Maritime Liens, Mortgages & Priorities
Commentaries are intended as an introduction or overview of the topic. The commentaries for some topics are more detailed than others but none of them should be taken as a complete and full recitation of the law applicable to the topic.
Maritime Liens, Mortgages and Priorities
The substantive law applicable to maritime liens, ship's mortgages and priorities differs significantly from the law that is applied to land based property as does the procedural law.
The law applicable to mortgages on ships is dependant on whether the particular ship is a "registered" vessel under the Canada Shipping Act, 2001. If the ship is a registered vessel, sections 65 through 72 of the Canada Shipping Act, 2001 apply. These provisions require that mortgages and transfers of mortgages be in the from prescribed and be registered in the Canadian Register of Vessels (s.65(2) & .71). (Failure to register the mortgage can result in a loss of priority as in British Columbia v. PT Car and Yacht Rental Inc., 2003 BCSC 1073.) The Act further provides that priorities as between mortgages is by order of registration unless all mortgagees consent otherwise in writing (s.67). The first mortgagee of a registered vessel is empowered with the right to sell the vessel (s.69(1)). A subsequent mortgagee may not sell the vessel without an order of the Federal Court or the consent of the prior mortgagees (s.69(2)). Finally, the Act provides that a registered mortgage is not affected by the bankruptcy of the owner and the mortgagee has priority over creditors or the trustee in bankruptcy.
The form prescribed for a mortgage of a registered vessel is very brief containing little more than the names of the parties and a space to enter the nature of the consideration and whether there is a collateral agreement. Due to the fact that sections 65 through 72 of the Canada Shipping Act, 2001 provide relatively little regulation over ship's mortgages, it is customary, if not universal, for there to be a collateral agreement containing the full terms of the mortgage agreement. Such a collateral agreement will normally contain extensive terms including: charging provisions (what is being mortgaged); representations and warranties of the mortgagor; repayment terms; insurance requirements; and remedies on default (including a right of private sale and appointment of a receiver).
It is to be noted that the Personal Property Security Acts of British Columbia (s.4(b)), Nova Scotia (s.5(j)), Prince Edward Island (s.4(j)), Newfoundland (s.5(j)) and New Brunswick (s.4(j)) specifically exempt mortgages registered under the Canada Shipping Act from the application of those acts. The Quebec Civil Code (s. 2714) similarly exempts ships registered under the Canada Shipping Act. The laws of the other provinces are silent on the issue which can present difficulties as in Royal Bank v. 1132959 Ontario Ltd., 2008 CanLii 40231.
With respect to unregistered vessels, there are no federal statutory provisions similar to sections 65 through 72 of the Canada Shipping Act, 2001. Such vessels are subject to the provisions of the provincial Personal Property Security Acts which do not exempt unregistered vessels. However, there may be a constitutional issue as to whether the provincial Personal Property Security Acts can validly regulate mortgages on unregistered vessels. (This is particularly so when addressing priorities between mortgages and maritime liens where the provincial act and maritime common law can have different results.) Nevertheless, many practitioners register such mortgages under the provincial acts, which seems prudent.
Types of Liens
There are various liens recognized in maritime law. The categories are traditional maritime liens, possessory liens and statutory liens. All can be, and should be, enforced by way of an action in rem which means that proceedings should generally be commenced in the Federal Court as opposed the provincial superior courts (with the possible exception of the Supreme Court of British Columbia which is the only superior court with rules providing for in rem proceedings.)
Traditional Maritime Liens
A traditional maritime lien is a lien unique to maritime law. It is a privileged claim, upon maritime property that accrues from the moment the claim arises. It travels with the ship unconditionally, even into the hands of bona fide purchasers for value whether with or without notice (This is its defining characteristic.). It is enforced, as with other claims, by means of an action in rem. The traditional maritime liens are claims for seaman's wages, salvage, collision damage, Master's disbursements and bottomry (virtually non-existent today).
Traditional maritime liens have a priority ranking above mortgages.
The common law possessory lien is recognized under Canadian maritime law. Such a lien requires continued uninterrupted possession or it lost. Possessory liens usually arise in the context of ship repairs and claims for freight. Such a lien has priority over mortgages and also over any subsequently accruing maritime liens. However, maritime liens that attached prior to the possession of the possessory lien claimant have priority.
Provincial statutes that provide for registration of liens and the continuation of the lien after possession is given up, such as the Repairers Lien Act and Warehouseman's Lien Act of British Columbia, have been held to apply to liens on ships. (see for example, False Creek Harbour Authority v. The “Shoda”, 2002 FCT 275) However, there is a constitutional issue as to whether such statutes can validly apply.
Statutory liens are liens created by a validly enacted statute. They have the priority given to them by the statute that created them. There are many such liens including:
- claims by the Master and crew for wages which rank in priority to all but marshall's costs and salvage claims (Canada Shipping Act, 2001, s. 86(1), (2) and (4));
- claims by the Master for disbursements which rank in priority to all but wage claims, marshall's costs and salvage claims (Canada Shipping Act, 2001, s. 86(2.1));
- claims in respect of fines or debts due the Minister have a super priority ranking above Marshall's expenses (Canada Shipping Act, 2001, s.226(2));
- claims by a carrier for any amounts due which must be perfected by notice and gives a right of sale (Canada Shipping Act, 2001, s. 248-9));
- claims by a Port Authority for amounts owing which rank in priority to all but claims for wages (Canada Marine Act, s.122); and
- claims in respect of goods, materials or services supplied to the foreign vessel and claims arising out of a contract for the repair or equipping of a foreign vessel by a person carrying on business in Canada which are given the status and priority of a "maritime lien". (Marine Liability Act, s. 139).
