Maritime Liens, Mortgages & Priorities
Commentaries are intended as an introduction or overview of the topic. The commentaries for some topics are more detailed than others but none of them should be taken as a complete and full recitation of the law applicable to the topic.
Maritime Liens, Mortgages and Priorities
The substantive law applicable to maritime liens, ship's mortgages and priorities differs significantly from the law that is applied to land based property as does the procedural law.
The law applicable to mortgages on ships is dependant on whether the particular ship is a "registered" vessel under the Canada Shipping Act, 2001. If the ship is a registered vessel, sections 65 through 72 of the Canada Shipping Act, 2001 apply. These provisions require that mortgages and transfers of mortgages be in the from prescribed and be registered in the Canadian Register of Vessels (s.65(2) & .71). (Failure to register the mortgage can result in a loss of priority as in British Columbia v. PT Car and Yacht Rental Inc., 2003 BCSC 1073.) The Act further provides that priorities as between mortgages is by order of registration unless all mortgagees consent otherwise in writing (s.67). The first mortgagee of a registered vessel is empowered with the right to sell the vessel (s.69(1)). A subsequent mortgagee may not sell the vessel without an order of the Federal Court or the consent of the prior mortgagees (s.69(2)). Finally, the Act provides that a registered mortgage is not affected by the bankruptcy of the owner and the mortgagee has priority over creditors or the trustee in bankruptcy.
The form prescribed for a mortgage of a registered vessel is very brief containing little more than the names of the parties and a space to enter the nature of the consideration and whether there is a collateral agreement. Due to the fact that sections 65 through 72 of the Canada Shipping Act, 2001 provide relatively little regulation over ship's mortgages, it is customary, if not universal, for there to be a collateral agreement containing the full terms of the mortgage agreement. Such a collateral agreement will normally contain extensive terms including: charging provisions (what is being mortgaged); representations and warranties of the mortgagor; repayment terms; insurance requirements; and remedies on default (including a right of private sale and appointment of a receiver).
It is to be noted that the Personal Property Security Acts of British Columbia (s.4(b)), Nova Scotia (s.5(j)), Prince Edward Island (s.4(j)), Newfoundland (s.5(j)) and New Brunswick (s.4(j)) specifically exempt mortgages registered under the Canada Shipping Act from the application of those acts. The Quebec Civil Code (s. 2714) similarly exempts ships registered under the Canada Shipping Act. The laws of the other provinces are silent on the issue which can present difficulties as in Royal Bank v. 1132959 Ontario Ltd., 2008 CanLii 40231.
With respect to unregistered vessels, there are no federal statutory provisions similar to sections 65 through 72 of the Canada Shipping Act, 2001. Such vessels are subject to the provisions of the provincial Personal Property Security Acts which do not exempt unregistered vessels. However, there may be a constitutional issue as to whether the provincial Personal Property Security Acts can validly regulate mortgages on unregistered vessels. (This is particularly so when addressing priorities between mortgages and maritime liens where the provincial act and maritime common law can have different results.) Nevertheless, many practitioners register such mortgages under the provincial acts, which seems prudent.
Types of Liens
There are various liens recognized in maritime law. The categories are traditional maritime liens, possessory liens and statutory liens. All can be, and should be, enforced by way of an action in rem which means that proceedings should generally be commenced in the Federal Court as opposed the provincial superior courts (with the possible exception of the Supreme Court of British Columbia which is the only superior court with rules providing for in rem proceedings.)
Traditional Maritime Liens
A traditional maritime lien is a lien unique to maritime law. It is a privileged claim, upon maritime property that accrues from the moment the claim arises. It travels with the ship unconditionally, even into the hands of bona fide purchasers for value whether with or without notice (This is its defining characteristic.). It is enforced, as with other claims, by means of an action in rem. The traditional maritime liens are claims for seaman's wages, salvage, collision damage, Master's disbursements and bottomry (virtually non-existent today).
Traditional maritime liens have a priority ranking above mortgages.
