The sale of goods and retention of title

29th October 2015

The definition of a contract for the sale of goods under the Sale of Goods Act 1979 (SOGA) is one in which the seller transfers the property in the goods to the buyer for money consideration, i.e. the price.

Under section 49 of SOGA, an unpaid seller can claim for the price of the goods if either: (1) the property in the goods has passed to the buyer; (2) or payment of the price is expressed to be payable on a certain day irrespective of delivery

If those requirements are not met, there can be no action for the price under SOGA. Actions under section 49 have advantages; in particular, issues of remoteness, causation and mitigation do not arise, making this a comparatively quick and easy way of obtaining judgment for a liquidated sum. How these statutory provisions interact with retention of title clauses has recently been considered by the High Court.

In PST Energy 7 Shipping LLC v OW Bunker Malta Ltd [1], a shipowner, PST, entered into an agreement to buy fuel with OWBM, a member of the OW Bunker group of companies. OWBM effectively contracted out the supply obligation, by way of a series of supply contracts with the fuel eventually being physically supplied by a member of the Rosneft group of companies. All the contracts in the chain contained terms which provided for a credit period of either 30 or 60 days from delivery and a retention of title clause by which the seller retained title in the fuel until payment. These are common terms in the industry.

After delivery of the fuel to PST but before Rosneft received payment from the OW Bunker group, the OW Bunker group applied to enter an insolvency process. This meant that Rosneft was unlikely ever to receive payment from OW Bunkers. Rosneft therefore sought payment direct from PST, notwithstanding it had not entered into a contract with PST. OW Bunkers and its assignee, ING Bank, also sought payment from PST.

PST argued that SOGA applied to its contract and so OW Bunkers’ claim needed to be for the price under section 49 and the conditions for section 49 had not been met. OW Bunkers argued that SOGA did not apply to the contract with PST at all and the claim was a straightforward debt claim.

The High Court stated that there were four conditions for a contract to qualify as a contract for the sale of goods under SOGA:

• the contract must be for goods
• the seller must undertake an obligation to transfer property in the goods to the buyer
• there must be money consideration payable to the seller
• there must be a link between the transfer of title and the money consideration, i.e. the buyer must be paying for the title to the goods.

In this case, the first and third conditions were satisfied. However, the combined effect of the retention of title clause, the credit period, the fact that permission was given under the relevant contracts for PST to use the fuel and the fact that some or all of the fuel would be used before the expiry of the credit period meant that the parties understood that title would never actually transfer to PST. Rather, the nature of the parties’ agreement was that OW Bunkers would arrange delivery of the fuel with the PST immediately being entitled to use it. Essentially, PST was paying for the right to use the fuel as opposed to title in the fuel. As such, SOGA did not apply to the contract at all. The claim was therefore a straightforward debt claim and not subject to any requirement as to the passing of title in the fuel to PST at the time of payment.

The parties themselves appeared to have anticipated at the outset that SOGA would apply to their contract. What the case shows is that whether SOGA applies will depend on the structure of the transaction as a whole and an analysis of the obligations the parties have assumed. The effect of the retention of title clause in the particular context of the case was that SOGA did not apply.

A consequence of this would be that that the statutorily implied protections such as fitness for purpose and satisfactory quality would not apply.

The lesson is that the inclusion of a “standard” retention of title can have substantial repercussions both on actions for payment of the price and on the terms that may be implied into the contract.

_____________________

[1] [2015] EWHC 2022 (Comm)