Appeals - Case Summaries
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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”.
Discovery - Privilege - Appeals - Whether Order of Prothonotary Discretionary
Webasto (Hagedorn) v. Shasta Equities Ltd. (The Helios), 2013 FC 101 2015 FCA 135
Précis: The Federal Court of Appeal held that preliminary investigation reports were not privileged even though counsel had been retained.
Facts: A fire broke out on board the defendants’ ship “Helios” and spread to other nearby vessels. The broker of the “Helios” appointed a surveyor and fire expert to attend the scene and investigate the fire on behalf of underwriters. The surveyor and fire expert were told they were being retained by counsel and would report directly to counsel. The broker next retained counsel who in turn retained a claims service to interview one of the owners of the “Helios”. The moving party brought an application to compel production of various documents over which privilege was claimed including survey reports, the report of the fire expert and reports from the claims service which attached an interview and pre-fire survey reports. At first instance the Prothonotary was not convinced the documents were created “wholly or mainly” with litigation in mind and held they were not privileged. The “Helios” defendants appealed.
On appeal (reported as Hagedorn v Helios I (Ship), 2013 FC 101), the appeal Judge held that the order of the Prothonotary was not discretionary and the correct standard of review was one of correctness. The appeal Judge further held that, with the exception of some pre-fire survey reports, the documents were privileged as the parties were in an adversarial position from the outset. A further appeal was taken to the Federal Court of Appeal.
Decision: Appeal allowed, in part.
Held: Litigation privilege requires both that litigation be ongoing or reasonably contemplated at the time of the creation of the document and that the dominant purpose of creating the document is for that litigation. Relevant considerations include: the author and the authority upon whose direction a report is prepared; the date of the report; when counsel was appointed; the person to whom the report was addressed; and, the content of the report. The initial report of the surveyor and the report of the fire investigator were prepared at a time when, although there was the possibility of litigation, neither party was in a position to assess the incident. The parties were in the preliminary stage of investigation. Litigation had not commenced and was not reasonably contemplated. These reports are not privileged as was held by the Prothonotary. The report from the claims service, on the other hand, is protected by privilege. The investigator was directly retained by counsel, the report was prepared when litigation was more clearly contemplated and the attached interview is detailed and extensive and in the nature of what one would expect of an interview of a possible witness. The balance of the documents were prepared when litigation was in reasonable contemplation and are privileged.
Stay Pending Appeal
Alpha Trading v. Sarah Desgagnés (Ship), 2010 FCA 209
In this matter the respondent had obtained an anti-suit injunction and an order requiring the appellant to release the defendant ship from arrest in proceedings in Belgium. The appellant sought a stay of the order pending the hearing of the appeal. The application was granted. The Court noted that the test for granting a stay required: that there is a serious question to be decided on appeal (a relatively easy condition to satisfy); refusing the stay is likely to cause irreparable harm; and, the balance of convenience favours granting the stay. The fact that the release of the vessel from arrest would result in the loss of the appellant’s security was a paramount consideration. A request by the respondent for counter-security was also refused on the grounds that there was no basis for such a condition in the circumstances.
Appeals – Overruling Prior Panels – Appeals to Supreme Court
Kremikovtzi Trade v. Phoenix Bulk Carriers Limited, 2006 FCA 240
In an application under section 37.1 of the Supreme Court Act for leave to appeal to the Supreme Court of Canada, the Federal Court of Appeal, although noting that the Supreme Court should be allowed to set its own agenda and that it should rarely grant leave, nevertheless granted leave reasoning that the issue was one of considerable importance to the maritime Bar. In a dissent, the dissenting Justice held that the mere fact of conflicting decisions should not be a sufficient reason for granting leave and that the Supreme Court should determine itself whether to grant leave.
