a) The case

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In PST Energy 7 Shipping LLC and another v OW Bunker Malta Ltd and another (“The Res Cogitans”)587 the English Supreme Court upheld the decisions of an arbitral tribunal and two judgments by lower courts in characterizing the contract in question not to be a sales contract under the Sale of Goods Act 1979.

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The Res Cogitans was a ship that lay in a Russian port in November 2014. Its owners and managers (hereafter: the shipowners) ordered bunkers (ship fuel) from OW Bunker Malta Ltd (hereafter: OWBM) to fuel said ship. OWBM bought the bunkers from its Danish parent company, OW Bunker & Trading A/S (hereafter OWBAS). OWBAS added to the chain of contracts by in turn ordering them from Rosneft Marine (UK) Ltd (hereafter: RMUK), which called on RN-Bunker Ltd (hereafter RNB), since the latter had facilities nearby the port and could deliver the bunkers directly to the shipowners. Subsequently OWBAS became insolvent.

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The contracts within the chain differed but each one contained a reservation of property clause, according to which the property would not pass until full payment. Under the contracts, payment was to be effected within 30 (contract between OWBAS and RMUK) and 60 days (contract between the shipowners and OWBM) respectively. The ship-owners purportedly used the bunkers within these time-periods to fuel the ship588 but did not pay OWBM. Fearful of being held liable by both their contractual partner, OWBM, and the original owners of the bunkers, they initiated arbitration proceedings against OWBM (and their bank ING, which may have been assigned the alleged claim for the price) asking the arbitral tribunal for a declaration that they were not liable for the price.

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While the dispute ultimately concerned the correct legal basis for claiming the purchase price, and especially with the limits to section 49 of the Sale of Goods Act 1979 posing difficulties on its own,589 the preliminary question arose regarding whether the contract at hand could be characterized as a sales contract under section 2(1) of the Sale of Goods Act 1979.

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The main line of argument presented by Lord Mance, with the full support of Lord Neuberger, Lord Clarke, Lord Hughes, and Lord Toulson is based on the liberty of the shipowners to use the bunkers before payment thereof. Since the parties expected the shipowners to use the bunkers before paying, and due to the commercial reality that credit has value and full advantage will be taken, the contract should not be characterized as a straightforward agreement to transfer the property for a price.590 The court further took issue with the fact that property in the goods would likely not have existed anymore as soon as the price would have to be paid. Lord Mance summarized his own reasoning:

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Consequently, the contract was qualified to be sui generis,592 to which the Sale of Goods Act 1979 did not apply. In contrast to the Court of Appeal, the Supreme Court found this contract not to be divisible into a sui generis part and a sales part regarding the number of bunkers not being used up before the price became due, since the arrangement called for a single price to be paid for all bunkers.593

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Lord Mance took up two of the major arguments against the sui generis characterization. First, his Lordship rejected a relevant scintilla temporis (a spark of time). Also referred to as the “nanosecond argument”, the argument is based on the idea that just before the bunkers were consumed, the reservation of property clauses were lifted and the shipowners became owners for a nanosecond. Lord Mance rejected the argument with the mere remark that doing so was right.594 Males J had reasoned at first instance that the construction of a nanosecond transfer would contradict the express contract term allowing property only to pass upon payment although the parties had envisioned the goods to be consumed beforehand.595

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Second, Lord Mance dismissed the argument that the contract at hand was a conditional sales contract.596 According to section 2(3) of the Sale of Goods Act 1979 a sale can be conditional, and section 2(6) of the Sale of Goods Act 1979 provides that the “agreement to sell becomes a sale when [...] the conditions are fulfilled subject to which the property in the goods is to be transferred.” Crow QC, acting for the shipowners, had claimed that the contract could, hence, be regarded as an agreement to transfer property, conditional 131 on the bunkers remaining unburned when payment is made.597 The rejection was threefold: the argument ignored that it addressed only one possibility, in that some of the bunkers would have to survive, while a condition under sections 2(3) and (6) of the Sale of Goods Act 1979 required it to apply to all goods under the contract, not just a part of them.598 Furthermore, the property in the consumed bunkers would never pass and was not agreed to pass,599 which is why there was no conditional sale with regard to these goods. Lastly, the price was a single price without any further distinction as to whether the goods had been consumed or not, which is why it was not convincing to focus on the agreement to pass property in the unconsumed bunkers at the time of payment.600 The follow-up-argument that OWBM had undertaken to transfer the property at the date of payment and that they would also have transferred property in the bunkers consumed, was rejected due to its lack of legal and commercial sense and its metaphysical appearance.601

b) Reception in the English literature

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Despite the clear consensus of the arbitrators and judges that decided this case, the characterization of the contract as sui generis has been criticized in English literature. While the overall result that OWBM or their bankers were entitled to the price is mostly welcomed,602 a broad consensus seems to emerge that this decision creates unwarranted legal uncertainty.603 This uncertainty extends to different directions. First, it is unclear which rules 132 of the Sale of Goods Act 1979 can still be applied (analogously) to such sui generis contracts.604 Second, it is unclear whether consumers and others can still expect to be protected under consumer laws605 and the Unfair Contract Terms Act 1977.606 Third, it is unclear to which kinds of contracts the characterization as sui generis contracts extends, since many contracts in many parts of the economy rely on retention of property clauses where the property in the goods might be lost by consumption or other use before payment of the price.607 Additional uncertainties are created in light of the fact that a number of other jurisdictions have their own Sale of Good Acts, which are closely modelled on the Sale of Goods Act 1979 and within which decisions of the English Supreme Court still remain important.608

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The following sections examine the arguments and solutions brought forward in literature to avoid this uncertainty and to characterize this contract as a sales contract under English law.

