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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Charters - Bunkers - Bankruptcy of OW Bunkers - Liens - Practice - Interpleader - Parole Evidence – Appeals – Standard of Review
Canpotex Shipping Services Limited v. Marine Petrobulk Ltd., 2015 FC 1108 2017 FCA 47
Précis: The Federal Court of Appeal held that the trial Judge erred in relying upon parole evidence when interpreting bunker supply contracts and further held that the error was sufficiently serious as to constitute an error in principle justifying review to the standard of correctness.
Facts: Canpotex obtained bunkers from OW Bunkers (“OW”) for two foreign registered vessels that it chartered. The bunkers were actually supplied by the defendant, Marine Petrobulk (“MP”), a Canadian bunker supplier. MP invoiced OW for the bunkers and OW invoiced Canpotex. Before any of the invoices were paid, OW became insolvent and subsequently bankrupt. Pursuant to various court orders and agreements, any sums owing to OW were to be collected by ING, its receivers. MP and ING both claimed entitlement to payment of the amounts owing by Canpotex in respect of the bunkers supplied. Canpotex brought this action and, pursuant to a consent order made by the Prothonotary under Rule 108, deposited the amount owing into a trust account. Canpotex then brought this application for a declaration that the payment of the funds into trust extinguished its liabilities and any in rem claims against the vessels. MP and ING each brought their own applications for declarations that they were entitled to the funds. ING also opposed the relief requested by the plaintiff.
A critical issue was the relevant contractual documents that applied to the purchases. This issue arose because Canpotex and OW had negotiated a Fixed Price Agreement that included as Schedule 3 a set of terms and conditions. However, because market conditions were not favourable, no purchases were made by Canpotex under this agreement. Rather, the parties were agreed that all purchases made by Canpotex were “spot purchases” not subject to the Fixed Price Agreement. Nevertheless, Canpotex led evidence and argued that Schedule 3 of the Fixed Price Agreement was intended to and did apply to “spot purchases”. This issue was important because Schedule 3 to Fixed Price Agreement provided that “where the physical supply of the fuel is being undertaken by a third party… these terms and conditions shall be varied accordingly”. In contrast, OW’s General Terms and Conditions, which were referred to in the bunker confirmations, provided that “where the physical supply of the Bunkers is being undertaken by a third party which insists that the Buyer is also bound by its own terms and conditions… these Terms and Conditions shall be varied accordingly”.
At first instance (2015 FC 1108), the motions Judge: (1) allowed the plaintiff's interpleader application; (2) ordered that the full amount of MP’s invoice be paid out of the funds held in trust; (3) ordered that the balance of the funds in trust be paid to OW/ING; and (4) declared that the in personam liability of the plaintiff and the in rem liability of the vessels would be extinguished upon the payments being made. In reaching this result, the motions Judge accepted the evidence of Mr. Ball of Canpotex that the purchases were subject to Schedule 3 of the Fixed Price Agreement. He further held that pursuant to Schedule 3 of the Fixed Price Agreement the terms and conditions were varied to include MP’s Standard Terms and Conditions. He then applied MP’s Standard Terms and Conditions and held that the plaintiff and OW were both customers of MP and were jointly and severally liable to pay it for the bunkers delivered. OW/ING appealed.
Decision: Appeal allowed. The matter is referred back to the Judge for reconsideration.
Held: Interpleader relief is available where “two or more persons make conflicting claims”. The claims must pertain to the same subject matter, must be mutually exclusive and must be such that the applicant faces an actual dilemma as to how he should act. The only claims here that are conflicting and can give rise to interpleader relief are the contractual claims of OW and MP. The assertion of a maritime lien against the vessels by MP under s. 139 of the Marine Liability Act is not a conflicting claim as it is a claim against the vessels and their owners not Canpotex. It was wrong for the trial Judge to extinguish the shipowners’ liability in relation to any s. 139 claim.
The Judge erred in considering Mr. Ball’s evidence which led him to err in concluding that Schedule 3 of the Fixed Price Agreement applied to the purchases at issue. There is nothing in the contractual documents to support his oral evidence. The trial Judge should not have used that oral evidence to replace or overwhelm the words used in the contractual documents. “The parol evidence rule precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing.” In failing to follow the principles of contractual interpretation the Judge erred in law and, although errors of contractual interpretation are normally errors of mixed fact and law and not subject to a standard of correctness, this error constitutes an extricable error in principle and is subject to the standard of correctness. Therefore, this matter is referred back to the trial Judge for reconsideration.
Purchase of Vessel – Whether a secured transaction – Entitlement to Foreclosure
Avina v. The Ship Sea Sensor, 2016 BCSC 2488
Précis: The purchase of a vessel through the medium of a company accompanied by a loan to purchase shares in the company is not a secured transaction entitling foreclosure against the purchased vessel.
Facts:The plaintiff and defendant agreed to purchase the “Sea Senor”, a 34-foot trawler. The vessel was put in the name of a company the shares of which were owned 51% by the defendant and 49% by the plaintiff. The parties agreed that operating expenses were to be apportioned by a similar ratio of 51%/49%. The defendant loaned to the plaintiff the funds for his share of the purchase price on terms that it be repaid over time at 5% interest. As security for this loan, the plaintiff endorsed and delivered to the defendant 50,000 shares, worth about $46,000, in an unrelated company. A dispute arose over the repayment of the loan and allocation of the expenses which resulted in the plaintiff commencing this proceeding and arresting the vessel. The defendant then gave notice of foreclose on the vessel under s. 61 of the Personal Property Security Act and also filed a counter-claim alleging the plaintiff defaulted on the loan and owed operating expenses.
Decision:Judgment to the defendant for the amounts owing but the claim for foreclosure is dismissed.