The common law possessory lien is recognized under Canadian maritime law. Such a lien requires continued uninterrupted possession or it lost. Possessory liens usually arise in the context of ship repairs and claims for freight. Such a lien has priority over mortgages and also over any subsequently accruing maritime liens. However, maritime liens that attached prior to the possession of the possessory lien claimant have priority.
Provincial statutes that provide for registration of liens and the continuation of the lien after possession is given up, such as the Repairers Lien Act and Warehouseman's Lien Act of British Columbia, have been held to apply to liens on ships. (see for example, False Creek Harbour Authority v. The “Shoda”, 2002 FCT 275) However, there is a constitutional issue as to whether such statutes can validly apply.
Statutory liens are liens created by a validly enacted statute. They have the priority given to them by the statute that created them. There are many such liens including:
- claims by the Master and crew for wages which rank in priority to all but marshall's costs and salvage claims (Canada Shipping Act, 2001, s. 86(1), (2) and (4));
- claims by the Master for disbursements which rank in priority to all but wage claims, marshall's costs and salvage claims (Canada Shipping Act, 2001, s. 86(2.1));
- claims in respect of fines or debts due the Minister have a super priority ranking above Marshall's expenses (Canada Shipping Act, 2001, s.226(2));
- claims by a carrier for any amounts due which must be perfected by notice and gives a right of sale (Canada Shipping Act, 2001, s. 248-9));
- claims by a Port Authority for amounts owing which rank in priority to all but claims for wages (Canada Marine Act, s.122); and
- claims in respect of goods, materials or services supplied to the foreign vessel and claims arising out of a contract for the repair or equipping of a foreign vessel by a person carrying on business in Canada which are given the status and priority of a "maritime lien". (Marine Liability Act, s. 139).
Foreign Maritime Liens
Liens that arise outside of Canada and have a status equivalent to a "maritime lien" under the foreign law applicable to the claim are recognized by Canadian courts as traditional maritime liens and have the priority of a traditional maritime lien. In other words, the law that determines the nature of the lien is the foreign law but the law applied in the ranking of the lien is Canadian law. This is different from the law that is applied elsewhere, such as the UK, where both the nature of the lien and its priority are determined by the local law.
Ranking of Claims
The priority of claims against a ship are ranked generally as follows:
- Marshall' Costs and expenses, being the costs and expenses of the sale of the ship;
- Possessory liens that attach prior to a traditional maritime lien;
- Maritime liens (traditional maritime liens and Marine Liability Act, s. 139 claims);
- Possessory liens that attach subsequent to a maritime lien;
- Registered mortgages; and
- Unregistered mortgages;
Statutory liens will have the priority dictated in the statute that created the lien.
In rem creditors/claimants have no special priority. Their claims will rank equally after mortgages.
Variations to the Usual Ranking
The court has an inherent discretion to depart from the usual ranking of priorities in appropriate cases. In order to depart from the usual order of priorities the Court must be satisfied that the usual ranking would produce "an obvious injustice" or " a plainly unjust result". It has been noted in many authorities that there is a heavy onus on the person seeking to depart from the usual ranking and that very strong and reliable evidence is required. Not surprisingly, there are few cases in which the usual ranking is upset by equitable considerations. Most of the authorities acknowledge the discretion but then refuse to exercise it. One of the few cases in which the discretion was exercised is Fraser Shipyard & Industrial Centre Ltd. v. The Atlantis Two, 1999 CanLII 8369, 1999 CanLII 8498.
The procedure for determining priorities is always for one claimant to commence an in rem action and to arrest the ship. Sometimes, more than one action is commenced and more than one arrest warrant is served. After the arrest, an application is made to the court for the sale of the vessel. All parties who have filed Caveats against Release are served with the application. Usually the Order authorizing the sale of the vessel will require that an advertisement be placed in local papers as well as one or two international shipping publications. The advertisement invites tenders and notifies all creditors of the pending sale. The Order and advertisement usually require that any creditors with a claim against the ship must file their claims by affidavit in the court by a specified date. Sometimes the Order will provide for cross-examination, otherwise, special orders to cross-examine must be obtained. Once all claims are filed and cross-examinations are completed a hearing is held to determine the priorities. Evidence at the hearing is by affidavit and cross-examination transcript. At the hearing, each claimant presents their claims and the other claimants may, if they deem it expedient, oppose the claim.
