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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Insolvency of Shipowner - Pension Benefits - Deemed Trusts - Priority
ITB Marine Group Ltd. v. Northern Transportation Company Limited, 2017 BCSC 2007
Précis: The British Columbia Supreme Court held that the unpaid vendor of marine assets sold to the bankrupt and secured by a registered security interest had priority over the claims of the administrator of the pension plan of the bankrupt.
Facts: In 2013 ITB and NTCL entered into a conditional sale type transaction whereby ITB sold 19 vessels to NTCL. NTCL was to have the use and possession of the vessels but title was to remain in ITB until the purchase price was paid in full. The interest of ITB in the vessels was registered in the Personal Property Security Registry. Subsequently, in 2016 NTCL became insolvent and later made an assignment in bankruptcy. The Trustee in Bankruptcy sold the vessels for an amount that was less than the amount owing to ITB. ITB sought the proceeds from the sale of the vessels. However, the administrator of the pension plan of NTCL claimed priority to the proceeds on the basis of a deemed trust under the Pension Benefits Standards Act, 1985, RSC 1985, c. 32 (2nd Supp) (the “PBSA”).
Decision: ITB has priority.
Held: ITB argues that the deemed trust under the PBSA does not arise as the deemed trust can only attach to assets owned by the debtor and the vessels were owned by it and not by NTCL. However, NTCL does hold a proprietary interest in the vessels by virtue of its interest under the conditional sales contract and the deemed trust will apply to the equity of NTCL in the vessels. Nevertheless, under the Bankruptcy and Insolvency Act, RSC 1985, c B-3, the deemed trust does not have priority over the secured interest of ITB.
Priorities Proceedings - Production of Documents
DP World Prince Rupert Inc. v. The Hanjin Vienna, 2017 FC 761
Précis: The court ordered that claimants proceeding by way of action produce documents that may be relevant.
Facts: Following the well publicized bankruptcy of Hanjin Shipping Co. Ltd. in 2016, the “Hanjin Vienna”, a ship under long term time charter to Hanjin, was arrested at Vancouver and sold by order of the Federal Court. Various claims were made against the proceeds of sale, some by way of action and some by way of affidavits of claim. All of the claims were subject to common case management in the Federal Court. The owner of the “Hanjin Vienna” brought this application for better production of documents from the various claimants.
Decision: Application granted, in part.
Held: The owner seeks production of documents from the claimants which might show they knew of Hanjin’s perilous financial circumstances and the steps they took to deal with that. This is a reasonable request but the motion as drafted is too broad. The request for contracts and invoices should be limited to the year 2016, since there is no evidence of financial difficulties before that time. The documents should be further limited to those involving the “Hanjin Vienna” and her alleged sistership the “Hanjin Geneva”.
Ship Building - Insolvency - Stay of Proceedings - Multiple Proceedings - Balance of Convenience
Sargeant v. Worldspan Marine Inc., 2017 BCSC 1153
Précis: The British Columbia Supreme Court refused to stay the action before it where a similar but not identical action was proceeding in the Federal Court.
Facts: Sargeant commissioned Worldspan build a luxury yacht. Disputes arose during the course of construction which resulted in the vessel being arrested in the Federal Court by Offshore, an unpaid supplier of materials and services. Various in rem claims were filed against the vessel in the Federal Court including claims by Sargeant and Worldspan. Subsequent to the commencement of the Federal Court action, Sargeant commenced this action against Worldspan in the Supreme Court of British Columbia for breach of duty, breach of trust, conversion, fraud and breach of contract. Worldspan brought this application for a temporary stay of these proceedings pending the adjudication of Sargeant’s claim in the Federal Court proceeding.
Decision: Application dismissed.
Held: The jurisdiction to grant a stay of proceedings is to be exercised cautiously taking into account all relevant factors and prejudice to the parties. Worldspan says it will be prejudiced if it must take steps in this proceeding before the in rem claims are determined in the Federal Court and further says that the Federal Court action will fully determine the claims of the parties. However, Sargeant’s claims for fraud and conversion will not be addressed in the Federal Court. Additionally, the potential recovery in the Federal Court is limited by the in rem claim and proceeds whereas the damages in this action are not so limited. A stay of proceedings will also not promote judicial economy and efficiency since Sargeant intends to pursue the fraud claim regardless of the outcome of the Federal Court proceeding. Finally, there is little risk of inconsistent verdicts since the adjudication of the conversion and fraud claims will not be part of the Federal Court proceeding. The balance of convenience favours dismissing the stay application.
Judicial Sale - Payment of Surplus Proceeds
Offshore Interiors Inc. v. Worldspan Marine Inc., 2017 FC 478
Précis: The Federal Court refused a motion for early payment of alleged surplus proceeds of sale.
