Mortgages Liens and PrioritiesIntroductionFor an introduction to and summary of Canadian law of priorities click HERE. To view a paper entitled Update on Priorities that was presented at a joint seminar of the Canadian Maritime Law Association and the Federal Court in April 2000 click here. To view a paper entitled Bankruptcy and Priorities in Admiralty that was presented at a joint seminar of the Canadian Maritime Law Association and the Federal Court in April 2002 click here.
Case SummariesSynopsis of significant developments in 2007-2008 The more interesting developments in 2007-2008 in relation to mortgages, liens and priorities include: Kent Trade and Finance Inc. v. JPMorgan Chase Bank, 2008 FCA 399, where the Federal Court of Appeal held that a choice of American law in a supply contract can result in priority for the supplier; Nanaimo Harbour Link Corp. v Abakhan & Associates Inc., 2007 BCSC 109, where the British Columbia Supreme Court confirmed that maritime lien claimants are to be treated as equivalent to secure creditors in bankruptcy situations and are free to pursue their remedies and priorities under Canadian maritime law; and Royal Bank v. 1132959 Ontario Ltd., 2008 CanLii 40231, where the Ontario Supreme Court held in respect of a vessel registered under the Canada Shipping Act that a PPSA security interest had priority over an interest registered under the CSA. Priorities - Necessaries suppliers - American Maritime Liens - Applicable Law - Foreign Law Experts Kent Trade and Finance Inc. v. JPMorgan Chase Bank, 2008 FCA 399, reversing 2005 FC 864, rev'd. in part 2006 FC 409 This was a hearing to determine the priorities of various claimants to proceeds from the sale of the Lanner. The competing claimants were the mortgagee and 15 suppliers of necessaries. The suppliers, who would normally rank below the mortgagee, challenged the validity of the mortgage. Some of them argued they had maritime liens under American law and, in the alternative, alleged special circumstances that should alter the normal order of priorities. At the initial hearing (2005 FC 864) the Prothonotary rejected all of these arguments. The challenge to the validity of the mortgage was based primarily on the absence of an expert's affidavit attesting to the validity of the mortgage under the applicable foreign law. The Prothonotary held that such an affidavit was not required. The argument by some of the suppliers that they had maritime liens through the application of American law was based upon choice of law clauses in the various supply contracts. However, the Prothonotary extensively reviewed the authorities and held that such choice of law clauses were not determinative. The applicable law was the law of the jurisdiction with the closest and most substantial connection to a particular transaction. The Prothonotary reviewed the factual circumstances of each claim and concluded that none of them were subject to American law. Accordingly, none of the suppliers had American maritime liens that would rank ahead of the mortgagee. In the course of his reasons the Prothonotary examined the nature of a maritime lien and held that such a lien could not be created by contract either through a lien clause or a choice of law clause. Finally, the Prothonotary considered whether delay by the mortgagee in enforcing its mortgage was a special circumstance of sufficient weight to alter the usual order of priorities. The Prothonotary found that the mortgagee had acted in a commercially reasonable manner and refused to alter the priorities. Five of the suppliers appealed the Prothonotary's order to a judge of the Federal Court (2006 FC 409 ). The appeal Judge agreed with the Prothonotary that the absence of an expert's affidavit attesting to the validity of a foreign mortgage was not required and further said that in the absence of such an affidavit Canadian law would apply. The appeal Judge also agreed with the Prothonotary that there should be no equitable adjustment of the priorities based on the alleged delay by the mortgagee. However, the appeal Judge disagreed, in part, with the Prothonotary on the issue of whether the suppliers had American maritime liens. Specifically, although the appeal Judge agreed that the Prothonotary had applied the proper test in determining the applicable law, the appeal Judge disagreed with the application of that test in respect of two claimants. The appeal Judge held that American law applied to the one corporate claimant that was an American company and also that American law applied to a foreign claimant who had supplied goods in the United States. A final issue of note dealt with on appeal concerned an order for costs made by the Prothonotary against the suppliers. This order was overturned on the grounds that the suppliers were not made parties to the proceedings nor had their caveats against release been transferred to this action. The appeal Judge noted that this should be done in future proceedings so claimants cannot avoid a cost order. The three unsuccessful necessaries suppliers commenced a further appeal to the Federal Court of Appeal (2008 FCA 399). All three of these suppliers supplied fuel or other necessaries under contracts that provided for the application of American law yet none of the suppliers were American and the supplies were not made in the United States. The Court of Appeal disagreed with the courts below and held that a contractual choice of law clause should normally govern maritime transactions including the rights which arise from those transactions. In reaching this conclusion the Court of Appeal acknowledged that in certain circumstances there may be such a strong connection to a jurisdiction that the choice of law clause should not apply, such as in Imperial Oil Ltd. v. Petromar Inc. (C.A.), 2001 FCA 391 (CanLII). However, the contractual choice of law should normally govern. The Court of Appeal next proceeded to consider whether American law in fact provided a priority lien in these circumstances. The Court noted that its role was limited to reviewing the affidavits and exhibits filed with the Court and that it should not conduct its own research into the foreign law. After reviewing the evidence, the Court concluded that American law would recognize a maritime lien in circumstances where a foreign supplier supplied goods in a foreign port under a supply contract governed by American law. Accordingly the appeals were allowed and the suppliers were entitled to priority. (Note: The Court of Appeal’s discussion as to the role of expert witnesses on foreign law is also interesting and useful reading.) Liens and Mortgages - Bankruptcy - Whether Bankruptcy Act Stays Apply to Maritime Liens Nanaimo Harbour Link Corp. v Abakhan & Associates Inc., 2007 BCSC 109 This matter concerned the bankruptcy of the owner and operator of a passenger ferry. The issue was whether maritime lien claimants are caught by the statutory stay of proceedings under the Bankruptcy and Insolvency Act. More specifically, the issue was whether the maritime claimants could proceed with their actions in the Federal Court and have priorities determined in accordance with Canadian maritime law. The claimants were the Captain and crew of the vessel and two ship repairers with unpaid invoices for repairs done to the vessel. The mortgagee of the vessel opposed the application to lift the stay of proceedings arguing that the Bankruptcy and Insolvency Act and not Canadian maritime law determined the priorities. The Court held that the priorities were to be determined in accordance with Canadian maritime law, that the claims for seamen’s wages were maritime lien claims, that the claims by the ship repairers, although not maritime liens, might be elevated by the court on equitable principles and they should have the opportunity to argue this, and, finally, that the fact that the ferry was an intra-provincial ferry did not oust Canadian maritime law. Liens and Mortgages - Ranking of Claims Nordea Bank Norge ASA v. KINGUK (Ship), 2007 FC 434 Two vessels had been sold by the Court for the sum of $5.8 million and this case was to determine priorities and distribute the proceeds. The fees and disbursements incurred in selling the ships were incurred by the mortgagee. These fees and expenses, including solicitors fees and brokerage fees, were given priority akin to Marshall’s fees. The next claims in priority behind the Marshall’s fees were the claims of the crew for wages and a claim by Canada Revenue for employee source deductions. It was not necessary to determine the priority as between these two claims. The next claim in the ranking was the claim of the mortgagee, which claim included amounts paid to solicitors and disbursements of a distress nature which were reasonably incurred for maintaining the ship. Following the mortgagee were claims by necessaries suppliers and claims by Revenue Canada and the Workers Compensation Board of Nova Scotia. There were insufficient funds to satisfy these claims and the Court ordered that they share in the distribution pari passu while acknowledging that whether they should rank pari passu was not fully argued. Mortgages - Priorities - Application of Provincial Statutes Royal Bank v. 1132959 Ontario Ltd., 2008 CanLii 40231 This was an application by the Appellant bank (the “Bank”) for possession of a yacht pursuant to rights allegedly acquired through a general security interest. The application was opposed by the Respondent, who was registered as the owner of the yacht under the Canada Shipping Act (“CSA”), on the grounds that the bank’s interest was not registered under the CSA. The background facts are important. The Bank entered into a general security agreement dated 9 March 2001 with a numbered company (“Numbered Co.”) and registered its interest under the Ontario Personal Property Security Act (“PPSA”). On 17 April 2004 the Numbered Co. acquired title to the yacht and, although it is not entirely clear from the judgment, it appears that the yacht was registered under the CSA at that time. On 13 February 2008 the sole shareholder of the Numbered Co. made an assignment in bankruptcy. On 12 March 2008 the Numbered Co. entered into a security agreement with the Respondent, the brother of the company’s sole shareholder. The security agreement was allegedly to secure a prior debt owed to the Respondent. This security agreement was never registered under the PPSA. On 20 March 2008 the Respondent was given a marine mortgage over the yacht as further security for the debt allegedly owed between the brothers. This marine mortgage was registered under the CSA but not the PPSA. On 10 April 2008 the marine mortgage was discharged and the yacht was transferred to the Respondent in full payment of the debt allegedly owed. On these facts the Court held that there was no doubt that on 17 April 2004 the Bank acquired a perfected security interest in the yacht pursuant to the after acquired property clause in the security agreement. The Court further