Carriage – Fire – Dangerous Goods – Hague Rules – Appeal – Standard of Review
Elders Grain Company Limited et al. v. The “Ralph Misener” et al., 2005 FCA 139
This matter involved the carriage of a cargo of alfalfa pellets from Thunder Bay to Montreal. During the discharge of the cargo in Montreal a fire broke out damaging the cargo and the carrying ship. The Plaintiffs claimed for the damage to the cargo and the Defendants counter-claimed for the damage to the ship. The Plaintiffs argued that the bills of lading, which were clean, created a prima facie presumption against the Defendants that the cargo was received in good order and condition. The trial Judge, however, held that during the loading the cargo was surrounded by a cloud of dust which made visual inspection difficult and that under these circumstances the presumption did not apply. The trial Judge then turned to the cause of the fire and reviewed the evidence of the various experts and witnesses. He concluded that the evidence overwhelmingly supported the conclusion that spontaneous combustion caused the fire. He next considered whether the alfalfa pellets were a “dangerous cargo” within the meaning of Article IV r. 6 of the Hague Rules. He noted that the word “dangerous” had to be given a broad meaning and concluded with little difficulty that the cargo was indeed dangerous since if not properly stored it could ignite. He further held that there was no evidence the Defendants consented to the shipment of the cargo with knowledge of its dangerous character. The Plaintiffs failed to advise the Defendants of its flammable nature and failed to provide any information to the Defendants with respect to the cargo. In their defence the Plaintiffs argued that pursuant to Art. IV r. 3 of the Hague Rules they could not be liable to the Defendants without proof of an act, fault or neglect. The trial Judge rejected this argument, holding that a shipper's liability for damage caused by dangerous goods was strict both under Art. IV r. 6 and at common law. In result, the Plaintiffs' action was dismissed and the Counterclaim was allowed. The Plaintiffs appealed.
At the Court of Appeal the Court first noted that the standard of review depended on the nature of the questions appealed from. The standard of review for pure questions of law is one of correctness. The standard for questions of fact is whether the trial judge made a palpable and overriding error i.e. “one that gives rise to a reasoned belief that the trial judge must have forgotten, ignored or misconceived the evidence in a way that affected his conclusion”. The standard for a mixed question of law and fact is that of “palpable and overriding error unless it is clear that the trial judge made some extricable error in principle with respect of the characterisation of the legal test or its application”. Applying these standards of review the Court of Appeal upheld the trial Judge and dismissed the appeal.
Jurisdiction Clause – MLA s.46 – Parallel Proceedings – Appeal from Prothonotary – Standard of Review
Ford Aquitaine Industries SAS et al. v. The “Canmar Pride” et al., 2005 FC 431
This action concerned the loss of or damage to several containers carried from LeHavre to Montreal. The damages were estimated at $6 million. The carriage was pursuant to a transportation services agreement which provided for American law and jurisdiction. The carrier under the transportation services agreement was OOCL but OOCL was expressly permitted to subcontract the carriage, which it did, to CP Ships. The Plaintiff originally commenced proceedings against only OOCL in a U.S. District Court. The Plaintiff attempted to discontinue those proceedings but was not allowed to do so. The Plaintiff also commenced this proceeding in the Federal Court against both OOCL and CP Ships. The Defendants brought this application to stay the Canadian proceedings. At first instance, the Prothonotary granted the application for a stay. He held that section 46 of the Marine Liability Act did not oust the court's jurisdiction under section 50 of the Federal Court Act to grant a stay on grounds other than a forum selection clause. He then applied the test from the decision of the British Columbia Court of Appeal in Westec Aerospace v Raytheon Aircraft Co., (1999) 173 DLR (4th) 498. That test was: 1) Are there parallel proceedings underway?; 2) If so, is the other jurisdiction an appropriate forum?; and, 3) Has the Plaintiff established by cogent evidence that there is some personal or juridical advantage available to him in the British Columbia action that is of such importance that it would be unjust to deprive him of it? The Prothonotary held that the Plaintiff had failed to meet the third element of that test. In this regard a main point argued by the Plaintiff was that a U.S. Court would apply the COGSA limit which was substantially lower than the limitation that would apply in a Canadian court applying the Hague-Visby Rules. The Prothonotary, however, considered that the issue of the applicable limitation would be argued in either court. On appeal, the appeal Judge first considered the appropriate standard of review from a discretionary order of a Prothonotary and noted that the test had been recently reformulated to require the reviewing judge to first determine whether the questions raised are vital to the final issue in the case. If so, the discretion should be exercised de novo and the reviewing judge need not consider the second branch of the test (whether the orders were clearly wrong). The appeal Judge considered the Prothonotary's decision final and thus proceeded to exercise her discretion de novo. The appeal Judge held that the Prothonotary had erred in applying the test from Westec. She considered that the Westec approach was incorrect in that it set up “loss of juridical advantage” as a separate test or step rather than weighing it with the other usual factors to be taken into account. Moreover, she considered that the objective was not just to determine if the foreign forum was equally appropriate to the domestic forum but whether it was more appropriate than the domestic forum. Nevertheless, weighing the relevant factors she concluded that the U.S District Court was a more appropriate forum and upheld the decision of the Prothonotary.
