Allen & Overy has successfully represented a group of financial institutions in a UK Supreme Court test case arising out of the collapse of the OW Bunker Group (OWB), which prior to its insolvency was the world’s largest supplier of marine fuel.
OWB sourced fuel for its shipping customers all over the world and arranged, in most cases, for it to be supplied to vessels by third party physical suppliers. OWB’s working capital was financed by a USD700 million loan, secured inter alia by the assignment to the lenders of the payments due from ship-owners to OWB on the fuel supply contracts.
The ship-owners argued that they had no liability to pay under the fuel supply contract with OWB because OWB had not paid the physical supplier for the fuel. The ship-owners argued that because title to the fuel had not passed to them, the effect of the Sale of Goods Act 1979 (SOGA), meant that there was no basis to claim the agreed contract price. The ship-owners emphasised that they were exposed to the possibility of claims both from the physical supplier and the lenders and it was not fair that they should have to pay twice for the same supply.
The challenge for A&O was to establish either that the contract was not one of sale or that a previous Court of Appeal decision in the Caterpillar[1] case should be overruled. In the event, A&O succeeded on both counts.
The Supreme Court unanimously held that the OWB contract with the ship-owners was a particular type of contract (“sui generis”) which was not about the transfer of title but was an indivisible contract concerned with providing fuel for immediate use by the ship-owners before they acquired title to the fuel or paid for it. Once the fuel was consumed title could never be passed in goods which did not exist.
The Supreme Court also held that even if the contract had been a SOGA contract, s49 SOGA was not an exclusive code and therefore there was a valid claim under the contract for the agreed price because the fuel had been consumed. In this respect, the Supreme Court overturned the decision in Caterpillar.
James Partridge, partner at Allen & Overy, comments: “This decision provides welcome certainty for supply receivable financiers that their security rights have been robustly upheld.
“We have been successful at every stage of this complex piece of litigation. It is a tribute to the English legal system that in space of 15 months the case has progressed from an LMAA Arbitration to a thorough Supreme Court judgment, via expedited appeals to the Commercial Court and the Court of Appeal.”