held that the Bank’s interest had priority over any interest the Respondent had pursuant to the agreement of 12 March 2008 since that agreement was not registered. However, the Court recognized that the real issue was whether a registered interest under the CSA could take priority over a prior interest registered under the PPSA. The Respondent alleged that the CSA provided a complete code and registry of all interests in vessels. The Court disagreed and held that the CSA created two types of registers; mandatory and voluntary. Pleasure craft are not required to be registered and fall within the voluntary registry. Therefore, the Court held the Bank was not required to register its interest under the CSA registry. In result, the Court held the Bank’s interest had priority. (Note: This has been a vexing issue for years and has the potential to cause serious difficulties for both lenders and borrowers. Although the equities of this case certainly favoured the bank, the Court’s analysis does not withstand any serious scrutiny. The distinction between mandatory and voluntary registration is no more than descriptive and does not provide a legal basis for the decision. Also, the mandatory - voluntary distinction is probably not accurate in respect of a mortgagee. The prevailing view is that if the vessel is registered (whether voluntarily or mandatorily) then any mortgage or security interest must be registered. It is submitted that the Court should have done a proper constitutional analysis taking into account the dual aspect doctrine, interjurisdictional immunity and paramountcy. Also, one cannot help but think that if, after the constitutional analysis, Canadian maritime law applied, then equitable considerations would have played an important part in any ranking.) Possessory Liens Chadwick et al. v Philbrooks Boatyard Ltd., 2006 BCSC 1607 This was an application by the Plaintiff for an order that it be permitted to inspect two engines in the possession of the Defendant. The Defendant opposed the application on the grounds that it had a possessory lien over the engines which would be lost if the engines were removed from its possession for inspection. The Court agreed with the Defendant that the possessory lien would be extinguished if the engines were removed from its possession. The Court did, however, grant the application ordering that the Plaintiff post security in an amount sufficient to cover the work done to the engines by the Defendant. No security was ordered in respect of amounts attributable to work done on the vessel (as opposed to the engines) since the Defendant was not in possession of the vessel and did not have a possessory lien for those amounts. Sales of Vessels Without Appraisals Nordea Bank Norge ASA v The “Kinguk”, 2006 FC 1290 This was an application by the Plaintiff mortgagee to realize its mortgage security over two vessels, and its default judgment, through the private sale of the vessels. The application was opposed on the apparent grounds that there had not been a formal appraisal of the vessels. The Court noted that generally it will require a formal appraisal and advertisement before approving a sale of a vessel but held that each case ought to be decided on its own facts and on the basis of the evidence presented. The Court was satisfied that the proposed sale would maximize the proceeds to be made available to creditors and, therefore approved the sale. The Court noted that orders for appraisal and advertisement were never intended to be used a a means to delay a judicial sale so a Defendant might redeem its mortgage. Late Filing of Expert's Affidavits JP Morgan Chase Bank v Mystras Maritime Corp., 2005 FC 486, affg. 2005 FC 383 This was an appeal from an order of a Prothonotary refusing leave to file an expert's affidavit on foreign law after the expiry of the deadline set out in a previous direction from the court and virtually on the eve of the priorities hearing. The motions Judge dismissed the appeal on the basis that the Prothonotary's order did not raise a question vital to the final issue and was not clearly wrong. Mortages – Duties of Mortgagee in Possession – Improvident Sale Middleton et al. v Farquharson et al., 2004 BCSC 32 In this matter the Defendant sold the vessel “Ocean Tribune” and her C licence to the Plaintiff for $135,000.00 payable $100,000 in cash and the balance by way of vendor financing for one year at 10%. The vendor financing arrangement was documented with a promissory note, a collateral marine mortgage and a registered marine mortgage. The Plaintiff failed to pay the amount owing on the due date and the Defendant seized the vessel. The parties then agreed that the Plaintiff would pay the Defendant $25,000 and would execute a second promissory note, collateral marine mortgage and registered marine mortgage for $35,000. This was done. The Plaintiff paid the $25,000 but failed to pay the amount due under the second note. The Defendant again seized the vessel. On the advice of the bailiff, the vessel was removed from the water which caused the wood planking to dry out and ultimately necessitated considerable repair work. The vessel was advertised for sale by the Defendant for 21 days. The only bid received was one by the Defendant himself for $75,000. His evidence, which was accepted by the trial Judge, was that his bid was a protective bid made because he was concerned the bids from others would be too low to recoup his losses. The Plaintiff subsequently brought this action. The first issue was whether the second note and second marine mortgage were invalid. The Plaintiff alleged that the $25,000 payment was made on account of the first note and first mortgage and that the second note and mortgage did therefore not properly reflect the amount owing. The Defendant replied that the $25,000 payment was intended to satisfy outstanding interest on the first note and the costs of effecting the seizure and to retire other debts owed by the Plaintiff to the Defendant. The trial judge preferred the Defendant's evidence to that of the Plaintiff and held that the second note and mortgage were valid. The next issue was whether the Defendant as mortgagee in possession breached his duty to take reasonable care of the goods seized. This issue concerned the taking of the vessel out of the water. Again, the trial Judge sided with the Defendant finding that the Defendant acted reasonably in taking the vessel out of the water. The next issue was whether the sale of the vessel to a numbered company owned by the Defendant was improper. The Plaintiff argued that the value of the vessel and C licence were much more than $75,000. The trial judge noted that there were two lines of authority dealing with the duty owed by a mortgagee when realizing on security. The subjective test requires the mortgagee to exercise good faith and the avoidance of wilful default in selling the asset. The objective test involves an obligation to act reasonably to obtain the market value. Although the trial judge considered the subjective test was the test that was binding on him he held that under either test the Defendant had not acted improperly. Priorities – Sisterships Royal Bank of Scotland PLC v The “Golden Trinity” et al., 2004 FC 795 This was a hearing to determine the priorities to the proceeds of sale from three vessels owned by various one ship companies but mortgaged under fleet type mortgages. The vessels were all under the management of a single company, the principal of whom was a Mr. Peter Lygnos. The main claimants were the mortgagees of the vessels and Tramp Oil & Marine Limited, a bunkers supplier that had supplied bunkers to the various vessels and to alleged sisterships of the vessels. Tramp Oil sought to enhance its priority by challenging the various mortgages, by alleging a maritime lien and by arguing that the normal priorities should be altered in the circumstances of the case. With respect to Tramp Oil's attempts to challenge the mortgages the Court held that the mortgages were properly registered, valid and enforceable. The Court then considered Tramp Oil's claim to a maritime lien. The Court allowed the claim in respect of bunkers supplied at an American port through the agency of an American supplier on the basis that Tramp Oil was subrogated to the American supplier's maritime lien created under American law. It is noteworthy that in reaching this conclusion the Court applied American law even though Tramp Oil's terms and conditions specified English law. The Court did so on the basis of Imperial Oil v Petromar, (2001) 283 N.R. 182, and the fact that there was no real connection with England, the jurisdiction selected in Tramp Oil's standard trading conditions. The Court disallowed Tramp Oil's claim to a priority on the basis of a contractual maritime lien as provided for in its standard trading conditions. The Court held that a contractual maritime lien was not a true maritime lien which arises automatically without antecedent formalities. The contractual lien did not raise the claim above the priority given to other statutory in rem creditors. The Court next considered the sistership claims. The Court first noted that even if the sistership claims were valid such claims would rank as ordinary in rem claims and not have the status of maritime liens. The Court, however, rejected the sistership claims. In doing so it noted the difference between the French and English versions of section 43(8) of the Federal Court Act. The English version requires consideration of the registered owners whereas the French version requires consideration of the beneficial owners. The Court held that the French version was the better approach and stated that if Tramp Oil could prove that the vessels it bunkered were beneficially owned by the owners of the Defendant ships there would be a sistership claim. The Court further noted that in trying to determine the beneficial ownership it is permissible to look behind the registered ownership and that this was not an unauthorized piercing of the corporate veil. The factors considered by the Court included: that the vessels were under common management; that the Boards of Directors of the one ship companies were identical; that the Banks required a personal guarantee from Peter Lygnos; that the ships were insured under the same insurance policy; and that the ships were jointly and severally liable under the mortgages for each other's debts. These factors, however, were not sufficient to find a sistership relationship. The Court noted that there was no evidence as to who ultimately enjoyed or was entitled to the profit and benefit derived from the ships, something which leads to the concept of beneficial ownership. Accordingly, the Court found the sistership relationship had not been proved. The Court finally turned to the question of whether the priorities should be re-ordered on the basis of equitable considerations. The issue here was whether the mortgagees ought to have moved sooner to realize