OW Bunker's Bankruptcy: Will You Have to Pay Your Bunker Debts Twice?

Zeina is a specialized maritime lawyer with an extensive experience in Lebanon and the gulf region.

In November 2014 OW Bunker – one of the world's largest bunker suppliers and traders – filed for in-court restructuring for major parts of its business. This triggered a number of cases involving shipowners or operators that had contracted with OW, but had been physically supplied bunkers by a third party. In such cases, shipowners are at risk of having to pay their bunker debts twice if the physical supplier fails to receive payment under its supply contract with OW.

Physical suppliers in the OW supply chain have sought payment of outstanding amounts directly from shipowners – irrespective of their contractual position – and have threatened to arrest ships if their debts remain unpaid, leaving shipowners in a dilemma. Following OW's bankruptcy, shipowners have faced claims for payment directly from physical suppliers that have not been paid by OW on the basis that they were directly liable for the debt – either because of the bunker delivery receipt signed by the ship master or because the supplier had had a retention of title provision in its terms and conditions.

The situation became more complicated when ING Bank NV intervened as OW's security agent under the English omnibus security agreement concluded between OW Bunker Trading A/S (and some of its subsidiaries) and ING on December 19 2013. As part of the agreement, OW Bunker Group assigned and charged to ING all current and future rights, titles and interests in its third-party and intercompany receivables. In other words, OW and ING sought payment from shipowners for the same bunkers as the physical suppliers. Both OW and ING and the physical suppliers could threaten to arrest ships to secure the same claim, which has put shipowners in the untenable position of having two different parties demand payment for the same debt.

Right to arrest

The merits of a physical supplier's claim against a shipowner or ship in the absence of a contractual link will depend on the governing law and jurisdiction; it should not give rise to the right to arrest the ship in Lebanese territorial waters. Pursuant to Lebanese law (the Civil Procedures Law in the case of the precautionary arrest of ships), a ship can be arrested in Lebanese territorial waters for any claim that the claimant has against the shipowner, provided that the claim is proven – at face value – to be serious and grounded. The only exception to this principle is a maritime lien over a ship, which gives creditors the right to arrest the ship even if the shipowner is not the debtor (Article 48 of the Merchant Shipping Code).

In this case, the problem for physical suppliers has been the lack of sufficient proof of the debt as the contracts for the supply of bunkers were not concluded directly with the shipowners. However, in December 2015 an execution judge arrested a ship in Lebanon for the debt of a physical supplier that had supplied bunkers to the ship on behalf of OW. The physical supplier filed its substantive claim on the merits within the required five days of the date of the arrest order and on December 14 2015 the Beirut Commercial Court issued a judgment in favour of the physical supplier, ordering the shipowner to pay it the value of the supplied bunkers.

The shipowner did not appeal the judgment. Thus, the court could have been more flexible in regards to proof of debt, allowing the physical supplier to arrest the ship and confirm its debt later.

This development in the Lebanese jurisdiction coupled with the recent judgment issued in the London arbitration case Res Cogitans has put pressure on shipowners. In Res Cogitans the shipowner sought to challenge the right of OW Bunker and ING to obtain payment for bunkers supplied to its ship on the basis that the bunker supply contract was governed by the UK Sale of Goods Act 1979, and that title to the bunkers had not passed. However, the Supreme Court's May 11 2016 decision confirmed that bunker suppliers that are unable to transfer property in bunkers supplied to a ship are still entitled to receive payment for the bunkers from the shipowner.

Unfortunately, the Supreme Court's decision removed the shipowner's ability to appeal the decision further and deprived it of a defence against a claim from OW and ING. As a direct consequence, a shipowner or charterer that contracted with OW potentially may have to pay not only OW and ING, but also the physical supplier if the supplier is granted a lien under local law. However, each case should be considered separately as the Supreme Court's comments in relation to the implied terms of bunker supply contracts must be carefully considered.

Comment

In principle, shipowners are liable to pay a contractual debt to ING (as OW's assignee) as well as to the physical supplier, effectively meaning that they must pay for the same bunkers twice. This is a disappointing decision for the maritime industry that has an unwelcome outcome for those regularly entering into bunker supply contracts. Standard industry forms (and not only those relating to bunker supply contracts) will have to be amended in order to protect the position of those purchasing bunkers from bunker traders in the future.