Seizure – Setting Aside – Corporate Veil – Appeals – Standard of Review
Foresight Shipping Co. Ltd. v. Union of India et al., 2004 FC 1501
This was an appeal from an Order of a Prothonotary in which the Prothonotary had set aside the seizure of the ship. The facts were that the Plaintiff had obtained an arbitral award against the Union of India and the Food Corporation of India and registered the judgment in the Federal Court. The award/judgment was not paid and in an effort to obtain payment the Plaintiff seized the ship “Lok Rajeshwari” at Sorel, Quebec. The owner of the ship, the Shipping Company of India Ltd., brought an application to set aside the seizure, which was granted by the Prothonotary. On appeal, the appeal Judge initially addressed the question of the standard of review from orders of Prothonotaries. She referred to the test enunciated in Canada v Aqua-Gem Investments,  2 F.C. 425 where it was held that discretionary orders of Prothonotaries should not be disturbed unless they are clearly wrong or raise questions vital to the final issue of the case. She also referred to the more recent formulation of this test in Merck & Co. Inc. v Apotex,  2 F.C. R. 459 where it was said that the first inquiry now concerns whether questions vital to the final issue of the case are raised. It was on this basis that the appeal Judge determined her discretion should be exercised de novo. The appeal Judge reviewed conflict of laws principles and determined that the law of India, not the law of Canada, should be applied to determine whether the ship was an asset of the Union of India subject to execution proceedings. She then reviewed the affidavits of foreign law and held that the law of India regarded the Shipping Company of India as having a distinct legal personality separate and apart from its major shareholders and that under the law of India the lifting of the corporate veil was allowed only in exceptional cases such as fraud. The appeal Judge was not prepared to disregard the distinct legal personality of the ship owner and dismissed the appeal.
Dismissal for Delay – Appeal – Standard or Review
Precision Drilling International B.V. v. The “BBC Japan” et al., 2004 FC 701
This was an appeal from an order of a Prothonotary dismissing the action for delay after a status review. The only explanation for the delay was that the Plaintiff had been negotiating a settlement with one of the Defendants. The appeal Judge considered first whether discretion should be exercised de novo on the appeal and held that it should since the Prothonotary's decision was final. The appeal Judge then considered the proper test to be applied and noted that the questions to ask were: 1) What are the reasons for the delay and do they justify the delay? and, 2) What steps are proposed to move the matter forward? The appeal Judge further noted that the overarching concern should be whether the Plaintiffs recognize their responsibility to move the action along and are taking steps to do so. Applying this “liberal” approach the Judge held that although the Plaintiff might have provided a better explanation for the delay it had justifiably explained the delay. The Judge further found that although the Plaintiff had failed to propose a time table they did ask that the matter be set over for a few months to allow the settlement to be finalized. The Judge considered this a reasonable response and queried why the court should insist on litigants preparing an artificial timetable when the parties are involved in meaningful negotiations. In the result, the appeal was allowed and the order dismissing the action set aside.
Appeal – Finding of Fact – Contract
Sabina A.G. v. Carisbrooke Shipping Limited, 2003 FCA 366
This was an appeal by the Defendant from the judgment of the trial Judge who found there was a contract between the parties on the basis of documents, conversations and the evidence as a whole. The appeal was dismissed because the appellate Court would not interfere with the trial Judge's findings of fact unless there was an overriding and palpable error.