against the ships. The Court found that banks are entitled to grant indulgences to customers in bad times and refused to re-order the priorities on this basis. The Court noted, as it frequently does, that very special circumstances are required to vary the usual ranking and that there is a very heavy onus on the party seeking to do so. Meaning of “Vessel/Ship” – Mechanics Lien TJ Inspection Services v Halifax Shipyards, 2004 NSSC 181 In this matter the Plaintiff was retained by the Defendant to provide detailed inspection services in connection with the construction of a production platform which, when completed, would be towed on board a barge to the off-shore production site. When placed the platform would rest on four legs on the sea floor. The Plaintiff was not paid by the Defendant and registered a lien against the platform under the Nova Scotia Mechanics Lien Act. The Defendant brought this application for summary judgment dismissing the Plaintiff's claim. The motions Judge reviewed the relevant provision of the Mechanics Lien Act and noted that the validity of the Plaintiff's lien depended on the platform being either an “erection” or a “vessel”. The motions Judge noted that the thrust of the legislation “is against the land” and held that the platform could not be an “erection” within the meaning of the Act since it was to be placed on the sea bed. With respect to the definition of “vessel”, the motions Judge referred to the definitions in the present Canada Shipping Act, in the not yet proclaimed Canada Shipping Act 2001 and in the Federal Court Act. He held that under any of these definitions a structure must be capable of floating to be a vessel and that since the platform was not capable of floating it was not a vessel. In result, the Defendant's application was allowed and the lien was vacated. Priorities – Severance Pay – Maritime Liens C.I.B.C. v “Le Chene No. 1” et al., 2003 FC 873 affirming in part 2003 FCT 292 The main issue in this case was whether a claim for severance pay or damages for wrongful dismissal is a maritime lien entitling the claimant to priority over a ship's mortgage. The claimant had been employed by the shipowner on a full time basis for 12 years and had worked as chief engineer on various ships for 8 of those 12 years. The claimant's employment was terminated when the shipowner made an assignment in bankruptcy. The Prothonotary held that the claimant was entitled to damages for wrongful dismissal but refused the claim for a maritime lien. The Prothonotary held that there must be a relationship between the severance pay and a particular ship before such a claim can be categorized as a maritime lien and that such a relationship was lacking in the instant case. On Appeal, the appeal Judge agreed with the Prothonotary that the Plaintiff was entitled to damages for wrongful dismissal but disagreed with the Prothonotary's findings concerning the existence of a maritime lien. The appeal Judge noted that damages for wrongful dismissal have long been recognized as giving rise to a maritime lien and held that it did not matter whether the Plaintiff had served on one or more ships or whether the employment contract failed to specify a particular ship or ships. The appeal Judge further held that the lien would attach to the ship that received the benefit which in this case would be the ship the Plaintiff was working on at the time of his wrongful dismissal. That ship was the Defendant vessel. Liens and Priorities – Tax Lien – Provincial Law British Columbia v PT Car and Yacht Rental Inc., 2003 BCSC 1073 The primary issue in this application was whether the Crown in right of the Province of British Columbia had priority over the Respondent for taxes owing to it by the judgment debtor. The Respondent had loaned money to the debtor for the purchase of a motor vessel which was registered under the Canada Shipping Act. However, a mortgage was not registered under that Act. Instead the Respondent's interest was secured by a security agreement. Pursuant to the provisions of the Personal Property Security Act of British Columbia (the “PPSA”), if the Respondent had registered its security interest under the PPSA it would have had a “super priority” but the Respondent failed to register in time. The Crown, who was owed tax for the importation of the vessel into the Province, argued that the Social Services Tax Act of British Columbia (the “SSTA”) gave it a priority. The motions Judge held that the SSTA gave the Crown priority over all other security interests or liens except a purchase money security interest (“PMSI”) which was the type of security the Respondent held. The Crown argued that the exception for PMSI interests in the SSTA should be read as excepting only registered PMSI security interests. The motions Judge held, however, that the SSTA did not limit the exception to registered PMSI interests and cautioned against reading words into a statute. In the result, the Respondent was given priority. (Note: It is extremely important to note that the priority between these two creditors was decided without any reference whatsoever to Canadian Maritime Law. Since at least Ordon v Grail it is a debatable point whether a provincial priority scheme can have any application to a vessel, particularly a registered vessel.) Priorities - Fines - Forfeiture Canada v Neves (The “Kristina Logos), 2002 FCA 502, affirming in part 2001 FCT 1034 This was an appeal from an order of a motions Judge setting priorities to the sale proceeds of the Defendant vessel. The vessel had been seized by the Crown for violations of the Fisheries Act and was later arrested and sold at the application of the Crown. The claimants were the Crown, the mortgagee, and the co-owners of the vessel. The Crown claimed a priority for the costs of sale, the costs of maintaining the ship, for $50,000.00 ordered forfeited to the Crown and for a $120,000.00 fine imposed by the Supreme Court of Newfoundland for violations of the Fisheries Act. The Prothonotary granted the Crown priority ahead of the mortgagee for the costs of sale and for the $50,000.00 ordered forfeited. The Prothonotary refused to grant the Crown a priority for the $120,000.00 fine or for the costs of maintaining the vessel. The Prothonotary further ordered that the amount owing to the mortgagee should rank after the claim of one of the co-owners of the vessel to the surplus. On appeal the motions Judge altered the priorities. The motions Judge gave the highest priority to the Crown for the costs relating directly to sale. Second priority went to the mortgagee. Third in priority came the costs of the Crown incurred for the care of the crew. Fourth and fifth in priority, respectively were the claims for the $50,000.00 forfeiture and $120,000.00 fine. The balance of the fund was to be distributed to the owners of the ship. The Crown’s claim for the costs of preserving the ship were disallowed. On further appeal the Federal Court of Appeal upheld the decision of the motions Judge except with respect to the $50,000.00 forfeited. With respect to the forfeiture, the Court of Appeal held that this was an in rem claim pursuant to s. 72(1) of the Fisheries Act and that pursuant to s. 75 of that act such a claim should be ranked in priority to all other claims. Lien For Necessaries - American Law Richardson International Ltd. v The “MYS CHIKHACHEVA” et al., 2002 FCA 97 This was an appeal from a decision of the Trial Division allowing the Plaintiff’s claim for
necessaries supplied to the “Mys Chikhacheva”. The facts of the case were very complicated. The
Plaintiff and one Defendant, Starodubskoe, had entered into a series of agreements relating to the
re-fitting of a vessel, the supply and purchase of fish products and the supply by the Plaintiff of
provisions to the “Mys Chikhacheva”. Starodubskoe later became bankrupt and the Plaintiff
obtained a default judgment in Seattle, Washington. The “Mys Chikhacheva” was subsequently
arrested in Nanaimo, British Columbia for the necessaries supplied to her and paid for by the
Plaintiff. The Defendant resisted the Plaintiff’s claim arguing, inter alia, that the “Mys
Chikhacheva” was not owned by Stardubskoe, that the Plaintiff had no maritime lien for
necessaries, that the matter was res judicata because of the Washington judgment and that the
Plaintiff had waived any right to a maritime lien. At trial the Judge reviewed the evidence of
ownership and noted that the vessel had been registered both in Cypress and Russia with
different registered owners. The trial Judge concluded that Stardubskoe was not the registered
owner but held that it was nevertheless a bareboat charterer. The trial Judge next considered the
issue of applicable law and concluded that the contracts were governed by American law. In
reaching this conclusion the trial Judge noted that the agreements called for American law, that
the place of arbitration was Seattle, that the currency of payment was United States dollars, that
payments were to be made in Washington and that interest was fixed by reference to the prime
rate of the U.S. Bank of Washington. The trial Judge accepted the evidence of the Plaintiff’s
expert on American law that, under American law, the Plaintiff had a maritime lien for the
necessaries supplied and paid for by the Plaintiff. The trial Judge further held that, under
American law, a maritime lien could not be defeated unless there was an express waiver. On the
issue of res judicata the Court held that the Washington judgment was not res judicata as the
Washington case was against Stardubskoe whereas the case at bar was based on a maritime lien
on the vessel “Mys Chikhacheva”. Finally, on the issue of damages the trial Judge held that there
was no requirement to set off the lien amounts against the value of fish delivered by the
Defendant to the Plaintiff and further allowed the Plaintiff to amend its Statement of Claim just
prior to closing argument to increase the amount claimed. On appeal, the Court of Appeal upheld
the trial Judge’s determination of the proper law of the contract as being American law and noted
that such a determination should be granted a high level of curial deference analogous to a
finding of fact. On the issue of waiver the Court of Appeal stated that there was a strong
presumption against such waiver under American law and upheld the trial Judge’s finding that
there had been no express waiver. On the issue of damages, the Court of Appeal agreed with the
trial Judge that there was no right of set-off and further agreed that the amendments were