Foreign Maritime Liens
Liens that arise outside of Canada and have a status equivalent to a "maritime lien" under the foreign law applicable to the claim are recognized by Canadian courts as traditional maritime liens and have the priority of a traditional maritime lien. In other words, the law that determines the nature of the lien is the foreign law but the law applied in the ranking of the lien is Canadian law. This is different from the law that is applied elsewhere, such as the UK, where both the nature of the lien and its priority are determined by the local law.
Ranking of Claims
The priority of claims against a ship are ranked generally as follows:
- Marshall' Costs and expenses, being the costs and expenses of the sale of the ship;
- Possessory liens that attach prior to a traditional maritime lien;
- Maritime liens (traditional maritime liens and Marine Liability Act, s. 139 claims);
- Possessory liens that attach subsequent to a maritime lien;
- Registered mortgages; and
- Unregistered mortgages;
Statutory liens will have the priority dictated in the statute that created the lien.
In rem creditors/claimants have no special priority. Their claims will rank equally after mortgages.
Variations to the Usual Ranking
The court has an inherent discretion to depart from the usual ranking of priorities in appropriate cases. In order to depart from the usual order of priorities the Court must be satisfied that the usual ranking would produce "an obvious injustice" or " a plainly unjust result". It has been noted in many authorities that there is a heavy onus on the person seeking to depart from the usual ranking and that very strong and reliable evidence is required. Not surprisingly, there are few cases in which the usual ranking is upset by equitable considerations. Most of the authorities acknowledge the discretion but then refuse to exercise it. One of the few cases in which the discretion was exercised is Fraser Shipyard & Industrial Centre Ltd. v. The Atlantis Two, 1999 CanLII 8369, 1999 CanLII 8498.
The procedure for determining priorities is always for one claimant to commence an in rem action and to arrest the ship. Sometimes, more than one action is commenced and more than one arrest warrant is served. After the arrest, an application is made to the court for the sale of the vessel. All parties who have filed Caveats against Release are served with the application. Usually the Order authorizing the sale of the vessel will require that an advertisement be placed in local papers as well as one or two international shipping publications. The advertisement invites tenders and notifies all creditors of the pending sale. The Order and advertisement usually require that any creditors with a claim against the ship must file their claims by affidavit in the court by a specified date. Sometimes the Order will provide for cross-examination, otherwise, special orders to cross-examine must be obtained. Once all claims are filed and cross-examinations are completed a hearing is held to determine the priorities. Evidence at the hearing is by affidavit and cross-examination transcript. At the hearing, each claimant presents their claims and the other claimants may, if they deem it expedient, oppose the claim.
For additional information, see the following papers:
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Stays of Proceedings - Second action Pending - Setting Aside Arrest
Quin-Sea Fisheries Limited v. The Broadbill I , 2013 FC 575
The plaintiff and defendants entered into an agreement whereby, in consideration of a loan by the plaintiff, the defendants granted a mortgage over the defendant vessel and agreed to make its catch available to the plaintiff for one year following the year the loan was repaid. The loan was repaid but the defendants failed to sell their catch to the plaintiff. As a result, the plaintiff commenced proceedings in the Supreme Court of Newfoundland for a mandatory injunction requiring the defendants to sell their catch to it. That injunction was refused on the grounds that there was no irreparable harm. The plaintiff then commenced these proceedings and arrested the vessel in Federal Court. The defendants brought this motion to stay the Federal Court proceedings on the grounds that parallel proceedings existed in the Supreme Court of Newfoundland.
Decision: Motion dismissed.
Held: The plaintiff was not acting in a vexatious manner when it sought to arrest the vessel after failing to obtain the injunction. The Supreme Court of Newfoundland has no specific admiralty rules dealing with arrest and an injunction is a very different procedure from an action in rem. It is not unusual for a party to take action in the Federal Court merely to obtain security. It would be inappropriate to stay the Federal Court proceedings at this time although at some point in time one of the actions must be stayed.
Priorities - Whether s.139 MLA applies to construction of ships? - Meaning of Foreign Ship - Whether personal liability of owner required?
Comfact Corporation v. Hull 717, 2012 FC 1161 2013 FCA 93
Précis: The Federal Court of Appeal agreed with the trial Judge that s. 139 of the MLA did not give a lien to a subcontractor who supplied manpower to construct a vessel.
