Res Cogitans: Cartesian dualism and what it means for the bunker industry?
9th November 2015 16:51 GMT

Alright, the title is a stretch, but this rather oddly named vessel, Res Cogitans, sits at the center of (as yet) the most significant legal decision to come out of the post OW Bunker bankruptcy legal machinations.  Oddly named, because the Latin term Res Cogitans, translates as “thinking thing” and was used by Rene Descartes to describe the thinking human mind in its relationship with the human body.  It is not something that is found in an inanimate object like a ship.  Having said that, Res Cogitan, which sounds more like a legal principle than a ship, is likely to provoke thought and discussion in the bunker industry for a long time to come.  

Why is this and what is the impact of this case?    Put simply, the decision from the London High Courts - assuming no appeal is successful, nor impactful even if it is - will change the way suppliers, owners and buyers look at counter party risk in relation to purchasing marine fuels.   In the days and weeks after this controversial judgement was issued many articles and comments have emerged that assess the impact from a buyer’s or from a seller’s perspective, but few have looked at the totality of this issue.

In the past, when a physical supplier sold a product, there has been a general confidence, usually supported in the terms and conditions of sale, that there was a lien against the vessel and/or a retention of title clause that provided security if the buyer (owner, operator or trader) was unable to pay.  Retention of title clauses are more commonly seen in English law contracts and lien clauses, particularly valuable and implicit with US law and other legally similar jurisdictions.   I would argue that this confidence and security has underpinned maritime bunker credit, whatever the terms, since the earliest days of the independent bunkering company.  I remember, from my own experience, discussing credit decisions with the former CEO of Chemoil, the late Bob Chandran, during the early days of the company, and making easy instant credit calls for a new trader or buyer,  because the worst case scenario was that we  could always use the lien and arrest the ship.   Happily, over the years, we became more sophisticated!  At that time, Chemoil was selling primarily in US ports and under US law, and it was always recognized (even back in those days) that different legal  jurisdictions would have different views.   Clearly Res Cogitans has turned some of this confidence and security on its head.

After the judgement, as far as the English courts are concerned, the physical supplier seems to have a problem, and payment will go to the OW Bunker company that actually sold the bunkers to the vessel owner, even though it was a trader in the transaction chain. Physical suppliers, whether their contracts are written in English law or not, will seek a more friendly jurisdiction to assert their rights, making double payments (or potentially more) very likely.  It is also very possible that this payment will come from the owner of the vessel, who may or may not have been the entity who bought the bunkers in the first place.  

It is hard to say how many physical suppliers will ultimately get paid; those whose contracts are under English law may not. Certainly, any failure rate will be, and should be, a major concern for anyone selling bunkers and giving credit to a trader. They must have a forensic understanding of who they are dealing with.  Genuinely, who is the company the supplier is working with?  Have all the potential counterparty risks been examined, even under potentially catastrophic circumstances?  Is anyone in the bunker industry too big to fail?  Unless you can get close being a 100% certain (didn’t everyone feel that way about OW Bunker?) of the credentials of your trader, then logically the supplier should try and find a direct channel.

Equally the buyer has a major incentive to find a direct channel to the supplier. Assuming he can get credit (or has cash in the bank account) why would a supplier ever take the extra risk of a trader in the middle?  If he doesn’t have that money or credit then his choice of trader needs to be carefully made. But, how do you find a trader, given that OW Bunker was viewed as one of the strongest?

Following the OW Bunker collapse and Bunkers International’s recent Chapter 11 filing, the trader’s position in the bunkering industry is now seriously under threat. Forget all the talk and spin about major traders increasing market share in the post OW Bunker world. The trader’s role has been rocked to its core.  When the buyer and supplier conduct their counterparty risk assessment they will do exactly what some of the world’s major shipowners have already done, and exclude or limit the trader from the transaction equation.   The only traders that should logically have a major role would be those that have a very strong balance sheet or are a subsidiary of a diversified, well-financed and capitalized company.   This is the message that surely will be delivered worldwide by credit managers, risk managers and lawyers as they look at the Res Cogitans decision.  This realization will not take place over night, but it would be hard to see a solid argument that supports any other conclusion than the fact that traded bunker volume reached its peak in November 2014!

By one estimate the 2014 traded bunker market was 140 million metric tons, but we all know, even if this was the peak, the industry needs traders.    Who after all will give the credit to the buyer who has none?   Who will give credit to the buyer with delayed cash flow?   It is the traders that will take on the quasi banking role we have seen in the past.  However, this role demands that the traders have something more akin to the financial strength that might be demanded of a bank.  This is not the only role the industry needs from traders, we need their consolidating capabilities, where their fixed volume off-take agreements can be very valuable for suppliers and where their fuel position in a port can help improve competition and liquidity for buyers.   In the physical supplier world this might be a controversial role, but the industry needs it, just as we need the commodity traders to arbitrage fuel oil cargoes.      However, when the dust settles, it is hard to see a long term role for the small and medium-sized trading houses.   Even the larger traders will have to be very strong financially to justify their existence, and grow.  Logically, it seems that trading volume has reached its peak and the OW Bunker fall out and decisions like Res Cogitans will be the cause.

The Res Cogitans decision is not the only major OW Bunker legal decision that will impact the industry in the months and years to come.  The collapse of the world’s largest bunker trader was inevitably going to damage the trading business model it represented.  Res Cogitans has provided more fuel to the fire and will ensure a rough ride for traders in the coming months.  The best and strongest can maintain and flourish, but just who are these companies?

So, what can we have to learn from an esteemed philosopher such as Rene Descartes that might help the bunker industry?  In reality, probably not much!  But Res Cogitans is an interesting name for a ship and it has inspired considered thought.

Adrian Tolson,
9th November 2015 16:51 GMT

Comments on this Blog
Kirsten Dibley - Channoil Consulting Ltd
16th November 2015
Surely the role will be filled by a combination of passing name brokers and banks.
Charles Daly
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