appropriate as they did not cause prejudice in a meaningful way. Taxation Neves v The “Kristina Logos, 2002 FCT 239 In a previous priorities hearing the Crown had been awarded priority in respect of its costs incurred in the sale of the defendant ship in a reasonable amount to be agreed or, failing agreement, to be taxed. The issue in this case was whether the Crown’s costs were to be taxed on a solicitor and client basis or on a party and party basis. The Taxation Officer held that in the absence of a special direction the costs were to be taxed on a party and party basis. Lien for Necessaries - Vessel Under Charter - U.S. Law Kirgan Holding SA v The “Panamax Leader”, 2002 FCT 1235 In this case the Plaintiff had entered into a contract with the agent for the demise charterer of the Defendant ship for the supply of bunkers. The contract contained a provision requiring the application of U.S. law. Bunkers were supplied to the ship by sub-contractors of the Plaintiff and were not paid for by the demise charterer who became bankrupt. The Plaintiff therefore commenced this proceeding and arrested the defendant ship. The Defendant, the owner of the Defendant ship argued that they were not a party to the contract and that the Plaintiff had no right to a lien over the vessel. The Judge applied U.S. law and held that the demise charter had the presumed authority to bind the ship and to assert a lien unless the Plaintiff had been specifically notified otherwise. The Defendant relied upon a prohibition of lien clause in the charter party and on notices of the prohibition of lien clause posted throughout the ship. The Judge held, however, that these notices were never brought to the attention of the Plaintiff who did not personally deliver the bunkers. In result, the Plaintiff was held entitled to a lien for the bunkers supplied. The Judge did, however, disallow the claim for interest at 1.5% per month on the grounds that it was excessive and substituted an award of interest at 2% over prime. Assignment of Crew Claims Finansbanken ASA v The “GTS Katie”, 2002 FCT 74, The issue in this case was whether the claimant had a subrogated interest in the wage lien of the crew of the defendant vessel. The claimant alleged that he had entered into an agreement with the vessel owner to provide the owner with US$40,000.00 to pay the crew. In return, and with the full knowledge and participation of the crew, the claimant was to be subrogated to the crew’s wage claim in the amount of US$ 50,0000.00 (ie. a 25% premium). Further, it was alleged that the agreement was subject to U.S. law. The Prothonotary rejected the subrogated claim primarily on the basis that the evidence was hearsay and did not establish an agreement in which the crew participated. Moreover, the Prothonotary held that there was no good evidence establishing an agreement that U.S. law would apply and that under Canadian law a wage claim could not be assigned or subrogated without the consent of the court. Finally, the Prothonotary held there were no equitable reasons to allow the claim since the claimant was not a voluntary organization that paid the crew wages out of altruism. The fact of the 25% premium discounted altruism as a motive. Necessaries Suppliers Finansbanken ASA v The “GTS Katie”, 2002 FCT 73, affirmed 2002 CFPI 339 In this matter a supplier of necessaries attempted to obtain priority by entering into an agreement with the ship owner for the transfer of property on board the ship. The property transferred consisted of plans, manuals, drawings, 5 life rafts and 2 breathing apparatus. The agreement provided that the ship owner could retake possession and ownership of the property by the payment of the outstanding amount owed for necessaries. The mortagee of the defendant vessel challenged the agreement arguing that the property allegedly transferred was covered by the mortgages and was invalid as the transfer had not been consented to by the mortgagees. The Prothonotary agreed with the mortgagee. He reviewed the terms of the mortgage and the meaning of the term “appurtenances” and concluded that the property was subject to the mortgage. He further held that the consent of the mortgagee is required where the mortgage security is dealt with so as to reduce the value of the security. The decision of the Prothonotary was upheld on appeal. Moorage - lien False Creek Harbour Authority v The “Shoda”, 2002 FCT 275 This was an action for outstanding moorage and miscellaneous charges. The moorage agreement
required, inter alia, that the vessel owner not cause a nuisance or disturbance and provided that
in the event the owner breached the terms of the agreement the Harbour Authority could seize the
vessel and exercise a warehouseman’s lien pursuant to the provincial Warehouseman’s Lien Act.
In breach of the agreement the dock owner was involved in a physical altercation with another
user of the dock and, as a consequence, the Harbour Authority terminated the agreement and
advised the vessel owner to remove his boat. The owner did not do as requested and the Harbour
Authority accordingly seized the boat and removed it to another marina where it incurred
additional storage charges. The vessel owner argued that he was not responsible for the storage
charges as the criminal charges that were laid arising out of the altercation had been dismissed.
The Judge held, however, that the Harbour Authority was within its rights in terminating the
lease and that the Harbour Authority had a lien on the vessel for the storage and miscellaneous
charges pursuant to the Warehouseman’s Lien Act as incorporated by the moorage agreement. Bankruptcies - Stay of Proceedings Holt Cargo Systems Inc. v ABC Container Line N.V., 2001 SCC 90 Re: Antwerp Bulkcarriers N.V., 2001 SCC 91 These cases address the issue of the apparent conflict between the law and procedures of bankruptcy and Canadian Maritime Law. They arose out of the arrest of the ship “Brussel” at Halifax by the Respondent, a maritime lien holder. Shortly after the arrest the Belgium owner was declared a bankrupt and a Trustee in bankruptcy was appointed by the courts of Belgium with the mandate to realize upon the assets of the bankrupt worldwide. The Trustee brought an application before the Quebec Superior Court for an order recognizing the judgment of Belgium court and “declaring it executory in Quebec”. The Quebec Superior Court recognized the judgment and ordered that the property of the bankrupt be vested in the trustee subject to the rights of any secured creditors. The Trustee then applied to the Federal Court to adjourn the judicial sale of the “Brussel”. When this was unsuccessful, the Trustee returned to the Quebec Superior Court and obtained an order from that court directing the Federal court to pay the proceeds from the sale of the “Brussel” to the Trustee or, if the sale did not proceed, to deliver up the ship to the Trustee. The Trustee then applied to the Federal Court for an order staying the Federal Court proceedings and for payment of the proceeds of sale. The Federal Court declined the stay application and declined to pay the proceeds from the sale to the Trustee. The Trustee appealed to the Federal Court of Appeal. The Federal Court of Appeal dismissed the appeal holding that a legitimate legal advantage would accrue to the Respondent if its claim was adjudicated in the Federal Court since it was unlikely the Belgium courts would recognise the Respondent's in rem claim. Further, the Federal Court of Appeal held that there was a "real and substantial connection" with Canada as Canada was where the ship was arrested. The Federal Court of Appeal was also critical of the Appellant's use of the Quebec Superior Court to obtain an order against the Federal Court. Meanwhile, the Respondent appealed the order of the Quebec Superior Court directing that the proceeds from the sale of the ship be paid to the Trustee. This appeal was allowed by the Quebec Court of Appeal. The Quebec Court of Appeal held that even if the matter was properly characterized as one of bankruptcy and not maritime law, the Superior Court did not have any jurisdiction to make an order against the Federal Court. Both the judgment of the Federal Court of Appeal and the judgment of the Quebec Court of Appeal were appealed to the Supreme Court of Canada. With respect to the appeal from the Federal Court of Appeal, the Supreme Court of Canada held that the Federal Court of Canada was not obliged to defer to the bankruptcy courts of the bankrupt’s domicile and did not lose its jurisdiction by reason of the bankruptcy. The Supreme Court further held that the Federal Court had a discretion to decide whether to stay the Canadian proceedings. The Court noted that the Trial Judge addressed the relevant factors in determining whether to stay the proceedings and committed no error in principle. In particular, the Supreme Court held that the Trial Judge was justified in putting considerable weight on the fact the Respondent would not enjoy the same priority in Belgium as in Canada. The Supreme Court also considered and rejected an argument that the bankruptcy gave the Trustee a valid claim to the ship. The Court held that the bankruptcy operates as an assignment of the bankrupt’s property to the trustee but is subject to any existing charges. With
respect to the appeal from the Quebec Court of Appeal, the Supreme Court of
Canada held, in addition to the above, that once the Quebec Superior Court
recognized the Federal Court had maritime jurisdiction to deal with the
“Brussel” it should have directed the Trustee to apply to the Federal Court
for a stay and should not have issued what amounted to an anti-suit injunction. Applicable Law Imperial Oil Limited v Petromar Inc., 2001 FCA 391 This was an appeal from a decision of the Trial Division declaring that the Defendant had a maritime lien. The issue in the case was whether the contract for the supply of marine lubricants was subject to American law and, consequently, whether the Defendant had a maritime lien. The Defendant, an American corporation, supplied lubricants through a sub-contractor to two Canadian registered ships owned by the Plaintiff at various Canadian ports. The ships were under demise charter to another Canadian corporation and were managed by an American corporation. The contract between the Defendant and the ships’ manager contained a choice of law provision calling for American law to be applied. Similarly, the contract between the Defendant and its sub-contractor who actually delivered the lubricants contained an American choice of law provision. There was no direct contract between the Defendant and the Plaintiff shipowner. The Plaintiff argued that the supply of lubricants should be governed by Canadian law because of s. 275 of the Canada Shipping Act (which provides a choice of law rule that matters relating to a ship shall be governed by the law of the port of registry) and because Canada was the place with the closest and most real connection to the transactions. At trial, on the issue of the application of s. 275 of the Canada Shipping Act, the Trial Judge held that this section applied only to matters dealt with in Part III of the Act (ie. in relation to seamen) and had no application to the case at bar. On the second issue, the Trial Judge recognized that there were a number of factors connecting the matters in issue to both Canada and the United States. However, the most