Kent Trade and Finance Inc. v. JPMorgan Chase Bank

In Maritime Liens, Mortgages & Priorities on (Updated )

This was a hearing to determine the priorities of various claimants to proceeds from the sale of the Lanner. The competing claimants were the mortgagee and 15 suppliers of necessaries. The suppliers, who would normally rank below the mortgagee, challenged the validity of the mortgage. Some of them argued they had maritime liens under American law and, in the alternative, alleged special circumstances that should alter the normal order of priorities. At the initial hearing (2005 FC 864) the Prothonotary rejected all of these arguments. The challenge to the validity of the mortgage was based primarily on the absence of an expert’s affidavit attesting to the validity of the mortgage under the applicable foreign law. The Prothonotary held that such an affidavit was not required. The argument by some of the suppliers that they had maritime liens through the application of American law was based upon choice of law clauses in the various supply contracts. However, the Prothonotary extensively reviewed the authorities and held that such choice of law clauses were not determinative. The applicable law was the law of the jurisdiction with the closest and most substantial connection to a particular transaction. The Prothonotary reviewed the factual circumstances of each claim and concluded that none of them were subject to American law. Accordingly, none of the suppliers had American maritime liens that would rank ahead of the mortgagee. In the course of his reasons the Prothonotary examined the nature of a maritime lien and held that such a lien could not be created by contract either through a lien clause or a choice of law clause. Finally, the Prothonotary considered whether delay by the mortgagee in enforcing its mortgage was a special circumstance of sufficient weight to alter the usual order of priorities. The Prothonotary found that the mortgagee had acted in a commercially reasonable manner and refused to alter the priorities.

Five of the suppliers appealed the Prothonotary’s order to a judge of the Federal Court (2006 FC 409 ). The appeal Judge agreed with the Prothonotary that the absence of an expert’s affidavit attesting to the validity of a foreign mortgage was not required and further said that in the absence of such an affidavit Canadian law would apply. The appeal Judge also agreed with the Prothonotary that there should be no equitable adjustment of the priorities based on the alleged delay by the mortgagee. However, the appeal Judge disagreed, in part, with the Prothonotary on the issue of whether the suppliers had American maritime liens. Specifically, although the appeal Judge agreed that the Prothonotary had applied the proper test in determining the applicable law, the appeal Judge disagreed with the application of that test in respect of two claimants. The appeal Judge held that American law applied to the one corporate claimant that was an American company and also that American law applied to a foreign claimant who had supplied goods in the United States. A final issue of note dealt with on appeal concerned an order for costs made by the Prothonotary against the suppliers. This order was overturned on the grounds that the suppliers were not made parties to the proceedings nor had their caveats against release been transferred to this action. The appeal Judge noted that this should be done in future proceedings so claimants cannot avoid a cost order.

The three unsuccessful necessaries suppliers commenced a further appeal to the Federal Court of Appeal (2008 FCA 399). All three of these suppliers supplied fuel or other necessaries under contracts that provided for the application of American law yet none of the suppliers were American and the supplies were not made in the United States. The Court of Appeal disagreed with the courts below and held that a contractual choice of law clause should normally govern maritime transactions including the rights which arise from those transactions. In reaching this conclusion the Court of Appeal acknowledged that in certain circumstances there may be such a strong connection to a jurisdiction that the choice of law clause should not apply, such as in Imperial Oil Ltd. v. Petromar Inc. (C.A.), 2001 FCA 391 (CanLII). However, the contractual choice of law should normally govern. The Court of Appeal next proceeded to consider whether American law in fact provided a priority lien in these circumstances. The Court noted that its role was limited to reviewing the affidavits and exhibits filed with the Court and that it should not conduct its own research into the foreign law. After reviewing the evidence, the Court concluded that American law would recognize a maritime lien in circumstances where a foreign supplier supplied goods in a foreign port under a supply contract governed by American law. Accordingly the appeals were allowed and the suppliers were entitled to priority. (Note: The Court of Appeal’s discussion as to the role of expert witnesses on foreign law is also interesting and useful reading.)

An application for leave to appeal the decision of the Federal Court of Appeal to the Supreme Court of Canada was dismissed at 2009 CanLii 28592.