The builder of the defendant ship became insolvent and went under the Companies Creditors Arrangement Act while in the course of constructing the ship. The plaintiff was a subcontractor of the builder who had supplied welding services to the ship but had not been paid. The ship was being built for a Norwegian corporation but was recorded in the Canadian registry. The plaintiff claimed to have a maritime lien pursuant to s. 139 of the Marine Liability Act. The mortgagee of the ship (who defended the in rem action) denied the existence of a lien. The trial Judge agreed with the mortgagee and held that the plaintiff did not have a lien. In his reasons (at 2012 FC 1161) the trial Judge noted that s. 139 of the Marine Liability Act (“MLA”) grants a maritime lien against a foreign vessel in respect of claims that arise out of the supply of goods, materials or services to the foreign vessel or out of a contract relating to the repair or equipping of the foreign vessel. He further noted that s. 139 does not expressly include ship construction. He said, as a matter of statutory construction, that the omission of a reference to ship construction in s. 139 and its inclusion in s.22(2)(n) of the Federal Courts Act gave rise to a presumption that the omission is deliberate. Further, although interesting issues were raised as to whether s. 139 of the MLA did away with the requirement that the liability of the owner be engaged before an action in rem could be maintained, the trial Judge said those issues would have to be decided another day. The plaintiff appealed.
Decision: Appeal dismissed.
Held: The court is not persuaded that providing manpower to a shipbuilder for the construction of a vessel amounts to the provision of services within the meaning of s. 139 of the MLA.
Judicial Sales - Priorites - Costs - Procedure in Priorities Disputes
Cameco Corporation v. The MCP Altona, 2013 FC 177
Précis: A party was ordered to pay the costs of a priorities hearing, an unusual order as normally costs are a charge on the funds in court.
The “MCP Altona” was sold by judicial sale following a spill of yellowcake uranium in one of her holds. Following the sale, the mortgagee of the vessel brought an application for payment out of the proceeds of sale. Cameco, the owner of the uranium cargo, defended that motion arguing that it had priority over the mortgagee. The court ultimately determined (at 2013 FC 23) that the mortgagee had priority and ordered payment of the proceeds to it. The mortgagee now moved for costs from Cameco on an enhanced basis.
Decision: The mortgagee is entitled to its costs against the cargo owner based on the tariff.
Held: The procedure in priorities disputes is similar to that for applications. Each party is to file written submissions supported by affidavits and documents to be relied on. Parties are entitled to cross-examine affiants. Although Cameco was unsuccessful in challenging the mortgagee’s priority, it had legitimate points. Further, although the issues were complicated and interesting, for the reasons given in Universal Sales, Ltd v Edinburgh Assurance Co, 2012 FC 1192, costs should be based on the tariff.
Comment 1: In Universal Sales, Ltd v Edinburgh Assurance Co, 2012 FC 1192, the court held that there must be reprehensible conduct to justify an order for enhanced costs.
Comment 2: The decisions addressing the taxation of the costs can be found at 2013 FC 1263 and 2013 FC 1264. An appeal from the taxation can be found at 2014 FC 255
Liens - Mortgages - Priorities - Necessaries Lien - Salvage Convention
Cameco Corp. v. The MCP Altona, 2013 FC 23
Précis: The Federal Court considered s. 139 of the MLA but confirmed the priority of a mortgagee.
The “MCP Altona” was sold by judicial sale following a spill of yellowcake uranium in one of her holds. Following the spill, the plaintiff, the owner of the uranium cargo, arranged and paid for the discharge of the uranium cargo as well as other cargo on the ship and undertook remedial efforts to clean the ship. The plaintiff allegedly incurred expenses in excess of $8 million. The plaintiff sought priority to the proceeds of sale for these costs over the mortgagee of the vessel. The plaintiff argued that it should have priority on four grounds: 1. the discharge of the cargo and remediation of the ship were necessary to bring the ship to sale and those costs should enjoy a priority akin to marshal’s expenses; 2. the services it rendered to the vessel have the status of a maritime lien pursuant to s. 139 of the Marine Liability Act; 3. the services it rendered to the ship were in the nature of salvage services having a priority pursuant to the International Convention on Salvage, 1989; and 4. the court ought to exercise its equitable jurisdiction to alter the usual order of priorities in its favour.
Decision: The mortgagee has priority.
Held: The costs of discharging the cargo and cleaning the ship form part of the plaintiff’s claim against the ship owner and are not to be equated with marshal’s expenses. The plaintiff was not a volunteer but was acting under compulsion of law. With respect to s. 139 of the Marine Liability Act, which grants a maritime lien to Canadian suppliers of goods or services to a foreign ship, the goods or services must be supplied at the request of the shipowner. They were not so supplied. There was no contract with the shipowner. With respect to the claim for a salvage maritime lien, the law of salvage requires that the services be voluntary, the adventure be in danger at sea and the salvage efforts be successful. The International Convention on Salvage, 1989 did not alter the law of salvage other than in relation to compensation for protection of the environment. The ship was not in danger once she arrived at the port and the plaintiff was not acting as a volunteer. Finally, with respect to the equitable ranking of priorities, the thread which ties recent cases on equitable ranking together is unjust enrichment. The mortgagee did not lull the plaintiff into doing something it would not have done in any event. The plaintiff acted not as a volunteer but as it was required to do by law. There is no reason to change the usual priorities.
Costs – Abandonment of Claim – Liability of Claimant
TAM International Inc. v. The " MCP Altona", 2012 FC 128
Précis: Costs were awarded against a party that withdrew a claim against proceeds of sale.
