When a counterparty becomes insolvent

Companies impacted by the demise of OW Bunkers can now refer to a common legal position

On 7 November 2014 OW Bunker & Trading, one of the world’s largest suppliers of shipping fuel, filed for bankruptcy in Denmark (along with a number of its Danish subsidiaries and affiliates). The move followed significant risk management losses and the revelation of internal fraud. That filing set off a series of other bankruptcies across the globe by other OW Bunker & Trading subsidiaries and affiliates. The collapse of OW Bunkers led to numerous lawsuits and arrests around the world as owners faced competing claims from both the physical bunker suppliers and ING as the liquidator for OW Bunkers.

In the immediate aftermath the legal position varied greatly from jurisdiction to jurisdiction. Now the dust has settled, following the Res Cognitans Supreme Court decision of 11 May 2016, we reflect on the UK’s position and that of many other maritime jurisdictions.

The leading English case is PST Energy 7 Shipping LLC and Product Shipping & Trading SA v OW Bunker Malta Ltd and ING Bank NV (the ‘Res Cognitans’). This was a test case, brought to resolve the question of who an owner should pay in situations where both OW Bunkers and the physical supplier were out of pocket. In this case, the bunkers were supplied to Res Cognitans by OW Bunker Malta Ltd in Tuapse, Russia. OW Bunker Malta Ltd had obtained the bunkers from OW Bunker Trading A/S, which had obtained them from Rosneft Marine (UK) Ltd and which, in turn, had obtained them from RN-Bunker Ltd (the physical supplier who made the actual delivery in Russia). At the time of OW Bunkers becoming insolvent, the physical suppliers had not yet been paid.

The Supreme Court held:

i) that the owners’ contract with OW Bunkers was not a sale within Section 2 of the Sales of Goods Act 1979, so the owners had no defence to OW/ING’s claim for the price under Section 49 SGA 1979. In reaching this decision the Court focused on the fact that the OW/owners contract gave the owners liberty to consume the bunkers without acquiring property in or having paid for them.

ii) there is no implied term in the OW/owners contract that OW Bunkers must promptly pay their physical supplier. The only obligation on OW Bunkers was to have a legal entitlement to give permission for use of the bunkers prior to payment.

iii) even if the contract had been one of sale and not sui generis (ie not a contract with features which made it distinct/unique from standard sales contracts), on the facts, Section 49 SGA 1979 would not have prevented OW/ING’s claim for the price succeeding.

As a result, owners will have to treat any claim from ING/OW Bunkers akin to a debt claim, to be paid on presentation.

We recommend owners review their existing contract wordings to make clear that should their direct counterpart become insolvent, in the bunker supply context or otherwise, that payment to the party down the chain (eg the physical supplier) shall be permitted and discharge the debt to the insolvent party.

This is particularly pertinent in light of the information that follows, which demonstrates that a payment to the insolvent contracting party may not – in all jurisdictions – protect owners against claims from the physical supplier.

Michael Ritter is an associate and Paul Dean a partner at Holman Fenwick Williams in London. This article originally featured on The Shipowners’ Club website