Held:The defendant says: that in substance the transaction as a whole was a secured transaction with the vessel as security; that the voluntary foreclosure provisions of s. 61 of the Personal Property Security Act applied to the vessel as security; and, that the plaintiff’s interest in the vessel is now foreclosed with the result that the vessels is now owned by the company free and clear of any interest of the plaintiff. However, the only secured aspect of the transaction was the loan which was secured by the shares. There was no security interest in the vessel which belongs to the company of which the parties hold the shares. The plaintiff is, however, in default under the loan agreement and owes the defendant.
Offshore Interiors Inc. v. Worldspan Marine Inc., 2016 FC 27 2016 FCA 307
Précis: The Federal Court will not require parties to litigate issues in another court. The priorities as between the builder and purchaser/mortgagee depend on the wording of the contractual documents.
Facts:Worldspan and Sargeant entered into a vessel construction agreement (“VCA”) for the construction of a yacht by Worldspan for Sargeant. Disputes arose during the course of construction which resulted in the vessel being arrested by Offshore, an unpaid supplier of materials and services. Various claims were filed against the vessel including claims by Sargeant and Worldspan. Sargeant claimed $20 million based on a builder’s mortgage granted to it by Worldspan to secure the advances made by Sargeant to Worldspan towards the construction of the vessel. Worldspan claimed $5 million in respect of amounts alleged to be due and owing to it by Sargeant and which it further alleged were secured by the VCA with a priority above the builder’s mortgage. The vessel was eventually sold by the Federal Court for $5 million, leaving a substantial shortfall. Meanwhile, a petition under the Companies Creditors’ Arrangement Act was filed by Worldspan and suits and countersuits were filed by Worldspan and Sargeant in the British Columbia Supreme Court.
At first instance (2016 FC 27), there were two motions before the Federal Court, one by Sargeant and another by Worldspan, both of which were dismissed. The motion by Sargeant was for an order that the in personam claims between it and Worldspan must proceed in the British Columbia Supreme Court leaving only the in rem claims to be addressed in the Federal Court. This motion was dismissed by the motions Judge on the grounds that Sargeant chose the Federal Court to adjudicate its in rem claims and that this must include the ability to address the underlying in personam liability. The motion by Worldspan was for an order that its claim for unpaid advances had priority over the builder’s mortgage claims. The motions Judge reviewed the various contract documents including section 12.1 of the VCA which provided that Sargeant’s first priority for advances was subordinate to “Builder’s right to receive payments pursuant to this Agreement”. Although Worldspan argued that this section created a condition that it be paid in full before Sargeant could exercise its mortgage security, the motions Judge held that this section merely gave Worldspan the right to deduct any amounts owed from the mortgage claim.
Worldspan appealed the dismissal of its motion.
Held: Although the appellant laid out a contractual interpretation that would support its appeal, the motions Judge adopted an equally plausible construction. There was evidence to support the construction adopted by the motions Judge and, therefore, there was no palpable and overriding error.
Ranking of Priorities - Sister Ship Claims - Interest – SSOPF
Verreault Navigation Inc. v. 662901 N.B. Ltd., 2016 FC 1281
Précis: This matter concerned the ranking of various claimants to proceeds from the sale of a ship.
Facts:The barge “Chaulk Lifter” was arrested by a harbour authority for non- payment of harbour dues. At the time of her arrest she was in the possession of a ship repairer for the purposes of having repair work done. The ship repairer subsequently commenced this proceeding for amounts owing and obtained an order for the sale of the vessel. The barge was sold by court order for $600,000. From the proceeds of sale, the expenses of the Marshall were paid as were two preferred claims under the Canada Marine Act for harbour dues and damage done to a dock. After the payment of these claims there was a balance of approximately $460,000 but the total claims against the vessels exceeded $6.5 million. The claimants and their claims were:
• The ship repairer for the costs of repairs to the barge, the costs of bringing the barge to sale and for various custodia legis expenses;
• The harbour authority for a mortgage claim of $57,000, which mortgage was granted on 20 August 2014 to secure partial payment of harbour dues owing in respect of the barge;
• The harbour authority for $260,000 in wharfage, clean-up and wreck removal, all of which were incurred as a consequence of the sinking of a sister ship;
• The brother and father of the sole officer and director of the owner for a mortgage claim of $407,000;
• The Canadian Coast Guard for $1.8 million representing the costs of cleaning up an oil spill that occurred as a consequence of the sinking of the sister ship;
• The Administrator of the Ship-source Oil Pollution Fund for security to satisfy claims anticipated to be filed as a consequence of the sinking of the sister ship; and
• A lender for funds advanced.
Decision: The balance of the sales proceeds are to be distributed in priority first to the ship repairer then to the harbour authority, in respect of its mortgage claim, with the balance then to be shared pro-rata between the allowed claims of the ordinary in rem creditors. Interest is to be allowed only to the extent earned on the sums on deposit and is to be shared pro rata.
Held:The ship repairer has a possessory lien which outranks the two mortgages that pre-date the commencement of its work on the vessel. The possessory lien covers the work done to the barge, the costs of moving the barge from time to time and the costs of fuel and supplies but not GST and PST for which the repairer was entitled to a rebate. In addition, its claim is reduced by $23,000 for damage caused to the dock while moving the barge and which formed part of the preferred claim under the Canada Marine Act.
The harbour authority claims $57,000 in respect of the mortgage it holds on the barge and $260,000 in respect of a sister ship claim. It is entitled to priority for its mortgage claim but not in respect of the amounts incurred in relation to the sister ship or as a consequence of the sinking of the sister ship. A sister ship claim is a mere claim in rem with no priority and ranks pari passu with other ordinary creditors.
The claims of the brother and father for priority as mortgagees are disallowed. The evidence establishes that the corporate owner of the barge was given no consideration for the mortgage. Moreover, the transactions were not at arms length and the court has inherent power to vary the normal ranking of priorities. If they have any claim, it ranks after the claims of ordinary creditors.
The claim of the Canadian Coast Guard in respect of the costs of clean-up of the oil spill associated with the sinking of the sister ship, being a sister ship claim, ranks pari passu with ordinary creditors.