The defendant vessel was forced to return to Vancouver after a cargo of yellowcake uranium spilled in the hold of the vessel. The vessel was arrested upon its arrival by the plaintiff TAM, one of the voyage charterers, as well as by another claimant. Other parties filed caveats against release including the mortgagee. Eventually the ship was sold by court order. Subsequent to the sale but after some additional steps had been taken by competing claimants to investigate TAM’s claims, TAM withdrew its claim to the proceeds of sale. The mortgagee of the vessel sought costs against TAM in the amount of $2,000.
Decision: The application was allowed, in part.
Held: The motions Judge noted that the mortgagee would probably be entitled to $2,000 in costs in a taxation but also noted that the Court should not discourage the discontinuance of unmeritorious proceedings by penalizing parties in costs. The motions Judge ordered TAM to pay $1,000 in costs.
Ship Building - Insolvency - Stay of Proceedings
Worldspan Marine Inc. (Re) v. , 2011 BCSC 1758
The issue in this case was whether a stay of proceedings previously granted under the Companies Creditors Arrangement Act to allow an insolvent ship builder to refinance should be continued. The intended buyer of the partially constructed yacht opposed the builder’s application to continue the stay. The buyer wanted to lift the stay so that he could appoint a receiver for the vessel and exercise his remedies. The Court noted that a stay should only be granted or continued when it would further the objective of facilitating a plan of arrangement between the debtor and its creditors. Other factors included the debtor’s progress towards a restructuring and the relative prejudice. The Court reviewed the various steps that had been taken and ultimately granted the continuation of the stay noting that “at this stage, a CCAA restructuring still offers the best option for all of the stakeholders”.
Ship building - Insolvency -Stays of Proceedings
Sargeant v. Worldspan Marine Inc., 2011 BCSC 767
This matter concerned a partially constructed yacht, an insolvent builder and many unhappy creditors. Some of the creditors had commenced proceedings in the Federal Court and obtained either arrest warrants against the vessel or caveats. The builder brought this application in the British Columbia Supreme Court under the Companies Creditors ArrangementAct seeking, inter alia, a stay of the Federal Court proceedings so that it could develop a viable restructuring plan that would allow it to complete the construction of the yacht. Although the Court granted much of the relief requested, including a general stay of all proceedings, the Court refused to specifically stay the Federal Court proceedings “as a matter of comity”. Instead, the Order of the Court included a specific request to the Federal Court for its assistance to recognize the stay. The Court noted that the British Columbia Supreme Court and the Federal Court “working cooperatively and each exercising its own jurisdiction should be able to avoid any insuperable conflicts between their respective jurisdictions”.
In Rem Actions – Time Charters – Presumption - Liens - Ship Suppliers
World Fuel Services Corporation v. Nordems (Ship), 2011 FCA 73
This case probes the extent to which American maritime liens will be recognized by Canadian courts. Essentially, the issue was whether an American maritime lien would be recognized where bunkers were supplied to a ship under time charter outside of the United States or Canada and pursuant to a contract between the supplier and the time charterer. The bunker supply contract contained terms to the effect that: the bunkers were supplied on the faith and credit of the ship and her owners; the supplier was to have a lien over the vessel; and the supply contract was subject to U.S. law. The time charter party contract, on the other hand, contained the usual terms that the charterer was responsible for fuel and was prohibited from incurring liens. At first instance (2010 FC 332
) the Judge held the charterer had no authority, express or implied, to bind the owners to the supply contract and that therefore there was no in personam liability on the part of the owners to support a claim in rem. In reaching this conclusion, the Judge noted that the presumption as to the authority of a time charterer under Canadian law is much weaker than under U.S. law. Under U.S. law the presumption can only be rebutted by showing the supplier had actual knowledge of lack of authority whereas under Canadian law less than actual knowledge is necessary. The Judge found that the supplier’s own terms and conditions referred to commercial ship registries such as Lloyds which identified the vessel’s owner and held that the supplier was therefore on notice and should have verified whether the charterer had authority. The Judge next considered whether American law applied to the transaction and looked at the various connecting factors. In doing so he noted that because the owners were not a party to the supply contract the U.S. choice of law clause in the contract was of less significance than otherwise. He ultimately found that the applicable law was the place of the supply of the bunkers, which was South Africa, and as South African law had not been pleaded or proven, he applied Canadian law. Although the Judge had held that U.S. law was not applicable to the transaction, he nevertheless continued to decide whether U.S. law would recognize a maritime lien under circumstances where bunkers were supplied to a time charterer of a non-American ship outside of a U.S. port. He reviewed the affidavits of American attorneys that had been put before him and the various U.S. authorities and ultimately concluded that U.S. law would not recognize a lien under the circumstances.
On appeal, the Federal Court of Appeal dealt first with the presumption and then with the applicable law. On the presumption issue the Appellate Court agreed with the Trial Judge that the presumption was weaker under Canadian law than under American law. The Court said that the relevant question under Canadian law is whether there was behaviour or conduct on the part of the shipowner that would lead a supplier to believe the charterer was authorized to contract on the owner’s behalf or on the credit of the ship. In the absence of any “holding out”, the owner is not liable. The Court further noted that there is a duty on the supplier to make inquiries. Applying these principles to the facts of the case the Court held that the supplier knew or ought to have known that the charterer was not the owner and ought to have made inquiries. The Court further found that there was no “holding out” by the owner. The Court then turned to the question of applicable law and specifically to the question of what weight should be given to the choice of law clause in the supply contract. The Court held that where the owner was not a party to the supply contract the choice of law clause should be given no weight. The Court further refused to interfere with the Trial Judge’s balancing of the various factors and dismissed the appeal. The Court of Appeal did not address the Trial Judge’s finding as to whether U.S. law would recognize a lien in the circumstances.