significant factors were the contracts relating to the supply of lubricants both of which applied American law. In the result, the Trial Judge held that the contracts for the supply of lubricants were governed by American law and that the Defendant had a maritime lien. On appeal, the Federal Court of Appeal reviewed the nature of a maritime lien and noted that such liens arise not from contract but by operation of law. The Court concluded that the Trial Judge had correctly determined that the law to be applied was the law with the “closest and most substantial connection” to the transaction and that this involved weighing various factors. The Court of Appeal held, however, that the Trial Judge erred in holding that the United States contracts were the most significant factors. The Court of Appeal considered that the most significant factor was that the demise charterer had its base of operations in Canada where the vessels traded and were based. When that factor was weighed with other factors connecting the transactions to Canada the proper law was the law of Canada. In result, the appeal was allowed and the Defendant did not have a maritime lien. Priorities - Bankruptcy - Striking Claim of Trustee Global Enterprises International v The “Aquarius”, “Sagran” and “Admiral Arciszewski”, 2001 FCT 1311 In this case the Polish trustee in bankruptcy of the owner of the Defendant ships had filed an affidavit of claim claiming the entire proceeds of sale of the vessels for the purpose of distributing the proceeds in the Polish bankruptcy proceedings. An Intervening creditor brought this application to strike the trustee’s affidavit of claim. The Prothonotary commenced his analysis with the observation that parties ought not generally be permitted to strike out each others affidavits. The exceptions are where the affidavit is abusive or clearly irrelevant or is an abuse in the sense of prejudicing or delaying an orderly and fair hearing. The Prothonotary noted this was a heavy burden but did go on to find that the burden had been met. The Prothonotary struck out the affidavit on three grounds. First, the Prothonotary held that the affidavit of the trustee was not a claim in rem and did not even purport to be so. It being a pure claim in personam it was irrelevant and liable to be struck. Second, that as the claim of the trustee was purely a claim in bankruptcy the Federal Court was without jurisdiction. Finally, the Prothonotary ordered the affidavit struck on the grounds that the conduct of the trustee was an abuse of the process of the Court. The abuse consisted of the placement by the Trustee of an advertisement in Lloyd’s List declaring any sale of the vessels by the Federal Court to be illegal. Further, the Prothonotary noted that the Trustee had hampered the efficient and orderly progress of the action by filing appeals which were not proceeded with. Supplies to Ships Under Charter Finansbanken ASA v The “GTS Katie”, 2001 FCT 1316 In this case a bunker supplier claimed a priority over mortgage creditors under Egyptian law for bunkers ordered by the charterer of the Defendant ship and supplied to the ship at Gibraltar while it was under charter. The bunker delivery receipt stated that the vessel was under charter and that the charterer had no right to subject the ship to maritime liens. The bunker supplier relied upon a term in the bunker invoice that the agreement was to be determined by the law of Egypt. The Court held that the owner of the ship was not bound by the choice of law clause. Priorities
- Validity of Seizure Under Mortgage Greeley v The "Tami Joan", 2001 FCA 238 This was a contest between the mortgagee and lessee of the fishing vessel "Tami Joan". The Plaintiff had leased the vessel from its owner and had effected improvements to it. Unknown to the Plaintiff the vessel was mortgaged and the mortgage was in arrears. The mortgagee seized the vessel pursuant to the mortgage and it was eventually sold. The Plaintiff alleged that the mortgagee had wrongly deprived him of possession of the vessel and that he was entitled to a possessory maritime lien for the materials and services he had supplied to the vessel. The Trial Judge held that the mortgagee was entitled to seize the vessel because the mortgage was in arrears and its security was impaired by reason that the vessel was uninsured. The Trial Judge further held that the Plaintiff was not entitled to a possessory lien because he had lost possession of the vessel to the mortgagee. The Plaintiff was, at most, entitled to a statutory right of action In Rem which gave him no priority. The Plaintiff appealed and further claimed monetary relief for equipment he alleged he supplied to the ship. On appeal the Court of Appeal affirmed the decision of the Trial Judge and further held that the Plaintiff had failed to properly prove any damages as a result of equipment he supplied to the vessel. Production of Documents - Cross-examination Unitor ASA v The “Seabreeze I”, 2001 FCT 416 In this matter a claimant alleged that the Defendant vessel was sold by judicial sale to a nominee of the ship’s mortgagee. This information came from various published newspaper reports. The claimant sought to compel the mortgagee to answer questions on cross-examination and to produce documents relating to the identity of the purchaser at the judicial sale, its corporate relationship to the mortgagee and whether the ship was resold or whether there was an agreement to resell the ship. The application was denied by the Court on the grounds that the evidence was not relevant to any of the issues then before the Court. Those issues were the entitlement of the mortgagee to reimbursement for the costs of repatriating the crew and maintaining the vessel while under arrest and for the value of the bunkers on board the vessel at the time of sale. The Court appeared to acknowledge that different considerations might apply when the claim of the mortgagee as mortgagee was considered. Priorities - Duties of Mortgagees - Merger - American Liens - Brussels Convention - Sister Ships Governor and Company of the Bank of Scotland v The "Nel", (August 2, 2000) No. T-2416-97 (F.C.T.D.), [2000] F.C.J. No. 1305 This was a hearing to determine the priorities of claimants to the proceeds of sale of the "Nel" which had been sold pendente lite for US$5,000,000. The claimants and their claims were: the mortgagee under a fleet mortgage for the expenses of sale, for wages paid to the crew and repatriation costs, and for the amount owing under the current account mortgage; a bunker supplier who claimed a maritime lien for bunkers supplied in Panama; a travel agent who purchased airline tickets for crew members; a chemical supplier who supplied necessaries to the "Nel" and alleged sister ships; and, finally, a medical clinic who provided medical supplies. The Prothonotary dealt first with the mortgagee’s claims. The claim for a first priority for expenses of sale was not seriously challenged and was allowed. The priority for wages and repatriation costs was also granted as there had been an assignment of these claims in favour of the mortgagee. The mortgagee’s claim for the net amount due and owing under its current account mortgage was challenged on various grounds including: that some of the funds advanced by it were distress payments and not secured; that the mortgagee had failed to take into account a profit earned by it on the purchase and resale of the "Blue L", another ship secured under the fleet mortgage; that the mortgagee’s claim should be capped as of the date it took out default judgment; and that there were special circumstances justifying a departure from the usual order of priorities. With respect to the distress payments made by the mortgagee, the Prothonotary held that these payments were covered by the broad terms of the account current mortgage. With respect to the purchase and resale of the "Blue L", the Prothonotary found that the mortgagee had purchased the "Blue L" through a nominee at a judicial sale held by the Court of South Africa. The mortgagee then re-sold the vessel to a customer of the mortgagee at a pre-arranged price which netted a profit to the mortgagee of approximately US$1,700,000. There was no evidence that the South African Court was aware of the mortgagee’s intent to purchase and re-sell the "Blue L". The Prothonotary held that the profit on the re-sale had to be taken into account by the mortgagee. In reaching this conclusion, the Prothonotary noted that mortgagees have a duty to obtain the best possible price when realizing upon security and further have a duty to provide full disclosure before bidding in a court ordered sale. An additional argument advanced was that the claim of the mortgagee had to be capped as of the date that the mortgagee took out a default judgment on the basis that the original indebtedness had been merged with the judgment. The Prothonotary, however, held that the doctrine of merger did not operate to extinguish the original indebtedness but rather that its effect was to merge the remedy with the judgment and, if the creditor had more than one remedy he was free to pursue it even after judgment. In the instant case, the Prothonotary held that although the mortgagee had obtained a judgment on its debt this did not prevent the mortgagee from making a claim against the res under its mortgage. Finally, it was argued that the usual order of priorities ought to be varied because the mortgagee delayed unreasonably in enforcing its mortgage and because it did not come to court with clean hands, having tried to hide the profit from the re-sale of the "Blue L". The Prothonotary declined to alter the usual order of priorities. He found that the arguments that the mortgagee had unreasonably delayed were based on supposition, innuendo and assumption and further found that the failed efforts to exempt the profit on the re-sale of the "Blue L" was not a sufficient special circumstance to justify altering the normal order of priorities. The Prothonotary next considered the claim of a bunker supplier who had supplied bunkers to the "Nel" at Panama. The contract to supply the bunkers was arranged by telexes which provided that the supply was to be on the local terms and conditions of the fuel agent who made the actual physical delivery. Those terms and conditions stipulated that American law was to apply. The bunker supplier argued that the contract to supply the bunkers was governed either by Panamanian law or by American law and that, in either case, it had a priority. The Court accepted that Panamanian law gave the supplier a priority but held that because of the choice of law clause Panamanian law did not apply. The Prothonotary then considered the effect of American law. The mortgagee filed an affidavit of an expert on American law to the effect that although American law gave a supplier of necessaries a priority over a mortgage for necessaries supplied within the United States, it did not give a priority for necessaries