The claim by the Administrator of the Ship-source Oil Pollution Fund for security is challenged on the basis that s. 102 of the Marine Liability Act gives no right to claim against sister ships. However, neither does the Marine Liability Act contain anything that detracts from the general right under s. 43(8) of the Federal Courts Act to claim against a sister-ship. Accordingly, the Administrator has a right to claim against a sister ship but its claim will rank pari passu with other ordinary creditors.
The claim by the lender is disallowed as the funds advanced were not in respect of the barge or a sister ship of the barge.
Hanjin Bankruptcy – Recognition of Foreign Insolvency Proceedings – Stays of Federal Court Proceedings
Re: Hanjin Shipping Co. Ltd. v. , 2016 BCSC 2213
Précis: The automatic stay of proceedings that arises upon recognition of a foreign insolvency proceeding does not automatically include existing Federal Court in rem proceedings.
Facts: Following well publicized financial difficulties, Hanjin Shipping obtained a creditor protection order from Korean courts under the Debtor Rehabilitation and Bankruptcy Act of Korea. The Trustee of Hanjin then made this application to the British Columbia Supreme Court under the Companies’ Creditors Arrangement Act for recognition of the Korean proceeding as the main proceeding and for a stay of any proceedings as against Hanjin and its property. At the time of the application, there were several proceedings already commenced against Hanjin in the Federal Court and at least two vessels that had been operated by Hanjin had been arrested in those Federal Court proceedings.
Decision: Application allowed, except in respect of the Federal Court proceedings.
Held: The contentious issues relate to the Federal Court proceedings. “In recognition that in rem proceedings are before the Federal Court in respect of the vessels, Hanjin Vienna, Hanjin Scarlet, and Hanjin Marine, this order shall not apply to those proceedings (including caveators) unless and to the extent the Federal Court of Canada may determine in the exercise of its own unfettered jurisdiction and discretion.”
Mortgage - Innocent Purchaser - Validity of Foreign Mortgage - Limitation Period Applicable - Application of Provincial Laws
Lakeland Bank v. The Ship NEVER E NUFF, 2016 FC 1096
Précis: The Federal Court gave judgment in rem in favour of a U.S. mortgagee notwithstanding the sale of the vessel to an innocent purchaser. Provincial laws requiring registration of a mortgage had no application in the circumstances.
Facts: The plaintiff loaned funds to the first defendant in 2007 for the purchase of a vessel and registered a mortgage against the vessel in the United States, the location of the vessel at the time. The first defendant defaulted on the loan and the plaintiff obtained an in personam judgment against him in the United States. The plaintiff was, however, unable to obtain an in rem judgment against the vessel as it had been moved to Canada and resold to the second defendant. The plaintiff learned of the sale in January 2009. In June 2012, the plaintiff brought this proceeding in the Federal Court of Canada in personam against the first and second defendants and in rem against the vessel. The court dismissed the in personam claim against the first defendant on the grounds that the Statement of Claim was never served on him and, in any event, the issue of his liability was res judicata. The court also dismissed the in personam claim against the second defendant as he was merely an innocent purchaser for value without notice of the mortgage. The remaining issue was the in rem claim and the validity of the mortgage.
Decision: Judgment for the plaintiff on the action in rem.
Held: The in rem action against the vessel was vigorously defended by the second defendant who argued, first, that the plaintiff had failed to prove the mortgage was valid under American law. However, the plaintiff was not required to present evidence of American law because it was not asserting any greater rights under American law than under Canadian law. With no evidence of American law, Canadian law is presumed to apply. The mortgage was valid under Canadian law and lack of registration is of no effect.
The second defendant next says the claim is subject to a three-year limitation period under either American law or pursuant to s. 140 of the Marine Liability Act. The plaintiff has not led proper evidence of a three-year limitation period under American law and fails on this account. With respect to the three-year limitation period contained in s. 140 of the Marine Liability Act, this limitation period does not apply since it was only enacted in September 2009 and does not have retroactive effect. In the Federal Court limitation/prescription periods are matters of procedure governed by the lex fori, except perhaps with respect to matters arising wholly within Quebec. The applicable limitation period is six years under s. 39(2) of the Federal Courts Act. The Statement of Claim was filed in June 2012, within six years of the plaintiff becoming aware of the sale.
Finally, it is argued that under Quebec law the mortgage is invalid since it was not registered as required by the Quebec Civil Code. If this was purely a Quebec matter, the mortgage could have been registered under the Civil Code and enforced in the Federal Court. It does not, however, follow that failure to register renders the mortgage unenforceable. This is a constitutional issue that must be considered in light of Ordon v Grail,  3 SCR 437, as modified by Marine Services International Ltd. v Ryan Estate, 2013 SCC 44. They set out four factors to consider, each of which are addressed below.
(1) Is a mortgage on a ship a matter within exclusive federal competence under the navigation and shipping power?
Although contracts of sale and insurance are within provincial competence as being matters of property and civil rights, the sale of a ship and marine insurance are also matters of navigation and shipping and form part of Canadian maritime law. Mortgages on maritime property clearly fall within Canadian maritime law and are subject to federal jurisdiction.
(2) Is there a federal statutory counterpart to the provisions of the Quebec Civil Code?
It is not necessary to determine if there is a federal statutory counterpart to the provisions of the Quebec Civil Code in this matter as the Canada Shipping Act 2001 would not have applied to an American ship and an American mortgage.
(3) If there is no federal statutory counterpart, should non-statutory Canadian maritime law be altered?
Canadian maritime law need not be altered as it currently recognizes unregistered mortgages.
(4) If the non-statutory Canadian maritime law should not be changed, does the provincial law trench upon a protected core of federal competence?
The provincial law in this case does trench upon a protected core of federal competence. This is not a case such as Ryan Estate where it was noted provincial workers’ compensation laws had applied to maritime matters for more than a century. Here, in the case of conflict, federal law is paramount.