For additional information, see the following papers:
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Meaning of “Vessel/Ship” – Mechanics Lien
TJ Inspection Services v. Halifax Shipyards, 2004 NSSC 181
In this matter the Plaintiff was retained by the Defendant to provide detailed inspection services in connection with the construction of a production platform which, when completed, would be towed on board a barge to the off-shore production site. When placed the platform would rest on four legs on the sea floor. The Plaintiff was not paid by the Defendant and registered a lien against the platform under the Nova Scotia Mechanics Lien Act. The Defendant brought this application for summary judgment dismissing the Plaintiff's claim. The motions Judge reviewed the relevant provision of the Mechanics Lien Act and noted that the validity of the Plaintiff's lien depended on the platform being either an “erection” or a “vessel”. The motions Judge noted that the thrust of the legislation “is against the land” and held that the platform could not be an “erection” within the meaning of the Act since it was to be placed on the sea bed. With respect to the definition of “vessel”, the motions Judge referred to the definitions in the present Canada Shipping Act, in the not yet proclaimed Canada Shipping Act 2001 and in the Federal Court Act. He held that under any of these definitions a structure must be capable of floating to be a vessel and that since the platform was not capable of floating it was not a vessel. In result, the Defendant's application was allowed and the lien was vacated.
Priorities – Sisterships
Royal Bank of Scotland PLC v. The “Golden Trinity” et al., 2004 FC 795
This was a hearing to determine the priorities to the proceeds of sale from three vessels owned by various one ship companies but mortgaged under fleet type mortgages. The vessels were all under the management of a single company, the principal of whom was a Mr. Peter Lygnos. The main claimants were the mortgagees of the vessels and Tramp Oil & Marine Limited, a bunkers supplier that had supplied bunkers to the various vessels and to alleged sisterships of the vessels. Tramp Oil sought to enhance its priority by challenging the various mortgages, by alleging a maritime lien and by arguing that the normal priorities should be altered in the circumstances of the case. With respect to Tramp Oil's attempts to challenge the mortgages the Court held that the mortgages were properly registered, valid and enforceable. The Court then considered Tramp Oil's claim to a maritime lien. The Court allowed the claim in respect of bunkers supplied at an American port through the agency of an American supplier on the basis that Tramp Oil was subrogated to the American supplier's maritime lien created under American law. It is noteworthy that in reaching this conclusion the Court applied American law even though Tramp Oil's terms and conditions specified English law. The Court did so on the basis of Imperial Oil v Petromar, (2001) 283 N.R. 182, and the fact that there was no real connection with England, the jurisdiction selected in Tramp Oil's standard trading conditions. The Court disallowed Tramp Oil's claim to a priority on the basis of a contractual maritime lien as provided for in its standard trading conditions. The Court held that a contractual maritime lien was not a true maritime lien which arises automatically without antecedent formalities. The contractual lien did not raise the claim above the priority given to other statutory in rem creditors. The Court next considered the sistership claims. The Court first noted that even if the sistership claims were valid such claims would rank as ordinary in rem claims and not have the status of maritime liens. The Court, however, rejected the sistership claims. In doing so it noted the difference between the French and English versions of section 43(8) of the Federal Court Act. The English version requires consideration of the registered owners whereas the French version requires consideration of the beneficial owners. The Court held that the French version was the better approach and stated that if Tramp Oil could prove that the vessels it bunkered were beneficially owned by the owners of the Defendant ships there would be a sistership claim. The Court further noted that in trying to determine the beneficial ownership it is permissible to look behind the registered ownership and that this was not an unauthorized piercing of the corporate veil. The factors considered by the Court included: that the vessels were under common management; that the Boards of Directors of the one ship companies were identical; that the Banks required a personal guarantee from Peter Lygnos; that the ships were insured under the same insurance policy; and that the ships were jointly and severally liable under the mortgages for each other's debts. These factors, however, were not sufficient to find a sistership relationship. The Court noted that there was no evidence as to who ultimately enjoyed or was entitled to the profit and benefit derived from the ships, something which leads to the concept of beneficial ownership. Accordingly, the Court found the sistership relationship had not been proved. The Court finally turned to the question of whether the priorities should be re-ordered on the basis of equitable considerations. The issue here was whether the mortgagees ought to have moved sooner to realize against the ships. The Court found that banks are entitled to grant indulgences to customers in bad times and refused to re-order the priorities on this basis. The Court noted, as it frequently does, that very special circumstances are required to vary the usual ranking and that there is a very heavy onus on the party seeking to do so.
