NEWOCEAN PETROLEUM CO LTD v. O.W. BUNKER CHINA LTD (in provisional liquidation) AND ANOTHER

HCMP 1474/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 1474 OF 2016

(ON AN INTENDED APPEAL FROM HCA NO. 381 OF 2015)

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J U D G M E N T

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Hon Kwan JA (giving the judgment of the court):

1.  On 18 March 2016, Deputy High Court Judge Le Pichon gave a decision (“the Decision”) dismissing the summons of the 2^nd defendant to set aside the order of Master S Lo on 27 April 2015 granting leave to the plaintiff to issue a concurrent writ for service out of jurisdiction on the 2^nd defendant which is resident in Singapore. Leave to serve the concurrent writ out of the jurisdiction was granted pursuant to Order 11 rule 1(1)(d)(ii) (in respect of a claim in contract) and rule 1(1)(f) (in respect of a claim in conversion).

2.  The judge refused the 2^nd defendant’s application for leave to appeal by a decision on 31 May 2016 (“the Leave Decision”).

3.  By a summons issued on 13 June 2016, the 2^nd defendant renewed its application for leave to appeal to this court.  We exercise our power under Order 59 rule 2A(5) to determine this application without a hearing on the basis of written submissions only.

4.  For the reasons given below, we grant leave to appeal limited to that part of the judge’s order granting leave to serve the concurrent writ out of the jurisdiction pursuant to Order 11 rule 1(1)(d) (the contract claim).  We decline to grant leave to appeal in respect of that part of the order granting leave to serve the concurrent writ out of the jurisdiction pursuant to Order 11 rule 1(1)(f) (the claim in conversion).

The claim in contract

5.  The plaintiff’s claim against the 2^nd defendant in contract is for the price of the bunkers.  The only foundation for any contract between the plaintiff and the 2^nd defendant, as argued before the judge, is the allegation of an agency relationship.  The judge stated her conclusion in this way in §64 of the Decision:

“On those facts, I do not consider it wholly unarguable that an agency relationship did arise. From D2’s perspective, the identity of the physical supplier [i.e. the plaintiff] could not have been material since it contracted with an intermediate bunker trader without stipulating the identity of the supplier. In other words, how OWBS [i.e. the intermediate bunker trader] chose to discharge its obligations under the D2–OWBS contract would not appear to have been material or of concern to D2. It could be said that D2 implicitly authorized OWBS to employ such means as would enable the latter to discharge its obligations to D2. Arguably, on the present state of the case law, there was an agency chain running from D2 and ending with OWBC who contracted with the physical supplier.”

6.  The judge’s decision on the contract claim is in conflict with two recent decisions of the Court of First Instance: Newocean Petroleum Company Limited v Rio Tinto Shipping (Asia) Pte Ltd (the RTS case), HCA 446/2015, 15 April 2016, Anthony Chan J, §§23 to 41; and Newocean Petroleum Company Limited v O.W. Bunker China Limited, Regional Container Lines Public Company Limited & RCL Feeder Pte Ltd (the RCL Feeder case), HCA 384/2015, 29 June 2016, Deputy High Court Judge Manzoni, SC, §§54 to 71.

7.  We note also that whilst Mr Sussex, SC acknowledged before the judge that the plaintiff’s pleaded case in contract requires ‘fine-tuning’ (§15 of the Leave Decision), he subsequently made a further concession before Deputy Judge Manzoni as recorded in §59 of the RCL Feeder case:

“During the course of argument Mr Sussex accepted that the thrust of his argument, based on the Res Cogitans case, had shifted away from a claim in contract for the price, and had become a claim for the value of the bunkers in conversion. That claim is premised upon there being a different set of conditions as between the plaintiff and OW China to the ones between the 3^rd defendant and OW Singapore. Mr Sussex conceded that he could no longer in fact maintain a claim for the price of the bunkers as a claim under contract.”

8.  It is not necessary to recite the arguments advanced by Mr Coleman, SC in support of his contention that the judge had erred in not setting aside leave to serve out of the jurisdiction in respect of the claim in contract.  We are satisfied that an appeal against that part of the judge’s order does have a reasonable prospect of success.  We would not limit the grounds of appeal to paragraph 3 of the draft notice of appeal.  We give leave to the 2^nd defendant to file and serve a notice of appeal against that part of the judge’s order within 14 days of this decision.

The claim in conversion

9.  The crucial point here is whether the plaintiff has made out a good arguable case of a claim in conversion so that leave to serve out of the jurisdiction should be granted under Order 11 rule 1(1)(f).  As Mr Sussex has acknowledged, this is a case which raises complicated issues of law and fact.  For the court to exercise its “long arm” jurisdiction under Order 11 rule 1, all that is required at this stage is for the plaintiff to establish a good arguable case that falls within one of the limbs in that provision.  Mr Coleman sought to argue that a good arguable case does not exist in relation to the claim in conversion.  This is an attempt to dismiss the claim summarily and does not have reasonable prospects of success in view of the fact that the claim relies on the reasoning of Males J in the Res Cogitans case ([2015] 2 Lloyd’s Rep 563), and that reasoning has the endorsement of the English Court of Appeal ([2016] 1 Lloyd’s Rep 228) and the Supreme Court ([2016] UKSC 23).