Anti-Suit Injunction - Bunker Supplies
Alpha Trading Monaco Sam v. Sarah Desgagnés (Ship), 2010 FC 695,
This was an application by the defendant owner of the subject ship for an anti-suit injunction restraining the plaintiff from continuing proceedings commenced in Belgium. The plaintiff was a bunker supplier who had supplied the defendant ship with bunkers at various ports including ports in Canada. The ship was under time charter at the time of the supplies and the time charter contained a prohibition of lien clause and a clause that charterers were responsible for bunkers. The ship was arrested by the plaintiff in this action in Montreal and was later released on the undertaking of the owner to provide bail. Before bail was actually provided, the plaintiff advised that it would amend its statement of claim and proceed with only one supply claim. The plaintiff later commenced proceedings in Italy and Belgium and had the vessel seized in Belgium. The Court noted that the reason the plaintiff was “slicing and dicing” its recovery efforts was because Canadian law required personal liability on the part of the ship owner to support an action in rem whereas under Belgium law a ship may be arrested to secure a claim by a bunker supplier without personal liability of the owner. The Court further noted that the discretion to order an anti-suit injunction should be exercised most carefully. However, the Court did exercise its discretion and granted the injunction on the basis that the plaintiff had commenced these proceedings and accepted the defendant‟s undertaking to post bail. Importantly, the Court said that if the plaintiff had not commenced this proceeding in the first instance the defendants would have no standing whatsoever to bring this motion. The Court noted that the plaintiffs could properly have made their claims in a number of jurisdictions but that having made its choice it would be held to it. Accordingly, the Court granted the anti-suit injunction and ordered the plaintiff to release the ship from arrest in Belgium. On appeal to the Federal Court of Appeal, the Court of Appeal in brief reasons merely said that the re-arrest of the ship was, in the circumstances, an attempt to take unfair advantage by forcing the owners to provide security to guarantee a judgment against a third party.
Liens and Mortgages- Mortgagee's Right to Possession
St. Anthony Seafoods Ltd. Partnership v. "F.V. Independence" (The), 2010 FC 634
This was an application by the plaintiff/mortgagee for possession of the defendant vessel for the purpose of selling it pursuant to s.69 of the Canada Shipping Act, 2001 (s.69 gives the mortgagee of a registered vessel a power of sale). The plaintiff alleged that there had been various breaches of a loan agreement but the Court found that there were no breaches when demand was made or when the action was commenced. The motion was dismissed. (Note: Section 69 of the Canada Shipping Act, 2001 does not require court authorization for a mortgagee to take possession. Although this formed no part of the Court’s reasons, it is something which the Court appeared to recognize at para. 8.)
Priorities - Necessaries suppliers - American Maritime Liens - Applicable Law - Foreign Law Experts
Kent Trade and Finance Inc. v. JPMorgan Chase Bank, 2008 FCA 399
This was a hearing to determine the priorities of various claimants to proceeds from the sale of the Lanner. The competing claimants were the mortgagee and 15 suppliers of necessaries. The suppliers, who would normally rank below the mortgagee, challenged the validity of the mortgage. Some of them argued they had maritime liens under American law and, in the alternative, alleged special circumstances that should alter the normal order of priorities. At the initial hearing (2005 FC 864) the Prothonotary rejected all of these arguments. The challenge to the validity of the mortgage was based primarily on the absence of an expert's affidavit attesting to the validity of the mortgage under the applicable foreign law. The Prothonotary held that such an affidavit was not required. The argument by some of the suppliers that they had maritime liens through the application of American law was based upon choice of law clauses in the various supply contracts. However, the Prothonotary extensively reviewed the authorities and held that such choice of law clauses were not determinative. The applicable law was the law of the jurisdiction with the closest and most substantial connection to a particular transaction. The Prothonotary reviewed the factual circumstances of each claim and concluded that none of them were subject to American law. Accordingly, none of the suppliers had American maritime liens that would rank ahead of the mortgagee. In the course of his reasons the Prothonotary examined the nature of a maritime lien and held that such a lien could not be created by contract either through a lien clause or a choice of law clause. Finally, the Prothonotary considered whether delay by the mortgagee in enforcing its mortgage was a special circumstance of sufficient weight to alter the usual order of priorities. The Prothonotary found that the mortgagee had acted in a commercially reasonable manner and refused to alter the priorities.
Five of the suppliers appealed the Prothonotary's order to a judge of the Federal Court (2006 FC 409 ). The appeal Judge agreed with the Prothonotary that the absence of an expert's affidavit attesting to the validity of a foreign mortgage was not required and further said that in the absence of such an affidavit Canadian law would apply. The appeal Judge also agreed with the Prothonotary that there should be no equitable adjustment of the priorities based on the alleged delay by the mortgagee. However, the appeal Judge disagreed, in part, with the Prothonotary on the issue of whether the suppliers had American maritime liens. Specifically, although the appeal Judge agreed that the Prothonotary had applied the proper test in determining the applicable law, the appeal Judge disagreed with the application of that test in respect of two claimants. The appeal Judge held that American law applied to the one corporate claimant that was an American company and also that American law applied to a foreign claimant who had supplied goods in the United States. A final issue of note dealt with on appeal concerned an order for costs made by the Prothonotary against the suppliers. This order was overturned on the grounds that the suppliers were not made parties to the proceedings nor had their caveats against release been transferred to this action. The appeal Judge noted that this should be done in future proceedings so claimants cannot avoid a cost order.
