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11 February 2015
As the last few months have shown, the bunkering industry is volatile and risky. As such, bunker suppliers seek to include favourable terms which will assist them if a deal goes wrong. These contractual precautions range from favourable applicable law and jurisdiction clauses to the imposition of retention of title clauses. Under these clauses, parties will normally agree that the bunker supplier retains ownership over all bunkers furnished until the buyer has paid in full.
In a recent decision the Civil Court upheld a request to have bunkers supplied to the defendant vessel excluded from a court-approved private sale on the basis that retention of title clauses existed, which governed the supply of the bunkers.
In Dr Ann Fenech noe v Vessel MV D Ladybug,(1) the court had to determine whether to grant the mortgagee bank's request to order the private treaty sale of Ro-Ro vessel MV D Ladybug to an interested buyer. A court-approved private sale grants the new owner clean title over the vessel (similar to that afforded pursuant to a judicial sale by auction). Thus, any claims against the vessel are limited to the purchase price, which is deposited with the court.
A vessel sold via a court-approved private sale is generally sold as is (ie, with everything on board, including equipment, machinery and appurtenances), unless a party comes forward with a legitimate claim of title over any of the machinery or equipment (eg, in the court-approved private sales of the sister ships MV B Ladybug(2) and MV A Ladybug,(3) the court excluded some on-board trailers from the sale of the vessels after a third party provided legitimate proof that it was the owner of the trailers).
In D Ladybug the owners had ordered several consignments of bunkers, all of which were furnished by two local suppliers while the vessel remained under arrest in Malta. The mortgagee bank paid the outstanding amounts due to the bunker suppliers, as the owners had defaulted on their payments. Simultaneously, the mortgagee bank entered into subrogation agreements with the suppliers.
During the court-approved private sale proceedings, the bank acted as both:
The bank successfully argued that the bunkers were not part of the debtor's property (ie, the ship) on the basis that the terms and conditions of both physical suppliers contained retention of title clauses, whereby the bunker suppliers retained ownership over all bunkers until the buyer had paid in full. The bank also relied on a recent amendment to the Commercial Code, which grants parties the statutory right to reach agreements on retention of title clauses. While the inclusion of Article 26H of the code would seemingly quash any debate regarding the enforceability of retention of title clauses or otherwise under Maltese law, it has rarely been tested; and until this case, it had never been used in the context of bunkers. The bank also argued that since it had been subrogated to the rights of the suppliers, it could avail itself of those rights.
The court agreed with the bank and excluded the bunkers from the sale, providing the bank with two options: debunker the vessel or sell the bunkers to the interested buyer.
The bank opted for the latter. To the bank's benefit, the proceeds from sale of the bunkers did not need to be deposited with the court alongside the funds from the actual sale of the debtor's vessel. Likewise, the amount received for the bunkers was not subject to any distribution proceedings.
Before this landmark decision, the issue of retention of title clauses with regard to bunkers was unclear. Indeed, the only other court rulings regarding the exclusion of bunkers reached the opposite conclusion. Admittedly, the facts were somewhat different and the issue related to bunkers purchased by the charterers, which were on board when a creditor requested the judicial auction of the MT Pacific Future.(4) The court concluded that the bunkers on board should be excluded, despite the charterers' claims that the bunkers were ultimately their property. The court further concluded that the charterers should not be treated differently from other creditors and all claims (including claims regarding bunkers) should attach to any eventual sale proceeds and rank according to law. However, arguably, this conclusion may have been somewhat superficial, as when considering the charters' claims for the bunkers, the court stopped short of distinguishing between those bunkers which were consumed and those which were still physical on board. Therefore, this verdict may have prejudiced the charterers' rights over their own property.
MV D Ladybug demonstrates that the inclusion of retention of title clauses can help to mitigate any possible losses in relation to bunkers.
For further information on this topic please contact Adrian Attard at Fenech & Fenech Advocates by telephone (+356 2124 1232), fax (+356 2599 0645) or email (firstname.lastname@example.org). The Fenech & Fenech website can be accessed at www.fenechlaw.com.
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