Constitutional Law – Distribution of Powers – Navigation and Shipping – Salvage
Gulf Log Salvage Co-Operative Assoc. v. Early Recovered Resources, 2003 FCA 35
This case concerned the constitutional validity of the Log Salvage Regulations of British Columbia. An application for summary judgment was brought by the Province of British Columbia for a declaration that the Regulations were valid. The motions Judge dismissed that application leaving no doubt that he considered the Regulations ultra vires (2002 FCT 184). The Province of British Columbia appealed to the Federal Court of Appeal but the Court of Appeal held that it was not appropriate to rule on the constitutional validity of a statute except upon an adequate record and that there was not an adequate record before the Court.
Appeals - Stay Pending Appeal
Saskatchewan Wheat Pool v. Armonikos Corp. Ltd., 2002 FCA 444
In this matter the Appellant applied for a stay of a judgement pending appeal. The judgement appealed from had ordered that the Federal Court proceedings be stayed in favour of London arbitration pursuant to an arbitration clause in a charter party. The court noted that the test to be applied was three-fold: (a) there must be a serious issue to be tried; (b) the applicant must show irreparable harm will result if a stay is not granted; and, (c) that the balance of convenience favours granting a stay. The court held that the first part of the test had been met as the appeal was not frivolous or vexatious. The court held the second part of the test had also been met in that the London arbitration had already and prematurely been commenced and the Appellant had lost its right to appoint an arbitrator. Moreover, if the Respondent obtained and collected an award, the Appellant would not be able to recover the payment, if successful on the appeal, as the Respondent had no Canadian assets. Finally, on the question of balance of convenience, the court held that the balance favoured granting the stay to avoid the costs and effort of the arbitration and because the Appellant was prepared to post security.
Appeals - Dismissal for Delay
Korea Heavy Industries & Const. Co. Ltd. v. Polar Steamship Line, 2002 FCA 173
This was an application to dismiss an appeal for delay in failing to file appeal books within the prescribed time. The facts were that the Plaintiffs had notified the Defendants of their intention to examine representatives of the Defendants for discovery but failed to do so and failed to move their case forward. As a consequence, a Prothonotary ordered that the Plaintiffs were precluded from examining the Defendants and set down guidelines for the continuation of the action. The Prothonotary’s order was affirmed on appeal to a Judge of the Court. The Plaintiffs further appealed to the Federal Court of Appeal but failed to file the Appeal Books in time. The Defendants then brought this motion to dismiss the appeal for delay. The Plaintiffs did not appear on the motion and the Court of Appeal granted the order dismissing the appeal with costs.
Stay of Proceedings - Jurisdiction Clause - Appeals Prothonotaries
Hyundai Merchant Marine Co. Ltd. v. Anraj Fish Products Industries Ltd. et al., 2000 CanLII 15628
This was an appeal from an order of a Motions Judge in which the Motions Judge overturned the order of a Prothonotary staying the action on the grounds of a jurisdiction clause in the bill of lading selecting Korea as the appropriate jurisdiction. The Federal Court of Appeal stated that the standard of review on an appeal of this sort, whether from a decision of a Motions Judge or a Prothonotary, is that the court of appeal must uphold the order unless it was arrived at on a wrong basis or was plainly wrong. The Court of Appeal noted that the court should not microscopically examine the reasons of the Motions Judge or Prothonotary in applying this test and held that the Motions Judge had erred in overturning the decision of the Prothonotary. The Court of Appeal further re-stated that prima facie an application to stay proceedings based on a jurisdiction or arbitration clause must succeed unless "strong reasons" are shown that it would not be reasonable or just to enforce the clause. The Court examined the factors set out in The Eleftheria,  1 Lloyd’s Rep.237, (i.e. the country in which the issues of fact are situated, the applicable law, the country with which the parties are most closely connected, whether the defendant genuinely desires trial in a foreign country and the prejudice to the plaintiff of litigating in a foreign country) and concluded that there were not strong reasons to decline to enforce the jurisdiction clause. In the result, the action was stayed.