April, 2020 - Bunker supplier insolvency gives rise to concerns
- Date: 15/04/2020
Reports of financial difficulties facing one of the biggest players in the Singapore bunkering market, Hin Leong Trading (Pte.) Ltd. give rise to concern within the industry.
Hin Leong’s bunker arm, Ocean Bunkering Services (Pte.) Ltd. (OBS), was ranked the third-largest shipping fuel supplier in Singapore last year. It is understood that OBS has informed its customers that it plans to suspend marine fuel deliveries, after banks failed to provide a letter of credit to buy cargoes.
It has been reported that Hin Leong owes banks over $3 billion. The issues faced by Hin Leong have come as a surprise to those in the market and are likely due to the recent collapse in oil prices together with the ongoing coronavirus pandemic.
Another OW Bunkers?
Members will no doubt notice the similarities with the OW Bunkers (OWB) insolvency seen in 2014. Following the dramatic collapse of OWB, which acted as an intermediate bunker trader, hundreds of ship operators were dragged into complex litigation involving competing claims for payment from physical bunker suppliers, OWB’s receivers and OWB’s financiers. Complex issues arose in relation to title to the bunkers and right of payment due to the use of credit arrangements and retention of title clauses in the applicable bunkering contracts, leaving many owners faced with the prospect of having to pay for bunkers twice. Many ships were arrested in multiple jurisdictions by bunker suppliers claiming to have a right to a maritime lien in respect of supplied bunkers, resulting in widespread disruption to owners and charterers alike.
The Association supported a test case through to the English Supreme Court, the RES COGITANS, seeking a declaration that the owners were not obliged to pay OWB or their lenders for the bunkers because, among other things, they were in breach of contract for failing to give good title to the bunkers. However, it was held that the Sale of Goods Act 1979 did not apply to the bunker contracts in question and that the parties had contracted on a different basis, under which technical points about title to the bunkers were irrelevant. As a result, the owners were obliged to pay OWB and/or their lenders for the bunkers whilst also remaining exposed to physical bunker suppliers claiming entitlement to a maritime liens. Members are referred to our May, 2016 Soundings for more detail on this case https://bit.ly/34Jzq54
Whilst the contractual terms and financial structuring in the Hin Leong case may differ and it remains to be seen whether similar issues will arise in this case, this is nevertheless a timely reminder to Members to take appropriate precautionary steps to protect their position in relation to bunker purchasers as a matter of course.
In light of the Supreme Court ruling in the RES COGITANS case, the Association provided guidance in order to avoid having to pay twice for fuel supplied to the ship, which can be viewed [here]. The following is a suggested clause that could be used in bunker contracts:
“In the event that the Bunkers purchased by the Buyer from the Seller are not physically supplied by the Seller but by a third party Physical Supplier, the following provisions apply notwithstanding anything else in this contract, including any terms relating to set-off or deduction:
1. The Seller must, as a condition precedent to any obligation or liability on the Buyer’s part, obtain the right to transfer title to any Bunkers consumed or unconsumed. The Seller agrees to indemnify the Buyer in relation to any losses, delays or other damages suffered as a result of any failure by the Seller to comply with this clause whatsoever.
2. The Seller must, as a condition precedent to any obligation or liability on the Buyer’s part, pay for the Bunkers supplied, prior to the due date for payment under this contract and must provide the Buyer with written confirmation from the Physical Supplier confirming that:
i. the Physical Supplier has received payment in full for the Bunkers supplied by them;
ii.the Physical Supplier has no objection to the Buyer making payment to the Seller for the Bunkers; and
iii. the Physical Supplier has no claim whatsoever against the Buyer or the ship in relation to payment for the Bunkers.
3. In the event that either (i) or (ii) above are not complied with the Buyer shall be entitled to withhold payment to the Seller or, where payment has already been made, reclaim such payment from the Seller. The Buyer’s payment obligations shall be suspended until the provisions in sub-clauses (i) and (ii) are complied with.”
Where a charterer purchases bunkers, owners may wish to include certain provisions in their charterparties to protect against any action being taken by a physical supplier against the ship. Although, in many cases, owners may have an indemnity against the charterer under the terms of the charterparty, an owner may still be exposed to direct claims from the physical supplier.
Owners should therefore consider including in their charterparties a provision requiring the charterer to obtain a written confirmation as envisaged in sub-clause (ii) above from their bunker supplier or an indemnity in the event of a claim by the physical supplier.
Owners should also try to include the BIMCO Bunker Non-Lien Clause for Time Charterparties. This clause is intended to protect owners from attempts by physical suppliers to exercise a maritime lien by requiring time charterers to inform their counterparty, the bunker seller, at the outset that any bunkers ordered are being supplied for their account and that no lien can be placed on the ship. Although this provision may not be effective in all jurisdictions, it is thought to provide an additional layer of protection.
We will continue to monitor the situation as it develops, but we advise Members to exercise extreme caution if entering into new dealings with these entities, and to ensure that contract terms are robust in order to be fully protected and avoid claims from third parties, should insolvency be declared. If Members have an existing contract for the future supply of fuel, the Association can provide legal guidance as to Members’ rights and remedies.