The three unsuccessful necessaries suppliers commenced a further appeal to the Federal Court of Appeal (2008 FCA 399). All three of these suppliers supplied fuel or other necessaries under contracts that provided for the application of American law yet none of the suppliers were American and the supplies were not made in the United States. The Court of Appeal disagreed with the courts below and held that a contractual choice of law clause should normally govern maritime transactions including the rights which arise from those transactions. In reaching this conclusion the Court of Appeal acknowledged that in certain circumstances there may be such a strong connection to a jurisdiction that the choice of law clause should not apply, such as in Imperial Oil Ltd. v. Petromar Inc. (C.A.), 2001 FCA 391 (CanLII). However, the contractual choice of law should normally govern. The Court of Appeal next proceeded to consider whether American law in fact provided a priority lien in these circumstances. The Court noted that its role was limited to reviewing the affidavits and exhibits filed with the Court and that it should not conduct its own research into the foreign law. After reviewing the evidence, the Court concluded that American law would recognize a maritime lien in circumstances where a foreign supplier supplied goods in a foreign port under a supply contract governed by American law. Accordingly the appeals were allowed and the suppliers were entitled to priority. (Note: The Court of Appeal’s discussion as to the role of expert witnesses on foreign law is also interesting and useful reading.)
An application for leave to appeal the decision of the Federal Court of Appeal to the Supreme Court of Canada was dismissed at 2009 CanLii 28592.
Mortgages - Priorities - Application of Provincial Statutes
Royal Bank v. 1132959 Ontario Ltd., 2008 CanLii 40231
This was an application by the Appellant bank (the “Bank”) for possession of a yacht pursuant to rights allegedly acquired through a general security interest. The application was opposed by the Respondent, who was registered as the owner of the yacht under the Canada Shipping Act (“CSA”), on the grounds that the bank’s interest was not registered under the CSA. The background facts are important. The Bank entered into a general security agreement dated 9 March 2001 with a numbered company (“Numbered Co.”) and registered its interest under the Ontario Personal Property Security Act (“PPSA”). On 17 April 2004 the Numbered Co. acquired title to the yacht and, although it is not entirely clear from the judgment, it appears that the yacht was registered under the CSA at that time. On 13 February 2008 the sole shareholder of the Numbered Co. made an assignment in bankruptcy. On 12 March 2008 the Numbered Co. entered into a security agreement with the Respondent, the brother of the company’s sole shareholder. The security agreement was allegedly to secure a prior debt owed to the Respondent. This security agreement was never registered under the PPSA. On 20 March 2008 the Respondent was given a marine mortgage over the yacht as further security for the debt allegedly owed between the brothers. This marine mortgage was registered under the CSA but not the PPSA. On 10 April 2008 the marine mortgage was discharged and the yacht was transferred to the Respondent in full payment of the debt allegedly owed. On these facts the Court held that there was no doubt that on 17 April 2004 the Bank acquired a perfected security interest in the yacht pursuant to the after acquired property clause in the security agreement. The Court further held that the Bank’s interest had priority over any interest the Respondent had pursuant to the agreement of 12 March 2008 since that agreement was not registered. However, the Court recognized that the real issue was whether a registered interest under the CSA could take priority over a prior interest registered under the PPSA. The Respondent alleged that the CSA provided a complete code and registry of all interests in vessels. The Court disagreed and held that the CSA created two types of registers; mandatory and voluntary. Pleasure craft are not required to be registered and fall within the voluntary registry. Therefore, the Court held the Bank was not required to register its interest under the CSA registry. In result, the Court held the Bank’s interest had priority.
(Note: This has been a vexing issue for years and has the potential to cause serious difficulties for both lenders and borrowers. Although the equities of this case certainly favoured the bank, the Court’s analysis does not withstand any serious scrutiny. The distinction between mandatory and voluntary registration is no more than descriptive and does not provide a legal basis for the decision. Also, the mandatory - voluntary distinction is probably not accurate in respect of a mortgagee. The prevailing view is that if the vessel is registered (whether voluntarily or mandatorily) then any mortgage or security interest must be registered. It is submitted that the Court should have done a proper constitutional analysis taking into account the dual aspect doctrine, interjurisdictional immunity and paramountcy. Also, one cannot help but think that if, after the constitutional analysis, Canadian maritime law applied, then equitable considerations would have played an important part in any ranking.)