Comment: The learned Judge appears to conflate the constitutional doctrines of interjurisdictional immunity and paramountcy. On the one hand, he discusses trenching upon the protected core of federal competence which is the language of interjurisdictional immunity. On the other hand, he says that the federal law is paramount, which is the language of paramountcy. It is therefore unclear which doctrine was ultimately relied upon to reach the decision that federal law applied. Moreover, to the extent that the Judge relied on the doctrine of paramountcy, he appears to have applied the doctrine to non-statutory Canadian maritime law which is, in essence, the common law. However, in Marine Services International Ltd. v Ryan Estate, 2013 SCC 44, the Supreme Court of Canada said that the paramountcy doctrine does not apply to an inconsistency between the common law and a valid provincial enactment.
Priorities - Ranking - Equity - Application of Provincial PPSA
Ballantrae Holdings Inc. v. The Ship Phoenix Sun, 2016 FC 570
Précis: This case deals with priorities as between various claimants and addresses the relevance of provincial personal property security legislation (PPSA) to maritime claims and priorities.
Facts:The “Phoenix Sun” was purchased while under arrest by a person who intended to repair her, find a cargo and sail her to Turkey where she would be sold for scrap at a profit. The ship was purchased for $1 million which was borrowed from the plaintiff, Ballantrae, and secured by a mortgage on the ship. The mortgage was never registered in a ship registry but it was registered as a charge under the Ontario Personal Property Security Act (“PPSA”). The purchaser hired a crew and persuaded other chandlers and repairers to provide goods and services to the vessel. The purchaser also obtained some additional funds from a Mr. Hamilton. Eventually, the funds ran out and the ship was again arrested in this proceeding commenced by Ballantrae. The ship was subsequently sold for $680,000. Pursuant to the normal procedure established by the Federal Court, claimants to the proceeds of sale filed their claims with the court. The court was called upon to adjudge and rank the claims. The claimants and claims included:
• The Marshall for the fees and expenses of bringing the ship to sale;
• Ballantrae for its costs of bringing the vessel to sale;
• The Master and crew of the vessel for the amounts due to them under their employment contracts;
• The City of Sorel for berthage and the costs of supplying electricity, which it claimed had a priority under either the Canada Marine Act, the Marine Liability Act or in equity;
• Various necessaries supplier who claimed lien rights under s. 139 of the Marine Liability Act;
• Mr. Hamilton, who also claimed lien rights under s. 139 of the Marine Liability Act or in equity;
• Ballantrae for the amount due under the mortgage; and
• Skylane, who also claimed to have a valid mortgage registered in Panama.
Decision:The claims will rank in accordance with the reasons.
Held:Generally, the highest priority claims are the Marshall’s fees and expenses and the costs of the creditor that brought the ship to sale. Thereafter come maritime liens and liens created by statute, which enjoy the same status. Next in ranking are mortgages followed by in rem creditors. On occasion, when the interests of justice require, this traditional ranking may be altered.
The Marshall’s claim for expenses ($39,000) is the claim with the highest priority. Ranking second is the claim of the plaintiff, Ballantrae, for the costs incurred to bring the ship to sale. These costs are not the actual solicitor client costs but are to be taxed under the tariff. Also, this priority is limited to the costs associated with bringing the ship to sale. It does not include the costs of asserting its own claim or contesting the claims of other parties.
Ranking next are the claims of the Master and crew for wages and benefits. These are alleged to be $180,000. However, the claim is calculated using an exchange rate at the date of judgment and includes a retainer or stand-by fee of one third of one month’s wages. The exchange rate to be used is the rate on the date of the breach, not the date of judgement. Additionally, the retainer or stand-by fee component does not enjoy maritime lien status. Finally, although the crew left the ship on 21 September 2014, their wage claims are to be calculated pursuant to the terms of their contracts which give additional payment.
The City of Sorel claims for berthage ($75,000) and for the supply of electricity ($22,000). It argues it is entitled to priority under s. 122 of the Canada Marine Act or s. 139 of the Marine Liability Act or, alternatively, on an equitable basis. Section 122 of the Canada Marine Act gives priority to a Port Authority or to “a person who has entered into agreement under s. 80(5)”. The City of Sorel is not a Port Authority and is not “a person who has entered into agreement under s. 80(5)” since s. 80(5) relates to parts of the Saint Lawrence Seaway and Sorel is not within the Seaway. Sorel therefore has no priority under s. 122 of the Canada Marine Act. Neither does the city’s claim fall under s. 139 of the Marine Liability Act. The claim of the city is not for “goods, materials or services” supplied to a vessel. This follows from the distinction in s. 22 of the Federal Courts Act between necessaries and docking charges and from the purpose of s. 139 of the Marine Liability Act which was to give Canadian necessaries suppliers a priority equal to that enjoyed by foreign suppliers. In the traditional ranking, the claims of the City of Sorel should, therefore, have no priority. However, the court does have an equitable jurisdiction to vary the traditional ranking if the interests of justice so require. It is appropriate to alter the traditional ranking in respect of the claim for the supply of electricity to the ship since this did benefit all of the creditors. The claim for the costs of electricity will rank immediately after the claims of the Master and crew.
The claims of necessaries suppliers with lien claims under s. 139 of the Marine Liability Act rank after the claim of the City of Sorel for the supply of electricity.
One of the claimants, Skylane, claims a Panamanian mortgage over the vessel in the amount of $1.7 million. This court previously ordered that it file evidence as to the validity of its Panamanian mortgage and it failed to do so. The claim of Skylane is struck for failure to comply with this order. In addition, the claim of Skylane would have been defeated because: the only evidence before the court is an affidavit to the effect the Skylane mortgage is invalid under Panamanian law; and, the Skylane mortgage was granted while the ship was under arrest. A shipowner cannot deal with a ship under arrest in such a way as to dissipate its value to other creditors.
Another creditor claimed to be a crew member and entitled to priority for unpaid wages of $50,000. This creditor was not, in fact, a crew member. He was an employee and shore labour and does not benefit from any priority.