supplied outside of the United States. The Prothonotary accepted this was a proper statement of American law but noted that under Canadian conflicts of laws rules the substantive nature of the right is to be determined by American law and the actual ranking of priorities is to be determined by Canadian law. He held that the lien was a maritime lien travelling with the ship and such a lien under Canadian ranking of priorities comes ahead of a mortgage. The Prothonotary next considered the claim of the travel agent who was owed a substantial sum for airline tickets supplied to crew members. The travel agent alleged that it had a maritime lien under Greek law which, it alleged, incorporated the Brussels Convention on Liens and Mortgages and, in particular, article 2(5) which provides a lien for "claims resulting from contracts entered into or acts done by the master, acting within the scope of his authority...". For sake of argument the Prothonotary assumed that Greek law provided a maritime lien for claims falling under article 2(5) of the Brussels Convention. However, he held that this did not assist the claimant as there was no evidence that the contracts were entered into by the master. (Similar claims by a Belgian supplier based on Belgian law and by Bureau Veritas based on French law were refused for the same reason.) Further, the Prothonotary had serious reservations as to whether the claims were properly in rem claims. In the result, the travel agent’s claim for a maritime lien was not allowed. The Prothonotary next considered the claim of a chemical supplier who had supplied chemicals to the "Nel" and various other ships which it alleged were sister ships of the "Nel". Dealing first with the claims for necessaries supplied to the "Nel" under contracts providing for American law to apply, the Prothonotary held that these were claims for which a maritime lien was available. The Prothonotary then considered whether the other ships to which necessaries were supplied were sister ships under section 43(8) of the Federal Court Act. These other ships were each owned by separate companies but were under common management and were all included in the fleet mortgage. Under all the circumstances, the Prothonotary held that the registered owners were sham companies and that the true owner was the managing company. As a result, the claimant was entitled to make sister ship claims. However, this did not assist the claimant as the Prothonotary went on to hold that necessaries supplied to sister ships did not give rise to a maritime lien. The Prothonotary lastly considered the claim of a medical clinic that had provided medical supplies to the "Nel". The Prothonotary noted that the clinic had no ethical choice but to assist mariners with their medical needs when called upon and held that, in the circumstances, it was appropriate that the clinic should be given an enhanced priority equivalent to that of a maritime lien holder. Assessment of Costs Holt Cargo Systems Inc. v The "Brussel", (March 30, 2000) No. T-738-96 (F.C.T.D.), [2000] F.C.J. No. 392 This was an assessment of costs pursuant to a court order granting the Plaintiff costs on a solicitor and client basis for the arranging of the appraisal and sale of the "Brussel". The submitted Bill of Costs was challenged on the basis that it included many matters not related to the appraisal and sale and on the basis that it included fees rendered for parties other than the Plaintiff. On the first issue the Court held that the items in the Bill of Costs not related to appraisement and sale were insignificant. On the second issue the Court held that the Bill of Costs had to be reduced by deleting the fees related to clients other than the Plaintiff. Cross-Examination - Substitution of Deponents - Right to Chose Deponent Nedship Bank N. V. v The "Zoodotis", (May 18, 2000) No. T-186-99 (F.C.T.D), [2000] F.C.J. No. 886 The Plaintiff mortgagee was unable to produce the deponent of its affidavit of claim for cross-examination and brought this application for leave to substitute another witness for cross-examination. The Court stated that the general rule was affidavits will be struck out if the deponent is not produced for cross-examination and replacement affidavits will not be allowed in the absence of justifiable grounds. The Court concluded, however, that to strike out the affidavit would be unjust and unjustifiable and allowed the Plaintiff to file a second affidavit adopting the contents of the first and to produce the deponent of the second affidavit for cross-examination. The Court further held that the cross-examining party had the right to chose the witness who would depose the second affidavit and be produced for cross-examination. Scope of Cross-Examination and Production of Documents Royal Bank of Scotland plc v The "Golden Trinity" et al., [2000] 4 F.C. 211 (F.C.T.D.) This motion considered the scope of cross-examination on affidavits of claim in a proceeding to determine priorities. The Prothonotary reviewed the various authorities relating to the issue and noted that the authorities supported both a narrow approach and a broad approach, depending on the context. The Prothonotary borrowed concepts from both approaches to arrive at some broad general principles as to the proper scope of cross-examination on affidavits of claim in a priorities hearing. First, cross-examination on affidavits must have factual underpinnings in the deponent’s affidavit, in other affidavits filed, in answers giving rise to collateral questions or in the documents attached to affidavits or otherwise produced. Second, the deponent of an affidavit of claim is an agent for and swears the affidavit on behalf of a party or claimant. He or she therefore has a duty to inform himself or herself. The duty to inform is not akin to what would be required on an examination for discovery but is bounded by relevance and whether the inquiry would be unduly onerous. Third, the production of documents on a cross-examination is governed by Rules 87 (Examinations out of Court), 91(2)(c) (Production for inspection at examinations), and 94 (Production on examinations). The documents must be relevant and in the possession, power and control of the person being examined, however, the scope is not as broad as discovery of documents. The scope is limited by relevance, the amount of material requested and whether it would be unduly onerous to require production. Late Filing of Supplementary Affidavits Royal Bank of Scotland plc v The "Kimisis III" et al., (June 5, 2000) No. T-38-99 (F.C.T.D.), [2000] F.C.J. No. 909 This was an application by a lien claimant for leave to file a supplementary affidavit of claim attaching a document showing delivery of necessaries supplied to the defendant ship. The Court refused the application noting that the document had been specifically requested one year earlier and not produced and that the time for filing affidavits had expired 14 months previous. The Court stated that the time for filing affidavits of claim or supplementary affidavits could be extended provided there were special circumstances that are fully explained. In the circumstances, however, the Court held that the Applicant had not satisfactorily explained why the document was not produced earlier. Cross-Examination - Right to Second Examination Royal Bank of Scotland plc v The "Golden Trinity" et al., (June 16, 2000) No. T-32-99, T-38-99 & T-119-99 (F.C.T.D.), [2000] F.C.J. No. 938 This was an application to strike out the affidavits of claim of the Plaintiff mortgagee on the grounds that the deponent produced for cross-examination was inadequately prepared. The Court agreed with the Applicant that the cross-examination was unsatisfactory in that the witness gave clearly incorrect answers and was not properly informed but refused to strike out the affidavits of claim. The Court noted that it would normally require the original witness to better inform himself and to re-attend for further cross-examination. However, in the circumstances, the Court felt that the original witness was not able to properly inform himself and therefore ordered that a second witness be produced for cross-examination. Priorities - Charterer's Claims - Foreign Maritime Liens - Sister Ships - Equitable Jurisdiction Fraser Shipyard & Industrial Centre Ltd. v The "Atlantis Two", (1999) 170 F.T.R. , varied in part (July 28, 1999) No. T-111-98 (F.C.T.D.) This was a hearing to determine priorities to the sale proceeds of the Defendant vessel. The claimants and their claims were: a bunker supplier for bunkers supplied pursuant to a court order granting a priority as Marshall's expenses; the crew for wages; the Master for disbursements; the Crown for the costs of repatriating the crew; the charterer for bunkers supplied to the ship and for damages for breach of charter party; suppliers of necessaries claiming foreign maritime liens in respect of both goods supplied to the Defendant ship and goods supplied to sister ships; the sub-charterer for breach of charter party; the mortgagee; and a ship repairer, without possession, for work done to the vessel to remedy deficiencies noted in a Port State Control Detention Order. The court allowed the claim of the bunker supplier pursuant to the previous court order as a first claim on the proceeds after the costs of sale. Next in priority was the claim of the crew and officers for wages and of the Master for disbursements for food for the crew, who had been abandoned by the owner. Next in priority was the claim of the Crown for the costs of repatriating the crew, which was a claim and priority that had been assigned to the Crown by the crew pursuant to an earlier court order. The court next considered the claim of the charterer for fuel and damages for breach of charter party . With respect to the claim for fuel, the charterer claimed both for fuel consumed at Vancouver and for fuel on board the vessel when sold. The charterer’s claim for priority in respect of fuel consumed was disallowed by the court on the grounds that the charterer did not obtain a court order in advance of supplying fuel to the vessel. The court considered whether there were any special circumstances that might justify a variation in the normal order of priorities but held that there were no such special circumstances. The charterer was, however, entitled to the value of bunkers not consumed and on board the vessel when she was sold, this fuel being the charterer’s property. With respect to the charterer's claim for breach of charter party, the court held that the charter party made it clear that it was subject to English law and under both English and Canadian law there is only a statutory right in rem as a remedy for breach of a charter party and no priority. With respect to the claims of foreign necessaries suppliers, primarily American suppliers, the court was invited to reconsider the fairness of allowing such suppliers a priority when their Canadian counterparts had only a right of