Liens and Mortgages - Ranking of Claims
Nordea Bank Norge ASA v. KINGUK (Ship), 2007 FC 434
Two vessels had been sold by the Court for the sum of $5.8 million and this case was to determine priorities and distribute the proceeds. The fees and disbursements incurred in selling the ships were incurred by the mortgagee. These fees and expenses, including solicitors fees and brokerage fees, were given priority akin to Marshall’s fees. The next claims in priority behind the Marshall’s fees were the claims of the crew for wages and a claim by Canada Revenue for employee source deductions. It was not necessary to determine the priority as between these two claims. The next claim in the ranking was the claim of the mortgagee, which claim included amounts paid to solicitors and disbursements of a distress nature which were reasonably incurred for maintaining the ship. Following the mortgagee were claims by necessaries suppliers and claims by Revenue Canada and the Workers Compensation Board of Nova Scotia. There were insufficient funds to satisfy these claims and the Court ordered that they share in the distribution pari passu while acknowledging that whether they should rank pari passu was not fully argued.
Liens and Mortgages - Bankruptcy - Whether Bankruptcy Act Stays Apply to Maritime Liens
Nanaimo Harbour Link Corp. v. Abakhan & Associates Inc., 2007 BCSC 109
This matter concerned the bankruptcy of the owner and operator of a passenger ferry. The issue was whether maritime lien claimants are caught by the statutory stay of proceedings under the Bankruptcy and Insolvency Act. More specifically, the issue was whether the maritime claimants could proceed with their actions in the Federal Court and have priorities determined in accordance with Canadian maritime law. The claimants were the Captain and crew of the vessel and two ship repairers with unpaid invoices for repairs done to the vessel. The mortgagee of the vessel opposed the application to lift the stay of proceedings arguing that the Bankruptcy and Insolvency Act and not Canadian maritime law determined the priorities. The Court held that the priorities were to be determined in accordance with Canadian maritime law, that the claims for seamen’s wages were maritime lien claims, that the claims by the ship repairers, although not maritime liens, might be elevated by the court on equitable principles and they should have the opportunity to argue this, and, finally, that the fact that the ferry was an intra-provincial ferry did not oust Canadian maritime law.
Possessory Liens - Practice - Court Ordered Inspection
Chadwick et al. v. Philbrooks Boatyard Ltd., 2006 BCSC 1607
This was an application by the Plaintiff for an order that it be permitted to inspect two engines in the possession of the Defendant. The Defendant opposed the application on the grounds that it had a possessory lien over the engines which would be lost if the engines were removed from its possession for inspection. The Court agreed with the Defendant that the possessory lien would be extinguished if the engines were removed from its possession. The Court did, however, grant the application ordering that the Plaintiff post security in an amount sufficient to cover the work done to the engines by the Defendant. No security was ordered in respect of amounts attributable to work done on the vessel (as opposed to the engines) since the Defendant was not in possession of the vessel and did not have a possessory lien for those amounts.
Sales of Vessels Without Appraisals
Nordea Bank Norge ASA v. The “Kinguk”, 2006 FC 1290
This was an application by the Plaintiff mortgagee to realize its mortgage security over two vessels, and its default judgment, through the private sale of the vessels. The application was opposed on the apparent grounds that there had not been a formal appraisal of the vessels. The Court noted that generally it will require a formal appraisal and advertisement before approving a sale of a vessel but held that each case ought to be decided on its own facts and on the basis of the evidence presented. The Court was satisfied that the proposed sale would maximize the proceeds to be made available to creditors and, therefore approved the sale. The Court noted that orders for appraisal and advertisement were never intended to be used a a means to delay a judicial sale so a Defendant might redeem its mortgage.
Late Filing of Expert's Affidavits
JPMorgan Chase Bank v. Mystras Maritime Corp., 2005 FC 486
This was an appeal from an order of a Prothonotary refusing leave to file an expert's affidavit on foreign law after the expiry of the deadline set out in a previous direction from the court and virtually on the eve of the priorities hearing. The motions Judge dismissed the appeal on the basis that the Prothonotary's order did not raise a question vital to the final issue and was not clearly wrong.
Meaning of “Vessel/Ship” – Mechanics Lien
TJ Inspection Services v. Halifax Shipyards, 2004 NSSC 181
In this matter the Plaintiff was retained by the Defendant to provide detailed inspection services in connection with the construction of a production platform which, when completed, would be towed on board a barge to the off-shore production site. When placed the platform would rest on four legs on the sea floor. The Plaintiff was not paid by the Defendant and registered a lien against the platform under the Nova Scotia Mechanics Lien Act. The Defendant brought this application for summary judgment dismissing the Plaintiff's claim. The motions Judge reviewed the relevant provision of the Mechanics Lien Act and noted that the validity of the Plaintiff's lien depended on the platform being either an “erection” or a “vessel”. The motions Judge noted that the thrust of the legislation “is against the land” and held that the platform could not be an “erection” within the meaning of the Act since it was to be placed on the sea bed. With respect to the definition of “vessel”, the motions Judge referred to the definitions in the present Canada Shipping Act, in the not yet proclaimed Canada Shipping Act 2001 and in the Federal Court Act. He held that under any of these definitions a structure must be capable of floating to be a vessel and that since the platform was not capable of floating it was not a vessel. In result, the Defendant's application was allowed and the lien was vacated.