Mr. Hamilton claims a priority for various amounts advanced to the purchaser to pay crew, service providers, ship chandlers and other vessel maintenance expenses. However, the evidence establishes Mr. Hamilton was in a joint venture with the purchaser and was not a lender. As a joint venturer he is only entitled to whatever funds are left over after all other creditors are paid.
The claim of Ballantrae as mortgagee is challenged on the grounds that its mortgage was not registered. Hamilton argues that as an unregistered mortgage it is an equitable mortgage which ranks just above ordinary in rem creditors. It is not correct that an unregistered mortgage is necessarily an equitable mortgage. An unregistered legal mortgage would have difficulty ranking ahead of a subsequently registered mortgage but outranks equitable charges and in rem creditors.
The registration of the Ballantrae mortgage under the Ontario PPSA also raises issues. Ballantrae argues this gives the mortgage priority over ordinary in rem creditors whereas Hamilton argues the registration under the PPSA is not relevant. Specifically, Hamilton says the PPSA registration is not relevant because, first, the vessel was never in Ontario and, second, the PPSA cannot constitutionally apply to maritime matters. It is correct that the PPSA does not apply as the vessel was not in Ontario and this is sufficient to dispose of this issue. However, the point of the general application of the PPSA to maritime matters is of such importance that it deserves comment. Recent jurisprudence indicates that the scope for the “incidental” application of provincial statutes in a maritime context is much broader than was thought. This court may “take cognizance of the Ontario PPSA”.
Finally, with respect to interest on the claims, prejudgment interest is in the discretion of the court. In the circumstances, it is appropriate that no prejudgment interest be awarded.
Comment: The statement that maritime liens and liens created by statute have the same status may be questionable as a rigid rule. It will depend in each case on the precise wording of the statute in issue. Also, the court’s treatment of the Ontario PPSA is notable but raises a question of what happens when the priorities established by the PPSA differ from those that arise under Canadian maritime law.
Practice - Interpleader Order - Concurrent Jurisdicition
Re: Bernard LLP v. , 2015 BCSC 2382
Précis: A law firm was entitled to interplead disputed funds notwithstanding that the Federal Court had ordered the funds paid to one of the claimants.
Facts:A yacht was ordered to be sold by the Federal Court with the proceeds of sale to be deposited into the trust account of the petitioner. Before the vessel was sold, CCAA proceedings were commenced in the British Columbia Supreme Court. In the CCAA proceedings an order was made appointing a “Vessel Construction Officer” and authorizing that officer to borrow funds to prepare a plan to complete the construction of the yacht. The “Vessel Construction Officer” borrowed $144,000 from an interested party, Sargeant, to perform this task. The Federal Court granted a first charge on the vessel for these borrowed funds. Sargeant then assigned his interest in the charge to BHT and brought an application in Federal Court to pay out the funds. That application was contested on the grounds that the assignment was fraudulent. The Federal Court ordered the funds to be paid to Sargeant. Sargeant then appealed on the grounds that the funds should have been made payable to BHT but did not obtain a stay of the order pending appeal. The petitioner then brought an application in the British Columbia Supreme Court for the right to interplead the funds and was granted such an order. Sargeant appealed.
Decision: Appeal dismissed.
Held: The central complaint is that this court should not make an interpleader order when there is an order of the Federal Court which has determined who is entitled to the funds. However, the Federal Court itself recognizes that it has limited jurisdiction to address the fraudulent allegations regarding the assignment and has further recognized that this court has jurisdiction to hear the interpleader application. The Federal Court order is not a final determination of who is entitled to the funds in these circumstances. This is a proper case for an interpleader order.
Mortgages - Default - Summary Judgement
National Bank of Canada v. Rogers, 2015 FC 1207
Précis: The bank/mortgagee was granted summary judgement upon the default of the debtor in advance of the sale of the ship.
Facts: In February 2010 the defendants purchased a yacht for $924,000 of which approximately $675,000 had to be financed. The defendants obtained the financing through a facility the vendor had with the plaintiff bank. The transaction was recorded in a conditional sales contract on the plaintiff’s form which showed the vendor and the defendants as buyers. The vessel and a mortgage in favour of the plaintiff were subsequently registered on 16 November 2010. Meanwhile, the defendants took possession of the yacht in May 2010 but were not happy with it and complained to the vendor but not the plaintiff. In August 2010 the vendor agreed to replace the yacht with delivery of the new vessel to be in April 2011. In October of 2010, the yacht was returned to the vendor and it was further agreed that the vendor would provide cash for the mortgage payments on the yacht which were drawn from the defendants’ account. The yacht was resold by the vendor on 26 October 2011.The plaintiff was unaware of the resale which was never registered. The plaintiff was also unaware that the vendor was providing the mortgage payments to the defendants. The defendants never received the replacement vessel nor did they receive any part of the proceeds from the resale of the yacht. The vendor went bankrupt in early 2015 and the defendants ceased making mortgage payments in February 2015. The plaintiff commenced this action for the balance owing in rem and in personam against the defendants and brought this application for summary judgment. The defendants contested the application. At the time the application was heard, the yacht had been arrested and was subject to an order of judicial sale.
Decision: Judgment for the plaintiff.
Held: The defendants argue that this summary judgment motion is premature as the plaintiff has not yet sold the yacht. They rely on case law relating to real estate which says a mortgage in possession is obliged to sell at the best possible price. However, a ship is not real estate. A mortgagee of a ship is under no obligation to commence an action in rem or to arrest the vessel and, in any event, an arrest does not put the mortgagee in possession of the vessel. It is the court that will sell the vessel and the proceeds from the sale will be distributed between the claimants thereto who, at present, comprise only the plaintiff and the purchaser of the yacht on resale.
With respect to the merits, the defendants argue that the plaintiff as assignee of the conditional sales contract is liable for the many deficiencies in the vessel and for the actions of the vendor who, they say, was the agent of the plaintiff. But, the vendor did not have any authority to represent the plaintiff and no reasonable person could reasonably believe the vendor had ostensible authority. From the evidence it is perfectly clear that the defendants knew the vendor was not an agent for the plaintiff.
