Fraser Shipyard & Industrial Centre Ltd. v. The Atlantis Two

In Maritime Liens, Mortgages & Priorities on (Updated )

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, (1999 CanLii 8369) 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.