The OW Saga continues: UAE Union Supreme Court decides to uphold the legal principle of privity of Bunker Supply Contracts


By Rania Tadros, Managing Partner, Ince & Co Middle East LLP

In the latest developments in the OW Saga, two decisions have been issued by the UAE’s Union Supreme Court deliberating on several legal issues of strong commercial importance in the shipping industry.

While there are some intricate differences in the facts of each case, the disputes generally arose from a common structure of sale/supply of bunkers agreements between a number of parties. Owners/Charterers had a contractual relationship with OW for the supply of bunkers to a vessel (“OW Contract”). OW would service that contract by sending a purchase order(s) to a bunker supplier at the particular port (“Physical Supplier”) requesting a nominated quantity of bunkers to be supplied to the named vessel (“Supply Contract”).

In November 2014, a number of OW entities filed for liquidation.  This led Physical Suppliers, who had supplied bunkers to ships but not been paid by OW, to pursue OW as well as the Owners/Charterers/the Vessel for payment. 

Whilst it was clear that the Physical Supplier’s contract was with the OW entity, they argued that they could claim payment from Owners/Charterers and/or the Vessel on the basis that:

  1. Owners/Charterers/the Vessel accepted the bunkers from the Physical Suppliers and this created a direct contractual relationship between the Physical Suppliers and Owners/Charterers.
  2. By signing the BDR, the Master/Chief Officer of the vessel, acknowledged the supply by the Physical Supplier on the latter’s terms and conditions,  which provide for payment by the Owner/Charterers.
  3. Alternatively, that there was an agency relationship between OW and Owners/Charterers, giving the Physical Supplier a right of direct recourse.
  4. The principle of joint liability should apply between OW and Owners/Charters for payment of the debts as such debts are within the meaning of a “maritime debt” under the UAE’s Maritime Law.

Uphelding the legal principle of privity of contract

In a number of recent decisions, the Supreme Court decided that Physical Suppliers could NOT look to Owners/Charterers/Vessel for payment and that its contract was with the relevant OW entity only.  In these cases, the Supreme Court also held that where the vessel had been arrested, such arrest should be vacated.

Accordingly, the Supreme Court has upheld the legal principle of privity of contract, as enshrined in article 151 of the UAE’s Civil Transactions Law (“CTL”). In one of the cases, the court remarked that it is impossible to treat the relationship between the Physical Supplier and OW, and OW and Owners/Charterers, as the same since the purchase price invoiced under each relationship for the same bunkers were different. This fact also evidenced, according to the Court, that OW cannot be treated as the agent of Owners or Suppliers.

Moreover, the signing of the BDR by the Master/Chief officer (which is common practice in the industry) as well as the fact that the Physical Suppliers sent several invoices and/or letters of demand to Owners/Charterers in respect of the supply of bunkers, did not indicate that Owners/Charterers entered into a contract or otherwise accepted the Physical Supplier’s terms of bunker supply – rather, the BDR was simply a receipt of delivery.

Significant Remarks

Applying such principles, the Court pronounced that the delivery of the bunkers to a third party (Owners/Charterers), did not oblige it to do any acts/omissions in satisfaction of terms and conditions of the Supply Contract. Rather, the delivery of the bunkers was proof that the Physical Supplier fulfilled its obligations to supply the bunkers to the vessel under the Supply Contract; though it may have conferred a personal (not absolute) right of receiving the bunkers to Owners/Charterers.

Finally, and significantly, the Supreme Court considered whether the principle of joint liability, as listed under the UAE’s Maritime Law, may be applied given that the purchase price for the supply of bunkers may be considered as a “maritime debt” under articles 115,117 and 135 of the Maritime Law. The Court concluded that since there is no contractual relationship between the Physical Supplier and Owners/Charterers, there is in fact no “debt” owed by the Owners/Charterers. Accordingly, although the nature of the disputed debt is a maritime debt, the relationship governing such dispute meant that Owners/Charterers cannot be considered to owe a “maritime debt”. On this basis, the application of the principle of joint liability between Owners/Charterers and OW was dismissed; and the only recourse available to the Physical Supplier is strictly against OW.