10.  The contract construed in the Res Cogitans case was the standard term contract of the O.W. Bunker Group, the terms of which are the same as the contract made between the 2^nd defendant in the present case and OWBS (referred to as “the D2-OWBS contract” in the Decision), and “materially identical” to the terms of the contract between the 3^rd defendant in the RCL Feeder case and OWBS (§33 of the RCL Feeder case).

11.  The material terms of this contract are clauses H.1 and H.2, which read as follows:

“H. TITLE

H.1 Title in and to the Bunkers delivered and/or property rights in and to such Bunkers shall remain vested in the Seller until full payment has been received by the Seller of all amounts due in connection with the respective delivery. The provisions in this section are without prejudice to such other rights as the Seller may have under the laws of the governing jurisdiction against the Buyer or the Vessel in the event of non‑payment.

H.2 Until full payment of the full amount due to the Seller has been made … the Buyer agreed that it is in possession of the Bunkers solely as Bailee for the Seller, and shall not be entitled to use the Bunkers other than for the propulsion of the Vessel, nor mix, blend, sell, encumber, pledge, alienate, or surrender the Bunkers to any third party or other Vessel.”

12.  The issue of law in the Res Cogitans case was whether the contract was for the sale of goods under which the consideration was the transfer of title to the bunkers, or whether it was a contract for the supply of goods coupled with a permission or licence to use the bunkers immediately.  Males J concluded it was the latter and reasoned as follows:

“46. In these circumstances the question arises, as already mentioned, what was the consideration for the money payment which the Owners agreed to make if it was not the transfer of title? In my judgment the true nature of the parties’ bargain was that OWBM [in the equivalent position as OWBS in the present case] would deliver or arrange for delivery of the bunkers, which the owners would be immediately entitled to use for the propulsion of the vessel. As Mr Robert Bright QC for OWBM submitted, the permission or licence to use the bunkers conferred by clause H.2 necessarily meant, not only that OWBM itself gave such permission but that OWBM was or would be in a position to give such permission to the owners on behalf of whichever entity in the supply chain was or would become the owner of the bunkers. … what the owners were paying for was the right to consume the bunkers and not an unlawful possession which exposed them to the risk of an action at the suit of the true owner. …”

13.  At §47, Males J recorded two submissions of counsel for OWBM that he agrees with:

“First, OWBM’s obligation to obtain such a permission is a contractual obligation owed to the owners …

Secondly, if OWBM fulfils its promise, that is to say if it obtains the necessary permission from the owner of the bunkers, it has done all that it is required to do and is not in breach of any obligation owed to the owners by reason of its own or others’ failure to make payments to suppliers down the chain …”

14.  In §48, Males J stated:

“…It seems to me, by parity of reasoning with cases such as Rowland v Divall [1923] KB 500 and Warman v Southern Counties Car Finance Corporation Ltd [1949] 2 KB 576, that if OWBM fails to obtain permission from the true owner of the bunkers for their consumption by the vessel, the owners do not receive what they agree to pay for, which is a lawful right to use the bunkers and not an unlawful possession which exposes them to liability to the true owner. There would then be a total failure of consideration, just as there was in these two cases.”

15.  In the Supreme Court, Lord Mance explained the essential nature of the bargain in this way at §§28 and 39:

“28. In these circumstances, OWBM’s contract with the Owners cannot be regarded as a straightforward agreement to transfer the property in the bunkers to the Owners for a price. It was in substance an agreement with two aspects: first, to permit consumption prior to any payment and (once the theory of a nanosecond transfer of property is, rightly, rejected) without any property ever passing in the bunkers consumed; and, second, but only if and so far as bunkers remained unconsumed, to transfer the property in the bunkers so remaining to the Owners in return for the Owners paying the price. But in this latter connection it is to be noted that the price does not here refer to the price of the bunkers in respect of which property was passing, it refers to the price payable for all the bunkers, whether consumed before or remaining at the time of its payment.”

“39. In short, the essential nature of the bargain is as I have stated in para 28 of this judgment. As a result, OWBM’s only implied undertaking as regards the bunkers which it permitted to be used and which were used by the Owners in propulsion prior to payment was that OWBM had the legal entitlement to give such permission. In order to be so entitled, OWBM did not need to have or acquire title to the bunkers. It merely needed to have acquired the right to authorise such use under the chain of contracts by virtue of which it had obtained the bunkers. …”

16.  The plaintiff here relied on the above analysis of the true nature of the contract.  As in the Res Cogitans case, the right of the intermediate bunker supplier to authorize the consumption of the bunkers prior to payment was acquired in contract, through a chain of contracts by which the intermediate bunker suppliers eventually obtained the bunkers from the physical supplier.  The 2^nd defendant was the first of the intermediate bunker suppliers in the bunker supply chain.  It entered into the D2-OWBS contract with OWBS, OWBS entered into a back-to-back contract with OWBC (the 1^st defendant), and OWBC entered into the P-OWBC contract to obtain the bunkers from the physical supplier (the plaintiff).

