Wine drinkers in the UK are in a fortuitous position: the UK (and specifically, London) boasts a world-beating breadth of wine merchants, restaurants and bars. Additionally, and thanks in no small part to the effects of global warming, the UK has also seen a proliferation of domestic growers and wine producers.
Whilst one can walk into any supermarket, off-license, or wine merchant and come away with a bottle in hand, the market for ‘fine wines’ operates very differently, with the vast majority of sales taking place without the wine physically changing hands – or in some instances, before the wine has even been bottled.
“En Primeur”
“En Primeur” (roughly translated as “the first”) refers to the process of buying wine whilst it remains unfinished and in barrel. It is effectively a ‘futures’ contract for wine: the consumer, via their merchant, pays money to the producer at an agreed price, who in turn commits to providing the wine that has been paid for once it has been bottled. The time between payment and delivery of wine bought En Primeur is often up to two years.
Originally, En Primeur was a means developed to ease producers’ cashflow concerns whilst an entire year’s worth of wine sat in their cellars. Now, it is both an effective marketing tool (the top 20 UK merchants sell well over £100 million of En Primeur wines every year), and occasionally the only way to obtain some highly in-demand wines.
“In Bond”
Once wine (sold En Primeur or otherwise) has been bottled and released by a producer, those bottles destined for the UK will be shipped over and held ‘in bond’ at a bonded warehouse: these are temperature and humidity controlled warehouses where imported wine can be stored without the need for wine duty (roughly £3 per 750ml bottle) and VAT (20%) to be paid. When the wine leaves the warehouse, duty and VAT become payable.
The perfect storage conditions offered by bonded warehouses mean that many UK consumers elect to store their wine in a bonded warehouse on a long-term basis (10 or 20 years is not uncommon), before withdrawing it when ready to drink. For a price of roughly £1 per bottle per year (plus VAT), a host of merchants and wine storage specialists will happily provide this service. It’s big business too: Octavian Vaults, one of the UK’s largest such providers and who store their wine under bond in an old underground munitions factory, look after over 10 million bottles of wine, at a market value of over £2 billion.
Given these ideal storage conditions, the market for secondary sales of wine held in bond is a thriving one. The guarantee of perfect provenance, together with soaring interest in ‘wine for investment’ since the mid noughties means that wine is now regularly re-sold whilst lying in bond. A case may transition through five or six different owners in as many years, all whilst remaining in the same place, in the same bonded warehouse.
Pitfalls
The rise of En Primeur and in bond storage have heralded an age in which most consumers do not have physical possession of wines that they nominally own. What happens, then, if something goes wrong further up the chain where a consumer’s wine is held? Most significantly, what happens if one of the key parties goes insolvent?
The answer, perhaps surprisingly, relies on a fundamental concept underpinning the law of trusts.
En Primeur orders
When a consumer buys a wine En Primeur from a wine merchant, the contract that they enter into is effectively as follows:
- the consumer pays the merchant a sum upon entering into the contract; and
- in return, the merchant promises to provide the ordered wine to that consumer once it has been delivered to the UK (often a year or two in the future).
What happens if a producer goes bankrupt, or sells the wine to somebody else?
The good news is that this is not the consumer’s problem: the consumer’s contract is with the wine merchant – not the underlying producer. If, the wine merchant cannot fulfil their obligation to provide the consumer with the ordered wine, they will have breached their side of the contract and the consumer will be entitled to a full refund from the merchant.
In reality, circumstances such as this are rare. Of more concern to a consumer will be what happens if the merchant goes under before the wine arrives in the UK.
What happens if a merchant goes bankrupt before the wine reaches the UK?
When a consumer pays money to a merchant under an En Primeur order, it is important to recognise that the consumer does not become the owner of that wine (indeed, such wine likely does not yet exist, at least in bottle). The only right that the consumer receives upon paying their money is the right to receive the ordered wine from the merchant at the specified future date (subject to any specific terms in a particular merchant’s terms and conditions).
Effectively then, if a merchant becomes insolvent in the period between accepting money for an En Primeur order and the ordered wine arriving in the UK, the consumer stands in no better position than the rest of the merchant’s unsecured creditors.