action in rem. The court declined to do so but noted that it may be time for Canadian necessaries suppliers to press for legislative change. The court allowed the claims of all but one the American suppliers but only in respect of goods delivered to the "Atlantis Two". One claim allowed was in respect of goods supplied to the "Atlantis Two" at Mexico and Vancouver by a Norwegian company through an American agent. A claim that was disallowed at first instance was a claim in respect of cylinder heads sold F.O.B. Houston, Texas and delivered to Australia and Vancouver. The Prothonotary found that there was no evidence that the goods were, in fact, delivered to the vessel and held therefore that no maritime lien arose. On appeal, Rouleau J. found that the shipping invoices clearly indicated that the cylinder heads were to be shipped to a specifically identified vessel (the "Atlantis Two") in Australia and Vancouver. This, he held, was sufficient to establish delivery to the vessel and to find a maritime lien. It is noteworthy that, insofar as the claims by American suppliers were for the supply of goods or services to sister ships of the "Atlantis Two", the court held that such claims did not attract a maritime lien and were mere rights of action in rem with no priority. With respect to the claim of the sub-charterer for breach of charter party, the court held that this claim was governed by American law by virtue of an arbitration clause in the charter party calling for New York arbitration. The court considered the expert evidence that had been filed and concluded that pursuant to American law the sub-charterer had a maritime lien. Accordingly, the court found that the claim of the sub-charterer ranked ahead of the mortgagee. In doing so, the court acknowledged that this was a higher ranking than the sub-charterer would enjoy under American law. This result flows from the fact that the substantive nature of the lien is determined by American law yet the ranking of priorities is determined by Canadian law. The court then turned to the claims of the mortgagee and the shipyard. The shipyard argued that it was entitled to priority over the mortgagee on two grounds: first, it argued that the mortgagee should lose its priority because it had been dilatory in enforcing the mortgage; second, it argued that the court in the exercise of its equitable discretion should grant it an enhanced priority because of the mortgagee’s delay in enforcing the mortgage and because the repairs done to the vessel (most, if not all repairs were done prior to the arrest) had added to the value of the vessel to the benefit of all creditors. With respect to the first argument the court accepted that a dilatory mortgagee might lose its priority if there was strong evidence the mortgagee knew money was being spent on the ship by the repairer and knew that the ship owner was insolvent. However, the court found as a fact that the mortgagee was not aware of the insolvency of the owner and was not fully apprised of the extent and value of the repairs being undertaken by the repairer. Accordingly, the court held that the mortgagee did not lose its priority. The court next considered whether it ought to exercise its equitable discretion to grant the shipyard an enhanced priority. The shipyard relied on various factors justifying an enhanced priority including that the repairs were done to correct deficiencies that had resulted in a detention order against the vessel being issued by Port State Control and that as a result of the work done by it the detention order was lifted and the value of the vessel was significantly enhanced. The shipyard argued that all of this increase in value would go to the mortgagee who had been dilatory in enforcing its mortgage if the usual ranking was not altered. The court ultimately agreed with the shipyard that there would be an unjust enrichment if the usual order of priorities was not altered. The court, therefore, granted the shipyard a priority equivalent to that of the American maritime lien claimants to the extent of US$220,000.00, being the increase in the value of the vessel consequent upon the repair work. Priorities - Port Corporations - Pilotage - Foreign Maritime Liens - Sister Ships - Contractual Liens Holt Cargo Systems Inc. v The "Brussel", (February 11, 2000) No.T-738-96 (F.C.T.D.) This was a hearing to determine priorities to the sale proceeds of the Defendant vessel. The claimants and their claims were: Holt Cargo Systems for costs of sale and Marshall's expenses; Halifax Port Corporation for port dues owed by the "Brussel" and her sister ships; Atlantic Pilotage Authority for pilotage services rendered to the "Brussel" and her sister ships; American maritime lien holders for goods and services supplied to the "Brussel" and to sister ships of the "Brussel"; the mortgagee for the mortgage debt; Canadian necessaries suppliers; and, the Trustee in Bankruptcy of the bankrupt ship owner. The court gave priority over the mortgagee to the claims of Holt Cargo Systems, the Halifax Port Authority, the Pilotage Authority and the various American maritime lien claimants who had supplied goods and services to the "Brussel". All of the other claimants ranked after the mortgagee, meaning they recovered nothing. The claim of Holt Cargo Systems for the costs and disbursements related to the sale of the "Brussel" were granted a priority as were other costs which the court had previously ordered would be given a priority equivalent to Marshall's expenses. The claim of the Halifax Port Corporation was granted a priority for port dues owed by the "Brussel" on the basis that section 43(5) of the Canada Ports Corporation Act gave it a priority over all other claims except the claims of seamen for wages. The Port Corporation was, however, not given priority for port dues owed by sister ships of the "Brussel". The court held that this claim was a mere statutory right of action in rem ranking behind the mortgagee. The claim of the Atlantic Pilotage Authority was allowed and given priority for the services rendered to the "Brussel" but not for the services rendered to sister ships. In awarding the Pilotage Authority a priority the court noted that the Pilotage Act did not confer a priority, however, the Prothonotary was referred to Osborn Refrigeration Sales and Service Inc. v The Ship "Atlantean I", [1979] 2 F.C. 661, varied on other grounds 7 D.L.R. (4th) 395, and Ultramar Canada Inc. v Pierson Steamships Ltd. et al., (1982), 43 C.B.R. (N.S.) 9, which did grant a lien for pilotage services. On the basis of these authorities, and because the other claimants appeared to not contest the claim, the court granted the lien for pilotage services. (Note: The authorities on this point are not unanimous. In Ostogota Enskilda Bank v Starway Shipping Ltd., (1994), 78 F.T.R. 304 at 306, Muldoon J. said it had not been established "that there is in law a maritime lien for Canadian pilotage services". This decision was apparently not brought to the attention of the court in The "Brussel".) With respect to the American lien claimants, the Trustee challenged the recognition of and the priority given to such liens and invited the court to reconsider these issues. The court held that the recognition and priority of such liens had been established by the Supreme Court of Canada and that it was not the role of the court to question established authority unless the circumstances were exceptional, which they were not. The court did, however, hold that the American claimants who had supplied goods and services to sister ships of the "Brussel" were not entitled to maritime liens and, therefore, were not entitled to a priority. The court ordered that the balance of the sale proceeds after payment of all of the above creditors would go to the mortgagee who had a claim in excess of $68 million. One of the other claimants, Halterm, had paid the wharfage for the "Brussel" to the Halifax Port Corporation and claimed to be subrogated to the statutory lien of the Port Corporation. The court found, however, that there was no evidence of an explicit assignment of the Port Corporation’s lien rights and further noted that the Canada Ports Corporation Act was silent regarding whether such rights could be assigned. The court ultimately held that there had been no assignment in favour of Halterm. In reaching this decision the court was careful to note that it did not "foreclose the possibility that a maritime right in rem or other lien may be assignable". (Note: in The "Atlantis Two" the court approved of an assignment of the seamens’ liens for repatriation costs to the Crown.) Another claimant, Bridge Oil, alleged that it was entitled to a maritime lien for bunkers supplied to the "Brussel" in Belgium based on Article 2(5) of the Unification of Certain Rules Relating to Maritime Liens and Mortgages, 1926, which gives a maritime lien for contracts entered into by a Master provided, inter alia, the vessel is away from her home port and the contracts were necessary for the preservation of the ship or the continuation of the voyage. The court disallowed the lien claim on the grounds that the bunkers were ordered by the owner and not the Master. A lessor of containers alleged that it had a maritime lien for unpaid lease payments on containers supplied to the "Brussel". The lease agreement expressly provided that the lessor was to have a contractual lien against the lessee’s vessels. The court held that such a lien has no special priority as against third parties. (Note: In The "Atlantis Two" the Prothonotary seemed to suggest that a contractual lien might be of some effect in a priorities hearing.) Priorities - Storage Charges Canadian Imperial Bank of Commerce v The "Barkley Sound", (March 4, 1999) Vancouver Reg. No.A983054 (B.C.S.C.) This was an application to determine priorities. At issue was whether a ship repairer in possession could claim priority over the mortgagee for storage charges and interest. The court found that the repairer had retained possession of the vessel and that the storage charges were incurred for the purpose of protecting the repairer's interest. Under these circumstances, the court held that such charges cannot be added to the maritime lien. On the matter of interest the court held that the repairer was entitled to interest at 5% per annum in priority to the bank. A secondary issue in the case was whether a supplier of goods to the vessel could obtain a priority over the bank on the basis of unjust enrichment. The court held that the supplier was a simple unsecured creditor and that he had not established any of the requirements of unjust enrichment. Priorities - Bunkers The Bank of Scotland plc. v The "Nel", (1999) 161 F.T.R. 303, (F.C.T.D.) This was an application by a shipping agent and ad hoc supplier of bunkers to recover from the sale price of the Defendant vessel the value of bunkers sold with the ship and supplied by the applicant. The supplier did not render an invoice to the ship owner