17.  The D2-OWBS contract contained terms identical to those considered in the Res Cogitans case.  On the analysis of the Res Cogitans case, the 2^nd defendant did not purchase the bunkers from OWBS by a contract for the sale of goods, but obtained permission from OWBS to use the bunkers for propulsion of the two vessels whilst title in the bunkers remained with whichever entity up the chain of contracts had retained title.

18.  It is the plaintiff’s case that there was a mismatch between the terms on which the plaintiff contracted (the P-OWBC contract) and the terms on which the O.W. Bunker Group contracted (the D2-OWBS contract).  The plaintiff contended that under the terms of the P-OWBC contract (clauses 5(b) and 11 of the general terms and conditions), the plaintiff retained title in the bunkers until such time as it was paid the price in full and the plaintiff did not grant permission to anyone to consume the bunkers prior to payment (§§38 to 45 of the Decision).  In permitting the owner of the two vessels to consume the bunkers immediately prior to payment, and by impliedly undertaking that it had a right to grant such permission, the 2^nd defendant asserted a right inconsistent with the plaintiff’s rights as the owner of the bunkers and is therefore liable to the plaintiff in conversion.

19.  As Deputy Judge Manzoni has put it in §39 of the RCL Feeder case,

“The mainstay of this argument in conversion is therefore the proper construction of the various contracts to which I have referred. In my view it is clear that there is a good arguable case that the construction relied upon by the plaintiff is correct. That construction, on materially identical terms, has already been upheld by three levels of court in England and Wales and on any basis it must be a good arguable case in Hong Kong.”

We are inclined to agree.

20.  Mr Coleman advanced a number of submissions to attack the plaintiff’s argument. In particular, he submitted it was held by Males J that even if there were a retention of title clause, the supplier would still fail to claim against the end-purchasers for conversion because the parties contemplated and knew that the buyers would either consume or dispose of or resell the bunkers to third parties and necessarily would have consented to the use of the bunkers in their normal employment, citing §§17, 36, 50 to 51 and 64.

21.  We do not think this is a submission of substance.  As stated by the judge in §44 of the Decision, Males J inferred consent to the use of the bunkers from the mere fact of delivery of the bunkers to the vessel knowing that they would or might be used straight away, but the English Court of Appeal was critical of that approach and considered that the matter should have been left to the arbitrators to make the appropriate finding of fact.  Further, as noted by the judge in §8(4) of the Leave Decision, the issue that arises in the present case, namely, whether the intermediate supplier had no authority to authorise the use of bunkers prior to payment was not an issue before the Supreme Court.

22.  Mr Coleman relied on a number of decisions in Singapore (Precious Shipping Public Co Ltd v O.W. Bunker Far East (Singapore) Pte Ltd [2015] SGHC 187; The Xin Chang Shu [2015] SGHCR 17 and [2015] SGHC 308) and a decision of the United States District Court Southern District of New York (O’Rourke Marine Services LP, LLP v M/V Cosco Haifa (15-CV-2992 (SAS), 8 April 2016) in support of his contention that there is some other reason why the intended appeal should be heard, in that these cases decided similar points in favour of the stance taken by the 2^nd defendant.

23.  We agree with the judge in §§9 and 10 of the Leave Decision that these cases adopted an analysis based on a chain of contracts for the sale of goods and are not relevant for present purposes in view of the Supreme Court’s judgment.

24.  As for the arguments advanced on material non-disclosure, we think they are of little moment given that the judge has said that she would have exercised her discretion to re-grant leave if necessary (§70 of the Decision).

25.  We are not persuaded that the 2^nd defendant has demonstrated any error in law or principle of the judge in arriving at the conclusion that a good arguable case was made out for the conversion claim.  We refuse leave to appeal that part of the judge’s order as we are not satisfied there is a reasonable prospect of success.

26.  We make a further order pursuant to Order 59 rule 2A(8) that no party may under rule 2A(7) request the determination to be reconsidered at an oral hearing inter partes.

Costs

27.  The 2^nd defendant succeeded in part in the application for leave to appeal.  Taking a broad brush approach, we would award the 2^nd defendant half of the costs in the applications for leave to appeal before the judge and before this court.  Half of the costs of these applications would be in the cause of the appeal.  As the judge has ordered costs in the leave application before her to be taxed, we would do likewise and decline to make a summary assessment.

28.  The above order on costs is an order nisi.  Any party who seeks to vary this order shall lodge a written submission within seven days hereof, failing which the order shall become absolute.  The other party may serve a response thereto within seven days thereafter.