Priorities – Sisterships
Royal Bank of Scotland PLC v. The “Golden Trinity” et al., 2004 FC 795
This was a hearing to determine the priorities to the proceeds of sale from three vessels owned by various one ship companies but mortgaged under fleet type mortgages. The vessels were all under the management of a single company, the principal of whom was a Mr. Peter Lygnos. The main claimants were the mortgagees of the vessels and Tramp Oil & Marine Limited, a bunkers supplier that had supplied bunkers to the various vessels and to alleged sisterships of the vessels. Tramp Oil sought to enhance its priority by challenging the various mortgages, by alleging a maritime lien and by arguing that the normal priorities should be altered in the circumstances of the case. With respect to Tramp Oil's attempts to challenge the mortgages the Court held that the mortgages were properly registered, valid and enforceable. The Court then considered Tramp Oil's claim to a maritime lien. The Court allowed the claim in respect of bunkers supplied at an American port through the agency of an American supplier on the basis that Tramp Oil was subrogated to the American supplier's maritime lien created under American law. It is noteworthy that in reaching this conclusion the Court applied American law even though Tramp Oil's terms and conditions specified English law. The Court did so on the basis of Imperial Oil v Petromar, (2001) 283 N.R. 182, and the fact that there was no real connection with England, the jurisdiction selected in Tramp Oil's standard trading conditions. The Court disallowed Tramp Oil's claim to a priority on the basis of a contractual maritime lien as provided for in its standard trading conditions. The Court held that a contractual maritime lien was not a true maritime lien which arises automatically without antecedent formalities. The contractual lien did not raise the claim above the priority given to other statutory in rem creditors. The Court next considered the sistership claims. The Court first noted that even if the sistership claims were valid such claims would rank as ordinary in rem claims and not have the status of maritime liens. The Court, however, rejected the sistership claims. In doing so it noted the difference between the French and English versions of section 43(8) of the Federal Court Act. The English version requires consideration of the registered owners whereas the French version requires consideration of the beneficial owners. The Court held that the French version was the better approach and stated that if Tramp Oil could prove that the vessels it bunkered were beneficially owned by the owners of the Defendant ships there would be a sistership claim. The Court further noted that in trying to determine the beneficial ownership it is permissible to look behind the registered ownership and that this was not an unauthorized piercing of the corporate veil. The factors considered by the Court included: that the vessels were under common management; that the Boards of Directors of the one ship companies were identical; that the Banks required a personal guarantee from Peter Lygnos; that the ships were insured under the same insurance policy; and that the ships were jointly and severally liable under the mortgages for each other's debts. These factors, however, were not sufficient to find a sistership relationship. The Court noted that there was no evidence as to who ultimately enjoyed or was entitled to the profit and benefit derived from the ships, something which leads to the concept of beneficial ownership. Accordingly, the Court found the sistership relationship had not been proved. The Court finally turned to the question of whether the priorities should be re-ordered on the basis of equitable considerations. The issue here was whether the mortgagees ought to have moved sooner to realize against the ships. The Court found that banks are entitled to grant indulgences to customers in bad times and refused to re-order the priorities on this basis. The Court noted, as it frequently does, that very special circumstances are required to vary the usual ranking and that there is a very heavy onus on the party seeking to do so.
Mortages – Duties of Mortgagee in Possession – Improvident Sale
Middleton et al. v. Farquharson et al., 2004 BCSC 32
In this matter the Defendant sold the vessel “Ocean Tribune” and her C licence to the Plaintiff for $135,000.00 payable $100,000 in cash and the balance by way of vendor financing for one year at 10%. The vendor financing arrangement was documented with a promissory note, a collateral marine mortgage and a registered marine mortgage. The Plaintiff failed to pay the amount owing on the due date and the Defendant seized the vessel. The parties then agreed that the Plaintiff would pay the Defendant $25,000 and would execute a second promissory note, collateral marine mortgage and registered marine mortgage for $35,000. This was done. The Plaintiff paid the $25,000 but failed to pay the amount due under the second note. The Defendant again seized the vessel. On the advice of the bailiff, the vessel was removed from the water which caused the wood planking to dry out and ultimately necessitated considerable repair work. The vessel was advertised for sale by the Defendant for 21 days. The only bid received was one by the Defendant himself for $75,000. His evidence, which was accepted by the trial Judge, was that his bid was a protective bid made because he was concerned the bids from others would be too low to recoup his losses. The Plaintiff subsequently brought this action. The first issue was whether the second note and second marine mortgage were invalid. The Plaintiff alleged that the $25,000 payment was made on account of the first note and first mortgage and that the second note and mortgage did therefore not properly reflect the amount owing. The Defendant replied that the $25,000 payment was intended to satisfy outstanding interest on the first note and the costs of effecting the seizure and to retire other debts owed by the Plaintiff to the Defendant. The trial judge preferred the Defendant's evidence to that of the Plaintiff and held that the second note and mortgage were valid. The next issue was whether the Defendant as mortgagee in possession breached his duty to take reasonable care of the goods seized. This issue concerned the taking of the vessel out of the water. Again, the trial Judge sided with the Defendant finding that the Defendant acted reasonably in taking the vessel out of the water. The next issue was whether the sale of the vessel to a numbered company owned by the Defendant was improper. The Plaintiff argued that the value of the vessel and C licence were much more than $75,000. The trial judge noted that there were two lines of authority dealing with the duty owed by a mortgagee when realizing on security. The subjective test requires the mortgagee to exercise good faith and the avoidance of wilful default in selling the asset. The objective test involves an obligation to act reasonably to obtain the market value. Although the trial judge considered the subjective test was the test that was binding on him he held that under either test the Defendant had not acted improperly.