Governor and Company of the Bank of Scotland v. The "Nel"

In Maritime Liens, Mortgages & Priorities on (Updated )

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.