Facts: Under a vessel construction agreement (“VCA”) Sargeant commissioned Worldspan to build a luxury yacht. Disputes arose during the course of construction which resulted in the vessel being arrested by Offshore, an unpaid supplier of materials and services. Various in rem claims were filed against the vessel totalling approximately $3.1 million. Sargeant claimed $20 million based on a builder’s mortgage granted to it by Worldspan to secure the advances made towards the construction of the vessel. Worldspan claimed $5 million in respect of amounts alleged to be due and owing to it by Sargeant. The vessel was sold by the Federal Court for $5 million. Prior to the full determination of the issues as between the various parties, Sargeant brought this motion for an order that the portion of the sale proceeds in excess of the amounts claimed by in rem creditors be paid out to it as the mortgage holder.
Decision: Motion dismissed.
Held: There is little precedent to guide the court on a motion such as this for early payment. However, prejudice is a relevant consideration in deciding whether there should be early payment of surplus funds. Sargeant has not shown a lack of prejudice to other parties if payment out is ordered nor has it shown any prejudice to itself if early payment is not made. Additionally, on the evidence, I cannot determine the rights of all claimants to the funds which is required by Rule 491(a) of the Federal Courts Rules.
Priorities Procedures - Supplementary Affidavit of Claim - Place of Cross examinations
Offshore Interiors Inc. v. Worldspan Marine Inc., 2017 FC 479
Précis: The court permitted the filing of a supplementary affidavit and addressed questions relating the scope of cross-examinations and documents to be produced.
Facts: Under a vessel construction agreement (“VCA”) Sargeant commissioned Worldspan to build a luxury yacht. Disputes arose during the course of construction which resulted in the vessel being arrested by Offshore, an unpaid supplier of materials and services. Various in rem claims were filed against the vessel totalling approximately $3.1 million. Sargeant claimed $20 million based on a builder’s mortgage granted to it by Worldspan to secure the advances made towards the construction of the vessel. Worldspan claimed $5 million in respect of amounts alleged to be due and owing to it by Sargeant. The vessel was sold by the Federal Court for $5 million. Worldspan brought this motion: to file a supplementary affidavit of claim; to have the Sargeant affiants attend cross-examination in Canada; for production of documents on cross-examination; and for an order defining the scope of the cross-examinations.
Decision: Motion granted in part.
Held: Worldspan wishes to file a supplementary affidavit of claim attaching various change orders during the construction of the vessel. The relevance of these change orders is not clear but there is no prejudice to the other parties and in the absence of prejudice this part of the motion is granted. With respect to the motion for cross-examination, the witnesses of Sargeant who have filed affidavits are reluctant to attend in Vancouver for cross-examination and wish to be examined in Detroit. However, it is more practical to have the witnesses travel to Vancouver than to have a “gaggle” of lawyers travel to Detroit. Moreover, these are witnesses for a party that has chosen to conduct business in Canada and to litigate in Canada. They must accept the minor inconvenience of having to attend here for cross-examination. Additionally, it is normal for a witness at cross-examination to bring documents with them and they must do so. Finally, with respect to the scope of the cross-examination, the court should not make advance rulings on the relevancy of questions.
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 so 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 the 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 parole 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.
s. 139 MLA Lien - Pleadings - Motion to Strike Claims of Railway Against Shipowner
Canadian National Railway Company v. Hanjin Shipping Co Ltd, 2017 FC 198
Précis: A motion by the Owner of the “Hanjin Vienna” to strike the Statement of Claim of the Canadian National Railway Company on the grounds that it disclosed no cause of action or was scandalous, frivolous or vexatious was dismissed.
Facts: Following the well publicized bankruptcy of Hanjin Shipping Co. Ltd. in 2016, the “Hanjin Vienna”, a ship under long term time charter to Hanjin, was arrested at Vancouver in the Federal Court. The plaintiff had provided rail services to Hanjin, including to the “Hanjin Vienna”, and was allegedly owed approximately $20 million in respect of these services. The plaintiff commenced this action against Hanjin and various vessels owned or chartered by it, including the “Hanjin Vienna”. The owner of the “Hanjin Vienna” then brought this application to strike the claim of the plaintiff as against it.
Decision: Application dismissed.
Held: The owner of the “Hanjin Vienna” brings this application to strike the statement of claim on the grounds that it discloses no reasonable cause of action or is scandalous, frivolous or vexatious. The burden on the owner is a heavy one. If there is a chance the plaintiff might succeed, the action should be allowed to continue. The plaintiff alleges that it has a maritime lien by virtue of s. 139 of the Marine Liability Act for services supplied to the vessel. The owner says that there can be no such lien as there is no contract between the owner and the plaintiff and therefore no personal liability on the part of the owner. However, it is not clear whether the personal liability of the owner is required for a lien under s. 139 of the Marine Liability Act. The plaintiff’s lien claim is therefore arguable. It is further arguable that the plaintiff’s claim is governed by Canadian maritime law. The claim of the plaintiff is arguably one for freight and may fall within s.22(1) of the Federal Courts Act. The Canada Transportation Act, S.C. 1996, c. 10, may also provide a basis for the plaintiff’s claims.
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.