136 a) Property-transfer for a nanosecond and functional analysis of the retention of property clause

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Both arguments regarding the property transfer for a nanosecond and the functional analysis of the retention of property clause rely on the interpretation of (national) property law: Under both arguments, property in the goods is transferred to the buyer, which in turn allows for a characterization of the contract as being a contract for the sale of goods. Especially in an international setting in which cases will be governed by the CISG, there are three disadvantages of such an interpretation. First, while it might be sensible to propose changes to English property law in introducing a functional interpretation of the transfer of property in such cases,635 these changes would have to be reflected in all potentially applicable national laws to allow for a uniform scope of application of the CISG. Since the uniform interpretation of the different applicable national laws is uncertain at best,636 the argument under English law carries less weight for the parallel problem under the CISG. Second, if one interprets the CISG to contain an implicit agreement of the parties to transfer the property a nanosecond before consumption or other loss of property, conflicts, or discrepancies with the law applicable to the transfer of property will arise, as these national laws will not necessarily accept such a transfer. Third, given the diverging national laws on the transfer of property in this respect, it is unlikely that the delegates negotiating the CISG provided for a solution of this question. Therefore, the CISG should not be interpreted to envision a nanosecond transfer or to provide that parties always transfer the property under a functional interpretation when the seller retains property.

b) Conditional contract of sale

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A different argument that warrants consideration of transfer to the CISG concerns the conditionality of the CISG contracts: One could interpret the contracts to make the transfer of property conditional on the ongoing existence of the goods at the time of payment.637 The CISG generally allows for conditions to be agreed upon by the parties (Article 6).638 Yet, if the parties 137 agree that the goods are consumed before payment, an interpretation under Article 8(1) of the CISG would accordingly find that no such condition was agreed upon. Moreover, a reasonable third person evaluating the transaction under Article 8(2) of the CISG would not find a condition to exist since property is not meant to be transferred according to the parties’ arrangements. The suggested condition would, thus, be a mere fiction, which is why this argument does not convince.

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Furthermore, the argument relies on alleged similarities to a loss of the goods: If the goods are destroyed before delivery and/or payment, the buyer might still be required to pay for the goods if the risk was shifted beforehand. Such contracts would still be considered contracts for the sale of goods. This could be considered to be comparable to consumption before payment. For this reason, one might claim that these contracts allegedly contain a similar conditionality.639 As the CISG governs the transfer of risk in Articles 66–70, and the mere materialization of the risk would not change the character of the contract, the argument could generally be transferred to the CISG. It is important to note, however, that risk under the CISG is understood to encompass haphazard events that none of the parties are responsible for.640 Consequently, these provisions govern situations that were not the desired outcomes of the transaction for any of the parties. Such a contract still called for the transfer of property. It is not comparable to a contract under which the parties agree that the goods can be consumed or destroyed before payment of the price although the property was retained by the seller until such payment. The intended outcome of the transaction is, however, the basis for the characterization of the contract. Therefore, a contract that cannot be fulfilled due to a materialization of risk and a contract under which loss of property due to consumption is envisioned and agreed upon by both parties should not be considered so similar as to allow reaching identical results regarding the characterization of contract.

c) Party autonomy in characterizing the contract

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This leaves the argument concerning party autonomy. Party autonomy is enshrined in Article 6 of the CISG and considered to be a cornerstone of modern contract law.641 Therefore, the argument raised under English law referencing the parties’ choice of wording (“sale”, “seller”, and “buyer”) to 138 express the intention of the parties to conclude a sales contract, can generally be transferred to the CISG.642

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If “party autonomy” is understood to refer to the parties’ ability to conclude a contract containing typical sales obligations and declaring them as such, no issue arises. It is questionable, though, whether the characterization of a contract is directly influenced by the parties’ choice of words if a contract does not fall under the scope of application of the Convention. This is because Contracting States are bound to apply the CISG under Article 1(1)(a) without recourse to private international law, if the Convention is applicable.643 If it were up to the parties to declare the CISG applicable by using terminology like “international sale” even if the contract would not be considered a sale of goods under the CISG, the parties could circumvent private international law to determine whether the choice of the parties amounts to a choice of the CISG and whether this choice is effective.644

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This detour along the rules of private international law can be an important restriction. For example, Article 3 of the Rome I-Regulation does not allow the choice of a non-State body of law.645 The CISG might fall under this designation if it is chosen without reference to a national law of which it might form part.646 Therefore, the mere use of wording common for sales contracts cannot have a decisive impact on the characterization of a contract under the CISG. Instead, the agreed upon content and obligations of the parties should be analyzed and, in this regard, substance shall take precedence over form or wording.

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Hence, party autonomy, understood as referring to the parties’ wording, should not be relied upon to define a sales contract under the CISG and thereby the scope of the Convention’s application.