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:
- Priorities and Bankruptcy in Admiralty – 2002
- Update on Canadian Law of Priorities – 2000
- Summary of Canadian Law of Priorities -1999