Construction Mortgage - Entitlement of Purchaser/Mortgagee to Return of Advances – Interpretation of Contracts – Standard of Review on Appeal
Offshore Interiors Inc. v. Worldspan Marine Inc., 2013 FC 1266 2015 FCA 46
Précis: The Federal Court of Appeal dismissed an appeal and confirmed the trial judgment holding that a Builder's mortgage secured advances made by the purchaser and that the builder was under an obligation to repay those advances.
Facts: Pursuant to a vessel construction agreement the builder was to retain title to the vessel until delivery to the purchaser and the purchaser was to make periodic payments in the nature of advances to the builder. The advances were to be secured by a continuing first party security interest supported by a mortgage. A current account Builder’s Mortgage was filed in the ship registry in favour of the purchaser. Disputes arose during the course of construction of the vessel with the result that construction ceased and the builder filed a petition in the British Columbia Supreme Court under the Companies Creditors’ Arrangement Act. The plaintiff, a supplier of goods and services to the vessel, also commenced these proceedings in the Federal Court for unpaid invoices and had the vessel arrested. In the B.C. Supreme Court action an order was pronounced on 22 July 2011 providing that any claimant with an in rem claim against the vessel could pursue that claim in the Federal Court. The Federal Court issued an order on 29 August 2011 establishing a process for the filing of in rem claims against the vessel which included a requirement that any claim be described with sufficient particulars so the court could establish whether it was a proper in rem claim and determine its priority. A claim was filed in the Federal Court by the purchaser/mortgagee for repayment of the funds advanced. The plaintiff brought this application for a declaration that the mortgage did not create a lien or charge on the vessel other than to secure delivery of the vessel. If correct, the effect would be that the funds advanced by the purchaser/mortgagee would be excluded from its claim.
At first instance (2013 FC 221), the Prothonotary granted the declaration sought. The Prothonotary said the question of whether there was an obligation under the mortgage that funds advanced be repaid depended on the construction of the vessel construction agreement and mortgage. The Prothonotary held there was no express provision requiring repayment of funds advanced for the construction of the vessel. Despite the mortgage stating it was a “current account” mortgage, the Prothonotary found no evidence that, in fact, an account current was created by the vessel construction agreement which allowed the builder to retain all advances. The Prothonotary found the parties contemplated that all monies advanced would be used in the construction of the vessel and not exist as a fund. The purchaser/mortgagee appealed.
On appeal (2013 FC 1266), the appeal Judge allowed the appeal holding:
(1) The Prothonotary correctly recognized that he was to determine the intent of the parties based on the language of the contract documents and correctly identified the principles of interpretation but failed to properly apply those principles. The purpose of the mortgage was to provide a continuing security interest in the vessel to secure the advances. It was intended to be effective as against third parties and was not limited to securing the delivery of the Vessel. Although the documents did not state the advances were a loan, they did state they would be made “on account”.
(2) Although there was no express requirement for repayment of advances, considering the agreements as a whole and within the factual matrix, there was an implied obligation to repay the advances. With respect to the Prothonotary’s reasoning that the funds advanced were not a loan because they would be used in the construction and not available as a fund, the purpose of any loan is to permit the borrower to spend the monies lent. A commercial absurdity would result if the advanced funds could not be used for the intended purpose and instead had to be set aside to create a fund. The sums advanced comprised the “account current” secured by the mortgage, even in the absence of an explicit reference in the construction agreement. It was not necessary to specify the amount owing or the time of repayment in the mortgage when there was sufficient detail in the construction agreement. It is also difficult to see how the mortgage could be intended to only secure the delivery of the vessel when the construction agreement expressly states it is to create a first priority security interest to secure advances.
(3) In addition, the purchaser has a claim pursuant to s. 22(2) (n) of the Federal Courts Act (which addresses claims arising out of the construction, repair or equipping of a ship), which can be addressed at the priorities hearing.
The plaintiff appealed to the Federal Court of Appeal. There were four issues on appeal, namely:
(1) What is the correct standard of review?
(2) Was the appeal Judge plainly wrong in her interpretation of the agreements?
(3) Was the appeal Judge plainly wrong in concluding there was an implied repayment obligation in the construction agreement?
(4) Did the appeal Judge err in law in her consideration of s. 22(2)(n) of the Federal Courts Act?
Decision: Appeal Dismissed.
(1) The standard of review enunciated in Bristol-Myers Squibb Co. v. Apotex Inc., 2011 FCA 34, applies to issues 2 and 3, i.e. whether the appeal Judge was plainly wrong in her interpretation of the agreements and in concluding there was a repayment obligation. The test is whether the appeal Judge “had no grounds to interfere with the Prothonotary’s decision or, in the event such grounds existed, if the Judge’s decision was arrived at on a wrong basis or was plainly wrong”. The proper test for issue 4, is whether the appeal Judge was correct in her conclusions with respect to s. 22(2)(n) of the Federal Courts Act.
(2) In Sattva Corp. v. Creston Moly Corp., 2014 SCC 53, the Supreme Court set out the guiding principles for contractual interpretation to determine the intent of the parties and the scope of their understanding. The contract is to be read as a whole giving the words their ordinary and grammatical meaning consistent with the surrounding circumstances. However, the surrounding circumstances “must never be allowed to overwhelm the words of that agreement” and must consist of “objective evidence of the background and facts”. The court should interpret the contract in accord with sound commercial principles and good business sense and avoid commercial absurdity. The appeal Judge was aware of these principles and applied them in construing the documents. After proper consideration she held the intent of the parties was to secure the advances which were in the nature of a loan. She did not imply a term of repayment. The Prothonotary’s finding that no “account current” was created because the advances were to be used in the vessel construction and not kept in a fund does not withstand scrutiny. It ignores the express wording in the Builder’s Mortgage which refers to an “account current” and would render the mortgage of no force or effect to secure delivery. Moreover, it ignores the essential promise of a builder’s mortgage which is to pay the mortgagee. While the documents may be unclear as to when and how advances are to be repaid, this is not fatal.