As an unsecured creditor, the consumer will be entitled to a portion of what they are owed, in the same proportion as most other unsecured creditors are paid out. This is calculated by reference to the value of the merchant’s realisable assets compared to the merchant’s outstanding liabilities.
It goes without saying that this is close to a ‘worst case’ scenario for a consumer - not only will they not receive their ordered wine, they won’t receive a full refund either. Happily though, the facts that give rise to this outcome only arise whilst the wine remains abroad. As soon as it becomes ‘physical’, and is delivered to the UK merchant, the position changes drastically.
Wine stored in bond
What happens if a storage provider goes bankrupt whilst holding a consumer’s wines?
Given the value of wine held under bond, it is perhaps no surprise that this has been dealt with by the courts before, namely in 1986 in the case of Re London Wine Co (Shippers) Ltd.
London Wine Co (LWC) was a wine merchant who were paid by many of its customers to store wines in its warehouse. For practical reasons, LWC did not segregate their customers’ wines, but instead stored all wines of a certain producer/vintage together, noting in its stock book how many cases belonged to each consumer. When LWC became insolvent, a number of its customers argued that the wines in LWC’s storage were their property, and that LWC held these cases on trust for the respective consumers who ‘owned’ the wines. If this was indeed the case, these customers would have been entitled to the underlying wines themselves in priority to any of LWC’s creditors.
Perhaps surprisingly, the Court found that no such trusts existed. Why? Because LWC did not allocate certain cases to specific customers, but merely held them ‘in bulk’. In order to establish a trust, the property to which that trust relates needs to be absolutely certain. In LWC’s case, the Court determined that no such certainty existed: it was impossible to identify which particular cases of wine out of the wine held in bulk were held for each customer.
As a result of the Court’s findings, the position of each of LWC’s customers was one of unsecured creditors, with a ‘debt’ equal to the value of their wine stored with LWC. They were not entitled by right to ‘their’ wines, and almost certainly did not receive assets in LWC’s liquidation which matched the value of the wines that they had stored. All in all, a bad result.
All is not lost, however. As one might imagine, wine storage has come a long way since 1986, and subsequent to Re London Wine Co (Shippers) Ltd, merchants and storage providers have taken steps to ensure that the identity of their customer’s property is adequately certain.
By way of example, Chelsea Vintners are a bespoke wine merchant founded in 2012 who store their customers’ wine with London City Bond (LCB). LCB are one of the UK’s largest providers of bonded warehouse space with over 10 million cases of wine under their care. Each individual case of wine stored at LCB is ascribed a unique stock rotation number, which is physically attached to that case. Both LCB and Chelsea Vintners’ software systems then record which cases are ‘owned’ by which of Chelsea Vintners’ customers, allocating these stock rotation numbers to customers’ accounts. This system (or similar variants) is now commonplace amongst the UK’s reputable merchants and storage providers.
The practical effect of this is that there is absolute certainty as to which individual case is held for each individual customer, thereby avoiding the pitfalls that LWC’s customers found themselves in back in 1986. Each of Chelsea Vintners’ customers owns the case numbered with the stock rotation number attributed to their account: there is no uncertainty as to which case this is.
The modern UK wine consumer who stores wine under bond can therefore sleep easy - in the event of insolvency of their storage provider, their wines will not be lost. Assuming that their wine has been stored in accordance with current standards, their wine remains their property and is merely held on trust by the storage provider on their behalf.
This means that upon insolvency of a storage provider, its customers are entitled not just to the value of their wine, but the actual bottles themselves of which they are the owner.
Final thoughts
The UK remains a very good place to be a wine drinker. Beyond the wide range of wine merchants, restaurants and bars that consumers have to choose from, UK wine drinkers are also well insulated from disasters such as insolvency events in the majority of circumstances.
The ‘chink in the armour’ remains the lacuna between placing an En Primeur order, and the ordered wine physically arriving in the UK. Whilst many consumers may consider this a risk worth taking to secure fleeting allocations of in-demand wine, the recent cooling of the wine market offers an opportunity for individuals to forego the En Primeur approach, in favour of buying wines only once they are physically in bottle.
