. 31, 39). For that reason, any question over the scope of s 49(1) fell away, leaving PST’s obligation to pay for the bunkers to be determined by reference to its agreement with OWBM. PST was, accordingly, unable to deny its liability to OWBM under the contract.

There are four points worth observing about the decision. First, the key conclusion at each stage of the proceedings—that the contract did not fall within the statutory definition of a sale of goods—may come as a surprise to those in the commercial world and to (at least) some lawyers. While the agreement for the supply of bunkers may have been regarded as a sale of goods in a commercial sense, the assumption or expectation that such contracts are governed by the Act was met by the logic of personal property law: one cannot obtain title to something that no longer exists, and so it cannot be a transaction with the transfer of title at its heart as stipulated by s. 2(1). That said, it is suggested that the categorisation of a transaction as ‘sui generis’ does not mean that the courts will allow contracting parties easily to evade the legal incidents usually associated with a sale of goods. Lord Mance says, for example, that: ‘I also accept that, both as regards bunkers consumed and as regards any bunkers remaining at the time of payment, the contract, although not one of sale, would contain similar implied terms as to description, quality, etc to those implied in any conventional sale.’ (para. 31).

Second, the Supreme Court decision draws a dividing line between, on the one hand, contracts for the sale of goods containing a reservation of title clause (governed by the Act) and, on the other, contracts reserving title that are to be regarded ‘sui generis’ (not governed by the Act). In the latter situation, it is the retention of title within the context of the transaction as a whole that prevents the contract being categorised as a sale of goods. Nevertheless, it does not appear that the bunkers case will unsettle the law governing retention of title (or Romalpa) clauses. PST had attempted to rely on certain retention of title authorities (as well as authorities on the supply of bunkers) which had proceeded on the assumption that there was a contract for the sale of goods. Lord Mance did not find these retention of title cases helpful in resolving the matter in hand and suggested that ‘even if on analysis … [Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25 and Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339] could and should have been analysed as sui generis, like the present, it is difficult to think that could have had any effect on their outcome.’ (para 35).

Third, although obiter given his conclusion that the contract did not come within the Act’s jurisdiction, Lord Mance was minded to overrule FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [2013] EWCA Civ 1232, [2014] 1 WLR 2365 on the exclusivity of s. 49 (para 58). This is, arguably, the most significant aspect of the Supreme Court decision. The Court of Appeal in Wilson v Holt had held that, where a contract is governed by the Act, the seller’s ability to claim the price was necessarily governed by and limited to s. 49(1). In other words, it had been said in that s. 49 represented a ‘complete code’  (a phrase used by Lord Mance, para. 58) on actions for the price: i.e. unless property in the goods has passed, the seller cannot maintain an action for the price; a position subject only to s 49(2) where the agreement expressly provides for payment on a certain date irrespective of delivery. Having rejected the idea that s 49(1) exhausts a seller’s right to claim the price, the courts will now have the opportunity, as and when suitable cases arise, to consider the extent to which a seller can claim the price on a basis other than s 49(1).

Finally, the case demonstrates the importance to the commercial lawyer of a sound grasp of personal property law. In contrast to land law, personal property law is rarely taught as a subject in its own right in English law schools. It may be covered to some extent during courses on commercial law (given its importance to bailment, sale of goods and security interests) and, at least tangentially, in trusts. Where, however, there is a contract for the sale of goods, or some equivalent transaction, the ability to draft an agreement appropriately and to give the right advice is dependent on an understanding of precisely what is being transferred or reserved, acquired or disposed of, created or consumed in the performance and/or the aftermath of the transaction. That is especially so where there is the added complexity of a retention of title clause.

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