(3) The appeal Judge’s conclusion that there was an implied repayment term was an alternative conclusion. As she was correct in her interpretation, this issue need not be considered.
(4) There is no doubt the appeal Judge was correct in concluding that the purchaser had a claim falling within s. 22(2) (n) of the Federal Courts Act. This section provides that the Federal Court has jurisdiction over “any claim arising out of a contract relating to the construction, repair or equipping of a ship”.
Supply of Bunkers in Brazil to Time Chartered Vessel - Applicable Law - Whether Supplier has Lien - Application of s. 139 MLA to Foreign Suppliers - Liability of Owner In Personam - Presumption
Norwegian Bunkers AS v. Boone Star Owners Inc., 2014 FC 1200
Précis: The Federal Court held that Brazilian law applied to a claim for bunkers supplied to a chartered vessel in Brazil and that such law gave the supplier a maritime lien but, there was no in personam claim as against the ship owner when the charterer ordered the bunkers.
Facts: The plaintiffs, Norwegian and Belgium companies respectively, supplied bunkers to the ship “Samatan”, a Maltese flagged vessel, in Brazil using a local Brazilian supplier. At the time of the supply, the vessel had been chartered and sub-chartered on the NYPE form. The NYPE form provided, among other things, that the charterer was not permitted to create maritime liens against the vessel. The bunkers were ordered from the plaintiffs by the sub-charterer. The plaintiffs acknowledged the order with a standard form that specified the bunkers had been ordered for “Master and/or Owner and/or Operator”. The plaintiffs knew the sub-charterer was not the owner of the vessel but had not been notified of the “no-lien” clause in the charter parties. The bunkers supplied by the plaintiffs were not paid for. The plaintiffs commenced this action and arrested the vessel in Canada. The plaintiffs argued that Brazilian law applied to the transaction and gave them a maritime lien against the vessel for the unpaid bunkers. The defendants argued that Canadian law applied by default (no law other than Brazilian being proven) and that pursuant to Canadian law there was no lien and no in personam action against the ship owner.
Decision: Judgment granted in part. The plaintiffs’ claim against the vessel for unpaid bunkers ranks as a maritime lien but the in personam action against the ship owner is dismissed.
Held: The parties are agreed that where, as here, there is no direct contract between the vessel owner and the supplier of the bunkers, the proper law is to be determined not by reference to the choice of law provision in the supply contract but by determining the jurisdiction with the closest and most substantial connection with the transaction. The seven factors to be considered are: (1) the place of the wrongful act; (2) the law of the flag; (3) the domicile of the plaintiff; (4) the domicile of the defendant ship owner; (5) the place where the contract was made; (6) inaccessibility of a foreign forum; and (7) the law of the forum. The defendants say Norway has the closest connection because the seller is Norwegian, the contract was made in Norway and payment was to be made in Norway. However, in a non-contractual claim such as this, it is more appropriate to consider the perspective of the parties involved in the claim rather than the contracting parties. In such a case, the place of delivery should be accorded greater weight than the other factors. The law of Brazil therefore applies and the uncontradicted expert evidence presented by the plaintiffs establishes that under such law a maritime lien exists for the bunkers supplied.
If Canadian law had applied by default, s. 139 of the Marine Liability Act (which gives persons “carrying on business in Canada” a lien against foreign vessels for goods and services “wherever supplied to the foreign vessel”) would not have applied as the plaintiffs are “foreign suppliers”.
With respect to the in personam claim against the ship owner, the plaintiffs were required to prove either that the owner was a party to the supply contract or had authorized someone to contract on its behalf. The mere fact the owner allows the charterer to accept bunkers is not sufficient. The presumption that necessaries are supplied on the credit of the ship is easily rebutted under Canadian law and is rebutted in this case. The plaintiffs knew their customer was a charterer and never inquired as to whether it had authority to bind the ship.
Liens and Mortgages - International Insolvencies - Ranking of Administration Charge - CCAA Trumps Canadian Maritime Law
Caterpillar Financial Services Corporation v. Boale Wood & Company, 2013 BCSC 1593 2014 BCCA 419
Précis: The British Columbia Court of Appeal confirmed the trial judgment holding that an administrative charge under the Companies Creditors Arrangement Act applied to the proceeds from the sale of a vessel and had priority over a mortgage.
Facts: The petitioner, Worldspan Marine Inc., was a builder of custom yachts who had entered into a contract for the construction of a 144’ yacht. During the course of construction, a dispute arose with the purchaser. As a result, the purchaser ceased making payments and the petitioner sought the protection of the Companies Creditors Arrangement Act (“CCAA”). A Monitor was appointed by court order under that act and a stay of all proceedings against the petitioner was ordered. The court’s initial order included an “Administration Charge” to secure the fees and expenses of the Monitor which were to rank in priority to all other security in the “Non-Vessel Property”. “Non-Vessel Property” was all property of the petitioner other than the 144’ yacht. (In rem claims against the yacht were being addressed in the Federal Court.) Caterpillar held a mortgage over another vessel owned by the petitioner, the “A129”, which was located in the State of Washington. Caterpillar commenced foreclosure proceedings in Washington and had the “A129” arrested there. The U.S. Bankruptcy Court subsequently granted a “Recognition Order”, at the request of the petitioner, under Chapter 15 of the U.S. Bankruptcy Code recognizing the British Columbia CCAA proceedings as the “Foreign Main Proceeding” and staying any execution against the assets of Worldspan located in the United States. The “A129” was subsequently released from arrest and sold with the proceeds to be dealt with in the CCAA proceedings. The sale order provided that Caterpillar was to have a first priority to the proceeds but subject to the potential claim of the Monitor for “Administrative Charges”. Caterpillar applied for an order declaring that the “Administration Charges” did not attach to the proceeds from the sale of the “A129” or, alternatively, that Caterpillar’s claim under its mortgage had priority to the Administrative Charge. Caterpillar argued, inter alia, that under Canadian maritime law the “Administrative Charge” was a statutory lien which ranks below the mortgage.