when the bunkers were delivered. The supplier said it intended to recover the price of the bunkers from the freight when paid and led evidence that it did not intend to sell the bunkers to the owner until the freight was paid. The court was satisfied that the intention of the supplier was to not transfer title in the bunkers to the ship owner until it was paid in full. The court therefore held that property in the bunkers had not passed and the supplier was entitled to the proceeds from the sale of the bunkers. Removal of Cargo Bank of Scotland plc v The "Kimisis III", (February 9, 1999) No.T-38-99 (F.C.T.D.) This was a motion by a mortgagee for an order that the owner of a cargo of wheat on board the "Kimisis III" remove the cargo at its expense. The motion was denied on the grounds that it was premature as the mortgagee had not entered into possession of the vessel and had not applied for a court ordered sale. However, during the course of his reasons, Prothonotary Hargrave noted that there was a difference between the English approach to the removal of cargo from a ship under arrest and the American approach. The English approach is that the costs of discharging the cargo should fall upon the cargo owner whereas the American approach is that the costs of discharging cargo are in the nature of custodia legis and are therefore recoverable from the fund in priority to other claims. (Note: It would appear to be an open question which of these two approaches a Canadian court will follow.) Priorities - Late Filing of Affidavits of Claim Bank of Scotland v The "Kimisis III", (June 8, 1999) No.T-38-99 (F.C.T.D.) In this matter the court allowed the late filing of several affidavits of claim as the order setting the time for filing was ambiguous and did not accord with what had been agreed to at the hearing. The court specifically cautioned against the use of the words "prior to" in orders and suggested instead that the words "on or before" should be used to avoid any misunderstanding. Priorities - Advance Payments Out of Court Bank of Scotland v. The "Golden Trinity" et al., (1999) 170 F.T.R. 314, (F.C.T.D.). These reasons dealt with a reconsideration of a previous Order made from the bench allowing an advance payment to the mortgagees of the Defendant vessel from the sale proceeds of the Defendant vessel. The court confirmed the previous Order on the grounds that the advertising and search of lien claimants had been completed, the funds remaining in court were sufficient to satisfy all claimants with a reserve for costs and interest, and the mortgagees had undertaken to return the advances should that be necessary. Affidavits - supplemental Affidavits The Governor and Company of the Bank of Scotland v The "Nel",(December 30, 1998) No. T-2416-97 (F.C.T.D.) This was a motion by the Plaintiff for leave to rely upon documents produced by it at cross examination and for leave to file a supplementary affidavit of claim. The Prothonotary held that documents produced at the cross examination did not form part of the evidence to be used at the upcoming priorities hearings unless cross-examining counsel wished to rely upon a document and then related or explanatory documents could be relied upon by the Plaintiff. The Prothonotary further held that the Plaintiff was barred by Rule 492 from filing a supplementary affidavit. Production of Documents The Governor and Company of the Bank of Scotland v The "Nel",(October 19, 1998) No. T-2416-97 (F.C.T.D.) This was an application to strike out the affidavit of claim of the Plaintiff on the grounds that proper production of documents had not been made or, in the alternative, an order for production. During the course of his reasons the Prothonotary noted that a cross examination on an affidavit is not as free ranging as an examination for discovery and is not to be used to obtain full production of documents. Marshalling The Governor and Company of the Bank of Scotland v The "Nel",(July 2, 1998) No. T-2416-97 (F.C.T.D.) This was motion by in rem creditors of the Defendant vessel to compel production from the Plaintiff mortgagee of various documents relating to the financing of the Defendant ship and of a sister ship. In the course of his reasons the Prothonotary considered at length the doctrine of marshalling and whether it could apply to the benefit of in rem creditors. The Prothonotary held that notwithstanding some Canadian case law to the contrary, unsecured creditors, and particularly in rem creditors could benefit from marshalling. (Note: The application of the doctrine of marshalling forces a secured creditor with two funds or securities, one of which other claimants have a claim against, to exhaust his rights against the fund or security that the other claimants have no access to before proceeding against the "shared" fund or security.) Priorities - Master's Disbursements Doris v The "Ferdinand", (September 23, 1998) No.T-1416-98 (F.C.T.D.) The Plaintiff was the C.E.O. of a company that in turn owned 12 other companies each of which owned one ship. The ships were floating homes. The Plaintiff alleged that as Master of the ships he disbursed funds for the payment of maintenance expenses. The Plaintiff claimed a maritime lien for Master's disbursements in respect of such payments. The Plaintiff's claim was disallowed. The Court held that the payments by the Plaintiff were for operating expenses of the company (primarily for principal and interest payments on loans) and not for necessaries. Further, the Court held the payments were not made by the Plaintiff in the capacity of Master but in his capacity as a shareholder. Finally, The Court held that a critical element of a Master's disbursement is the Master's inability to communicate with owners and that such element was totally missing in this case. Priorities - Classification and Survey Fees Fraser Shipyard and Industrial Centre v The 'Atlantis Two", (August 4, 1998) No.T-111-98 (F.C.T.D.) This was an application by Lloyd's for an order that it be given priority for amounts due to it for classification services rendered to the "Atlantis Two" in 1997 and 1998. At the time of the motion the "Atlantis Two" had been ordered to be sold pendente lite. The Acting Marshall had requested that Lloyd's make it books and records available to potential purchasers. Lloyd's refused to do so or to provide further classification services unless the Acting Marshall agreed to pay its outstanding account in full. The Acting Marshall declined to pay the outstanding account and the matter came before the court on the motion by Lloyd's. At the initial hearing of the motion the Prothonotary urged the parties to attempt to reach a settlement of the dispute. The parties were, in fact, able to achieve a settlement which was ultimately included in an Order. The settlement was that Lloyd's would make its records available but reserved the right to claim priority for its fees. Notwithstanding the settlement, the Prothonotary issued reasons in which he commented that Lloyd's came to the court with "unclean hands" and that, under the circumstances, it would have been premature and improper to have granted Lloyd's immediate priority. The Prothonotary further commented that the English practice of having the Marshall recommend payment of classification society fees at the conclusion of the sale (provided there has been an enhanced sale price as a result of the classification societies cooperation) was a sensible and workable practice. Container storage charges as Marshall's expenses Holt Cargo Systems Inc. v. The "Brussel" et.al., (December 3, 1998) No. A-384-97 (F.C.A.) This was an application by a terminal operator to recover movement and storage charges for abandoned containers from the proceeds of sale of the Defendant ship as if those charges had been a Marshall's expense of arrest. The containers had been off-loaded from the Defendant ship pursuant to a Court order. The motions judge granted the application, reasoning that the charges were incurred for the benefit of all cargo owners to facilitate the sale of the vessel and that, if the ship had not been unloaded when it was, the Marshall would have had to make those arrangements. On appeal, the Federal Court of Appeal said they could not find fault with the order of the motions judge and dismissed the appeal. Payment out of Court Pendente Lite The Governor and Company of the Bank of Scotland v The "Nel", (February 5, 1998), No.T-2416-97 (F.C.T.D.) This was an application by the Plaintiff mortgagee for payment out of Court of part of the proceeds from the sale of the Defendant vessel. The Prothonotary noted that there has been a practice to pay out, from sale proceeds, funds which are clearly in excess of the amount needed to satisfy the claims against the vessel provided full disclosure is made of other claimants and all claims are before the Court. The Court was satisfied that more than sufficient funds would be left in Court after the payment out and that all claimants had had an opportunity to lodge claims. The Court therefore ordered that the excess funds could be paid out upon the undertaking of the Plaintiff to repay any portion of the advance should it later be determined the advance was excessive to the prejudice of the other claimants. Equitable Jurisdiction to Depart From Normal Order of Priorities Scott Steel Ltd. v. The "Edmonton Queen" et.al., (January 30, 1997) No. T-1457-93 (F.C.T.D.) This was an appeal from the order of the Prothonotary setting the priorities among various claimants to the proceeds of the Court ordered sale of the stern wheeler "Edmonton Queen". The contest was between the builder who had a possessory lien over the vessel, the mortgagee who held a builder's mortgage which matured into a registered mortgage and a supplier of goods and services. The usual ranking of priorities in such a case would be that the possessory lien holder would rank first (after the Marshall's fees), the mortgagee would rank second and the supplier of goods and services last. The mortgagee argued that the Court had the jurisdiction to depart from the usual order of priorities. The Court upheld the decision of the Prothonotary to not depart from the usual order of priorities unless very special circumstances were shown or it was necessary to prevent an obvious injustice. The Court found no such obvious injustice and declined to interfere with the usual order of priorities. The decision also contains an useful discussion of the standard of review upon an appeal from a Prothonotary's order. Normal Order of Priorities Brotchie v The "Karey T.", (August 9, 1996) No. T-2369-93 (F.C.T.D.) In this matter the Court confirmed that the normal order of priorities upon the sale of an arrested vessel is as follows: first, to the Admiralty Marshall for reasonable charges and disbursements; second, to holders of maritime liens such as those arising out of a collision; and third, to holders of registered mortgages.
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