Supplier Beware! Retention of Title Clauses in Contracts and the OW Bunker Malta Ltd Decision

Supplier Contracts and Retaining Title Many suppliers take commercial risks when supplying physical components or “goods” in a manufacturing, supply or retail context. In a bid to protect their position, they often retain title or ownership in the goods they supply until payment, which can often be on a 60, 90 or 120 day credit

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Supplier Contracts and Retaining Title

Many suppliers take commercial risks when supplying physical components or “goods” in a manufacturing, supply or retail context. In a bid to protect their position, they often retain title or ownership in the goods they supply until payment, which can often be on a 60, 90 or 120 day credit term.

This is a commercial risk since a key legal right afforded to a supplier under the Sale of Goods Act 1979 is to sue for the price of the goods when ownership has passed to the buyer, provided the price is to be paid on a specified date and the buyer does not pay. This can also include the right to claim additional damages.

However, if a supplier retains title in their goods in their agreement, a big question arises whether the supplier can rely on this right to sue for the price if ownership of the good never passed to the buyer. In that case it will remain a simple debt claim.

The OW Bunker Decision

The recent UK Supreme Court decision of PST Energy 7 Shipping LLC and another v OW Bunker Malta Ltd and another [2016] UKSC 23 sheds some more light on this issue.

Briefly, OW Bunker supplied fuel to bunkers for ships with a 60 day payment period. The contract contained a retention of title in the fuel bunkers until payment. The ship owners (PST Energy) were able to then use the fuel in that time and it was understood that the fuel could be either partly or completely consumed in that 60 day credit period. If the fuel bunkers were not fully consumed, the ownership of the remaining fuel would pass to the ship owners in exchange for the price at payment.

OW Bunker was not paid in that time and went into administration. The administrators believed that the contract was for supply of goods and wished to use the Sale of Goods Act 1979 right to sue the ship owners to recover the price of the fuel.

Both the High Court and Court of Appeal said this was not a contract for the sale of goods since “title” or ownership of the goods had not passed and the Caterpillar decision did not allow a claim for price except under Sale of Goods Act 1979.

The Supreme Court and Suing for Contract Price

The Supreme Court agreed that this was not a contract that the Sale of Goods Act 1979 applied to, but because the contract contained a specific clause regarding suing for the price, OW Bunkers’ administrators had a common law right under contract to sue. A Supreme Court judge commented though that the right to sue for the price under the Sale of Goods Act 1979 was focused where the goods were not yet delivered. There are common law cases which show that suing for the price was possible even where ownership had not yet passed to the buyer, so in this case, the goods (fuel) were at the ship owners risk and they could use them even though they did not necessarily have “title” or ownership yet. He said that the Sale of Goods Act 1979 was therefore not a complete code for situations where a supplier can sue for the price.

So What Should Suppliers Do

akrantz-sbThis decision is by no means definitive, nor is it a panacea for suppliers who use retention of title clauses in their commercial supply contracts since this case is unique to its facts. However, it does helpfully reinforce that using a retention of title clause may leave a supplier at the mercy of their contract terms and common law to sue for the price if they aren’t paid, which must be balanced against the commercial reality of removing retention of title to secure the protection from the Sale of Goods Act 1979. Whichever of these strategies is used, it is clear that suppliers ought to invest in diligent commercial contract drafting to ensure their rights are secure for that rainy day.

*This article is not legal advice and is not intended to be relied on as such. If you have any queries please get in contact and a solicitor from our team will be able to assist.

commercial law • Uncategorized

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