At first instance (reported at 2013 BCSC 1593), the Judge held that the “super priority” given by s. 11.52 of the CCAA trumps the ranking of claims in rem under Canadian maritime law and that the “Administrative Charge” therefore had priority over the Caterpillar mortgage. Caterpillar appealed.
Decision: Appeal dismissed.
Held: There are two different issues that are relevant: first, did the “Administrative Charge” attach to the “A129” in rem; and second, what is the status of the charge in light of both the CCAA proceedings and the “Recognition Order”. With respect to the first issue, there is nothing in the CCAA to suggest that it has extra-territorial application to in rem property outside of Canada. Neither the CCAA nor the orders made in this case support a conclusion that the “Administrative Charge” attached in rem to the “A129”. With respect to the second issue, the “Administrative Charge” gave priority over all creditors on “Non-Vessel Property” including the proceeds. The order creating the “Administrative Charge” was made in accordance with the CCAA and the “Recognition Order” of the U.S. Bankruptcy Court did not purport to limit in any way the process of realization to be undertaken under the CCAA. Once the Canadian proceedings were recognized as the foreign main proceeding, it was entirely for the British Columbia Supreme Court to determine priority. Thus, although the “Administrative Charge” did not attach in rem, it does attach to the proceeds from the sale of the “A129” and gives the Monitor priority.
Insolvency Proceedings - Judicial Sale of Ship -Competing Jurisdiction of Federal Court and Provincial Superior Court
Roynat Inc v. Phoenix Sun Shipping Inc, 2013 ONSC 7308
Précis: The Ontario Superior Court referred applications concerning the sale of a ship to the Federal Court on the grounds that deference had to be paid to the Federal Court Proceedings.
The ship “Phoenix Sun” was arrested in Federal Court proceedings by two creditors. The mortgagee subsequently commenced proceedings in the Ontario Superior Court and obtained an order for the appointment of a receiver over the assets of the ship owner. The mortgagee also obtained a very detailed sales order from the Federal Court that, among other things, appointed the receiver as “Acting Admiralty Marshall” to sell the ship and set up a priorities claims process. The receiver found a buyer for the ship and now brought applications in the Ontario Superior Court for an order approving the sale and for directions regarding the disposition of the sale proceeds.
Decision: The applications should not be brought in the Ontario Superior Court but in the Federal Court.
Held: Although the provincial superior courts and the Federal Court have overlapping jurisdiction in maritime law matters, a creditor must take great care that it sets up a process by which one court will have primary carriage of the realization proceedings. Once in rem proceedings are commenced in the Federal Court the provincial superior court should pay due regard or deference to the Federal Court proceedings. Considering the extensive order made by the Federal Court, it is not appropriate for the Ontario Superior Court to exercise any of its jurisdiction and the motion should be brought before the Federal Court. Any residual matters the Federal Court cannot deal with can then be brought in the Ontario Superior Court.
Insolvency of Intermediate Charterer - Entitlement of Owner to Sub-Freight
Byatt International S.A. v. Canworld Shipping Company Limited,, 2013 BCCA 427
Précis: The British Columbia Court of Appeal confirmed the ship owner’s right to direct the payment of sub-freights to itself.
The owner of the ship “Loyalty” granted a time charter to KLC who, in turn granted a time charter to MUR who, in turn, granted a voyage charter to Canworld for a voyage from Vancouver to Australia carrying sulphur. Canworld contracted with the shipper, Prism, to carry the sulphur cargo to Australia. MUR paid its hire to KLC but KLC defaulted on its payment of hire to the owner. The owner then sought to exercise a lien on the freight owing by the shipper to Canworld and the shipper paid the freight into court. Insolvency proceedings were commenced in Korea concerning KLC. Those proceedings were settled on terms that the owner recovered approximately $10 million of the $16 million owed to it. However, the settlement terms further provided that any amounts recovered by the owner from sub-hires or sub-freights were to be deducted from the settlement amount. Subsequently, this motion was brought before the British Columbia Supreme Court for directions as to how the funds paid into court by the shipper ought to be paid out. The owner argued it was entitled to the funds on the basis of its lien rights and the terms of the bill of lading. MUR and others argued that, given the terms of the settlement in the Korean insolvency proceedings, it would be inequitable to order the payment to the owner since the person who would ultimately benefit would be KLC, the entity that was responsible for the dispute. At first instance, the motions Judge agreed and ordered the funds paid to Canworld who could then satisfy its debt to MUR. The ship owner appealed.
Decision: Appeal allowed.
Held: The motions Judge appears to have decided the case on the basis of his interpretation of what would be a fair result whereas he was required to base his decision on legal and equitable principles. There is no equitable principle supporting the motions Judge’s conclusions. There is no unjust enrichment or double recovery and there is not sufficient evidence for a conclusion that a payment to the owner would benefit KLC. There seems little question that, pursuant to the terms of the head charter party, the owner has the right to direct the payment of sub-freights to itself.
Summary Judgment - Foreign Judgment - Sufficiency of Evidence - Mortgage Enforcement
Lakeland Bank v. The Ship Never E Nuff, 2013 FC 864
The plaintiff was the mortgagee of the defendant vessel and brought this motion for summary judgment to sell the vessel promptly. In support of its motion the plaintiff filed an affidavit which apparently attached a judgment of the United States District Court of Northern New York in which the plaintiff was awarded US$190,000 and given the right to take possession and dispose of the vessel. The motion was opposed by the defendants who claimed to be the owners.
Decision: Application dismissed.
Held: A motion for summary judgment requires that there be no genuine issue for trial. The evidence is insufficient to meet this threshold. Section 23 of the Canada Evidence Act requires that the US judgment be proven by certified copies not by affidavit. Further, the foreign judgment could not be the basis for execution without more. A full hearing is required.
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.