On November 7, 2014 O.W. Bunker, the parent company of a global network of traders and physical suppliers of fuel bunkers, filed for bankruptcy protection in Denmark upon the discovery of a massive fraud and unsupervised trading which resulted in losses of about US$275 million. This forced nearly all of its subsidiaries to file for bankruptcy in their respective countries of incorporation. Shortly thereafter, a co-operation agreement was reached between O.W. Bunker and ING Bank, as the assignee of a number of debts due to the parent company.
At the time of is collapse, O.W. Bunker maintained operations in twenty-nine (29) countries (including the United States, Singapore, Germany, China, and the United Arab Emirates), and possessed a market share of roughly seven (7) percent of the worldwide bunker trade.
Given the importance of the company, it was unrealistic that such a fallout did not engender a plethora of litigation around the word. Even more interesting is the circumstance that in many of these cases the judiciary had to determine whether and to which extent maritime derogatory and domestic rules applied to a cross-border insolvency case.
This article examines the most remarkable decisions issued so far in four (4) common law jurisdictions, and highlights the existence of a common but uncertain pattern, which tends to favour the claims of the insolvency estate (and of the assignee of its credits) over those of the other claimants.
The main bone of contention
Nearly all contentious cases involving O.W. Bunker originated from the peculiar way in which the Danish company run its business. In summary:
- The crew of a ship (not necessarily with the prior, express permission of its owner or charterer) ordered a quantity of marine fuel (the bunkers) from O.W. Bunker or its subsidiary;
- The order was then transmitted to the local subsidiary, where the ship wanted to be refuelled;
- W. Bunker (subsidiary) then obtained the bunkers from the parent company which, in itself, bought them under credit from a physical supplier;
- W. Bunker (subsidiary) finally entered into a contract with the ship. The contract provided for payment 60 days after delivery, included a retention of title clause (which meant that the property of the bunkers did not pass until the payment has been received), but allowed the ship and its owners to use the bunkers for the propulsion.
When O.W. Bunker (parent) filed for bankruptcy, some of its physical suppliers still needed to be paid, while some of its clients still needed to pay for the bunkers. As a result, both the physical suppliers and ING Bank tried to recover their claims on the owners of the vessels.
The owners, on their side, not only did not want to pay the same amount twice, but they also wanted to have their ships arrested and sold for the satisfaction of the creditors, a possibility far from remote given that some jurisdictions recognize the enforceability of maritime liens for necessaries. Here is where the judicial branch had its say.
United Kingdom: the Res Cogitans Case
Because U.K. law does not recognise the enforceability of maritime liens over necessaries, the owners of the Res Cogitans vessel sought a declaration – first from an arbitration panel and then from the judiciary – that they were not liable for paying any amount of money to the parent company, because the agreement they signed could not be considered as a contract of sale.
Under s.49 of the Sale of Goods Act 1979, a seller is precluded from recovering the agreed price from the buyer if he had not transferred the property to him, a circumstance that was prevented by the existence in the Res Cogitans contract of a retention of title clause. However, both the arbitrators and the courts were not persuaded by a literal interpretation of the existing law, and concluded that the agreement signed by the parties was a contract sui generis, therefore not subject to the Sale of Goods Act 1979.
In its final ruling, the Supreme Court (11 May 2016) went a step further, and (even if in an obiter dictum) held that, had the agreement been qualified as a contract of sale, the seller was nevertheless entitled to recovery with an action in debt. This was because s.49 of the Sale of Goods Act 1979 did not represent an exclusive list of cases in which such a remedy was available to the seller. In other words, the Supreme Court expressed its willingness to overrule a precedent case known as Caterpillar (2014), thus significantly favouring the claims of O.W. Bunker over those of the physical suppliers.
Singapore: the Precious Shipping Case
In the Precious Shipping collective case, a group of owners of vessels sought an interpleader relief from the high court. Interpleader actions are procedures found in common law jurisdictions under which a debtor who has not paid an invoice but is faced with competing claims from several, alleged creditors brings proceeding to join the claimants, and pays the money into a court. It will be up to the court to determine who is entitled to the money.
Apparently, this was an inconclusive case, since the court issued a ruling (21 July 2015) in which it rejected the owners’ plea for lack of proof of the prima facie requirement prescribed by the law for this remedy to be invoked. However, in the same judgment, the court held that “there [was] no evidence […] that any of the physical suppliers intend[ed] to or ha[d] any basis to assert a claim in a jurisdiction which recognises a maritime lien in respect of unpaid bunkers”. In other words, another victory for O.W. Bunker.
Canada: the Canpotex Case
When things seemed to favour the pleas of the insolvent estate and its assignee over those of the opposing claimants, the federal court of Canada issued a judgment (22 June 2015), which sits strikingly in contrast with the English and Singapore decisions.
Canada is one of those jurisdictions where, unlike the U.K. and Singapore, it is possible to enforce a maritime lien against the vessel for necessaries. In that case, the court held that a broker trader is never entitled to a maritime lien if he had not paid the physical supplier. As a result, the court recognised the existence of a maritime lien in favour of the physical supplier. A solution, which has been explained by some commentators by reason of the unique, contractual incorporation of the contract with the physical supplier in the agreement between O.W. Bunker and the vessel.
As a result of this decision, O.W. Bunker was entitled only to recover the margin of the money paid by the owners to the court, while the biggest share was given to the suppliers (in blatant breach of the insolvency principle of pari passu distribution among equally ranking creditors).
U.S.A.: When Things Get Messy
The unsatisfactory level of co-ordination between courts is even more striking when we factor in the decisions issued in the United States, the latest of which dates back to 9 January 2017. This is because not only these rulings pay little attention to the similar cases decided abroad, but also because opposing interpretation of the U.S. law are proposed even within the same district.
One of the firsts to issue a ruling on the O.W. Bunker fallout was Forrest J from the Southern District of New York. In two decisions (24 August and 21 October 2016) in the Temara case, she observed that, while maritime liens for necessaries are permitted under U.S. law, they are also disfavoured (since they are perceived as an encumbrance to commerce) and can only arise by operation of law.
The court also observed that the supply agreement between the physical supplier of maritime bunkers and the intermediary (O.W. Bunker) did not in itself create any agency relationship between the physical supplier and the vessel’s owner or charterer, thus rejecting the physical suppliers’ request of being recognized a maritime lien over the vessels.
For similar considerations and, in particular, for observing that O.W. Bunker has not put itself at financial or other risk for providing to the vessels bunkers on which it had no proprietary title, the court concluded that the insolvency estate was equally devoid of the protection afforded by the maritime law.
Unfortunately, this decision was not followed in two other cases. The first is the Alabama’s district court decision in Deep Blue (28 Sept. 2016), where the court concluded that ING Direct and O.W. Bunker had an enforceable maritime lien over the vessels on the basis that payment of the physical supplier was not a requirement set out in the law for the maritime lien to exist.
The second, and most important dissenting decision was issued by Caproni J from the same Southern District of New York on 9 January 2017. This case – known as Canpotex – decided twenty-four claims against the Danish insolvent company, which were either commenced or transferred to that court during the previous years.
On that occasion, the court held that the insolvent estate was entitled to a maritime lien over the vessels, because the respondent (O.W. Bunker) was able to prove the existence of a financial or other risk in providing the fuel bunkers to the claimants.
This brief analysis of the case law on the O.W. Bunker case highlights the uncertainty of the position of each of the parties involved, despite the level of sophistication of the agreements they entered into. It also demonstrates the lack of sufficient coordination not only between domestic courts, but also between separate areas of law. Serious efforts should be undertaken to improve this rather bleak and murky state of affairs.