Mortages – Duties of Mortgagee in Possession – Improvident Sale
Middleton et al. v. Farquharson et al., 2004 BCSC 32
In this matter the Defendant sold the vessel “Ocean Tribune” and her C licence to the Plaintiff for $135,000.00 payable $100,000 in cash and the balance by way of vendor financing for one year at 10%. The vendor financing arrangement was documented with a promissory note, a collateral marine mortgage and a registered marine mortgage. The Plaintiff failed to pay the amount owing on the due date and the Defendant seized the vessel. The parties then agreed that the Plaintiff would pay the Defendant $25,000 and would execute a second promissory note, collateral marine mortgage and registered marine mortgage for $35,000. This was done. The Plaintiff paid the $25,000 but failed to pay the amount due under the second note. The Defendant again seized the vessel. On the advice of the bailiff, the vessel was removed from the water which caused the wood planking to dry out and ultimately necessitated considerable repair work. The vessel was advertised for sale by the Defendant for 21 days. The only bid received was one by the Defendant himself for $75,000. His evidence, which was accepted by the trial Judge, was that his bid was a protective bid made because he was concerned the bids from others would be too low to recoup his losses. The Plaintiff subsequently brought this action. The first issue was whether the second note and second marine mortgage were invalid. The Plaintiff alleged that the $25,000 payment was made on account of the first note and first mortgage and that the second note and mortgage did therefore not properly reflect the amount owing. The Defendant replied that the $25,000 payment was intended to satisfy outstanding interest on the first note and the costs of effecting the seizure and to retire other debts owed by the Plaintiff to the Defendant. The trial judge preferred the Defendant's evidence to that of the Plaintiff and held that the second note and mortgage were valid. The next issue was whether the Defendant as mortgagee in possession breached his duty to take reasonable care of the goods seized. This issue concerned the taking of the vessel out of the water. Again, the trial Judge sided with the Defendant finding that the Defendant acted reasonably in taking the vessel out of the water. The next issue was whether the sale of the vessel to a numbered company owned by the Defendant was improper. The Plaintiff argued that the value of the vessel and C licence were much more than $75,000. The trial judge noted that there were two lines of authority dealing with the duty owed by a mortgagee when realizing on security. The subjective test requires the mortgagee to exercise good faith and the avoidance of wilful default in selling the asset. The objective test involves an obligation to act reasonably to obtain the market value. Although the trial judge considered the subjective test was the test that was binding on him he held that under either test the Defendant had not acted improperly.
Priorities – Severance Pay – Maritime Liens
C.I.B.C. v. “Le Chene No. 1” et al., 2003 FC 873
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.
Priorities - Fines - Forfeiture
Canada v. Neves , 2002 FCA 502
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 - 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.
Finansbanken ASA v. The “GTS Katie”, 2002 FCT 73 2002 FCT 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 (2002 FCT 339).
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.
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.
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.
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.
Bankruptcies - Stay of Proceedings
Holt Cargo Systems Inc. v. ABC Container Line N.V., 2001 SCC 90
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.
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.
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 - 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.
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.
Late Filing of Supplementary Affidavits
Royal Bank of Scotland plc v. The Kimisis, 2000 CanLII 15751 2001 FCT 307
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. An appeal was dismissed at 2001 FCT 307.
Priorities - Duties of Mortgagees - Merger - American Liens - Brussels Conv
Governor and Company of the Bank of Scotland v. The "Nel",  1 FC 408
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.