T-531-03
2006 FC 409
JP Morgan Chase Bank and J.P. Morgan Europe Limited (Plaintiffs)
v.
Mystras Maritime Corporation, the Owners and All Others Interested in the Ship “Lanner” and The Ship “Lanner” (Defendants)
Indexed as: JP Morgan Chase Bank v. Lanner (The) (F.C.)
Federal Court, Gauthier J.—Montréal, November 1, 2005; Ottawa, March 29, 2006.
Maritime Law — Liens and Mortgages — Appeal from Prothonotary’s decision that, with respect to distribution of proceeds of judicial sale of Liberian ship Lanner, claims of five creditors (claimants) who had supplied necessaries not outranking plaintiff’s mortgage on ship — Plaintiffs’ foreign loan agreement, registered mortgage valid under Canadian, Liberian laws — Foreign maritime lien may be recognized, enforced by Federal Court once proven — Under Canadian law, suppliers of necessaries only having statutory right in rem (statutory lien), not maritime lien — Maritime lien privilege against property (ship) which attaches, gains priority without any court action, deed or registration — Creating bundle of rights, passes with ship when ship changing owner — Under American law, American supplier of necessaries benefiting from maritime lien even if services provided in foreign port — Such lien would outrank plaintiffs’ mortgage under Canadian law — All but two claimants not establishing having maritime lien under American law — As to issue of creditors’ priorities, not a case where judicial discretion should be exercised in favour of claimants.
Conflict of Laws — Appeal from Prothonotary’s decision that, with respect to distribution of proceeds of judicial sale of Liberian ship Lanner, claims of five creditors (claimants) who had supplied necessaries not outranking plaintiff’s mortgage on ship — Claimants contending contracted with owner of ship Lanner, contracts specifying American law governing transactions — Evidence of foreign law to prove validity of foreign documents (plaintiffs’ mortgage) may be required depending on circumstances, evidence put forward — If evidence on foreign law absent, assumed to be same as Canadian law (lex fori) — Canadian rules of conflict of laws governing to determine proper law to apply to determine existence of maritime lien — While Prothonotary’s approach (rule that law having closest, most substantial connection to transaction, i.e. supply of necessaries, applicable) preferred, Richardson International, Ltd. v. Mys Chikhacheve (The) binding — Rule of conflict of law applicable to determine proper law of maritime lien that used to determine proper law of contract — Except for two suppliers, other claimants’ evidence insufficient to support contention American law governing transactions, having American maritime lien.
This was an appeal from a Prothonotary’s decision that, with respect to the distribution of the proceeds of the judicial sale of the Liberian ship Lanner, the claims of five creditors (claimants) who had supplied necessaries did not outrank the plaintiff’s mortgage on the ship. Most of the necessaries were supplied outside of Canada and pursuant to contracts allegedly governed by the law of the United States. Under that law, necessaries men enjoy in specific circumstances a maritime lien, which under Canadian law, outranks a mortgage. The claimants allegedly contracted with the owner of the Lanner through its managing agent and their contracts purportedly specified that the law applicable to these transactions was American law. The plaintiffs had lent a principal amount of US $27,500,000 to the owners of the Lanner and its sister ships. As part security and under the terms of the loan agreement, a general assignment dated August 2, 2000, in favour of the plaintiffs and a first preferred mortgage on the Lanner was executed. The mortgage was apparently registered against the ship’s title on August 3, 2000. The borrowers initially defaulted on the loan in February 2002 and failed to make subsequent payments. After demanding immediate payment of all sums owed in early March 2003, the plaintiffs took possession of the Lanner which was sold for US $6,900,000 on June 9, 2003. According to the plaintiffs, on December 30, 2004, the amount owed after deducting money obtained from the execution of other securities was US $10,772,659.37. The issues were whether the plaintiffs’ right to claim was valid, what law applied to determine the nature of the claimants’ substantive rights and whether the Court should depart from the normal order of priorities because the plaintiffs took an inordinate amount of time to arrest the vessel and execute their security.
Held, the appeal should be allowed in part.
There was no evidence that the loan agreement or registered mortgage were deficient in any way under the laws of Liberia or Canada given that, in the absence of evidence regarding Liberian law, it is presumed to be identical to Canadian law. Evidence of foreign law may be required depending on the circumstances and the evidence put forward by the party contesting the validity of the documents filed by a mortgagee in support of its claim. The relevance of foreign law is a question of fact that needs to be established. If it is not pleaded and proved or insufficiently proved, then the foreign law is assumed to be the same as the lex fori. Under Canadian law, the loan agreement and the registered mortgage were valid. The plaintiffs established the basis of their claim.
A maritime lien acquired under a foreign law will be recognized and may be enforced by the Federal Court. But once the nature of the right has been assessed under its proper law, the priority to be given to that right will be assessed under Canadian law (lex fori). In ascertaining what proper law should be applied to determine whether a maritime lien exists, the Court must use Canadian rules of conflict of laws. However, before doing so, the Court must ascertain that there are significant differences between Canadian and foreign law creating a conflict. There was no evidence in this case that any law other than American law might apply. Under Canadian law, suppliers of necessaries do not have the benefit of a maritime lien but only have a statutory right in rem, sometimes referred to as a “statutory lien”, which ranks after a mortgage. A maritime lien constitutes a bundle of rights and is a privilege against property (a ship) which attaches and gains priority without any court action, deed or registration. It passes with the ship when the ship is sold to another owner. Under American law, an American supplier of necessaries will benefit from a maritime lien even if the services were provided to the ship in a foreign port. Under the Canadian law of priority and ranking, such a lien would rank before the plaintiffs’ mortgage. A conflict of laws did in fact arise with respect to such claims. There was a dispute as to whether American law grants a maritime lien for necessaries directly provided by a foreign supplier to a foreign ship in a foreign port.
The applicable Canadian rule of conflict of laws was that of the closest and most substantial connection with the supply of necessaries. The Prothonotary chose this approach because there was no direct contractual relationship between the plaintiffs and the claimants and he felt bound to apply the Federal Court of Appeal case of Imperial Oil Ltd. v. Petromar Inc. in which the law that had the closest connection to the transaction was applied. But the claimants argued that Stone J.A. in Imperial Oil meant to apply the rule of conflict of laws applicable to contracts. In Richardson International, Ltd. v. Myschikhacheva (The) the Federal Court of Appeal found that Imperial Oil confirmed the applicability of the usual rules for determining the proper law of a contract. These decisions appear contradictory because Stone J.A. stated that the choice of law in the supply contract with the demise charterer was but one factor among many to consider and that the Court should still examine all the factors to determine the law that has the closest and most substantial connection to the transaction. By simply applying the choice of law made by the two parties to the contract, the parties would be permitted to do indirectly what they cannot do directly, i.e. create a maritime lien. Courts respect and enforce the choice of a law provisions in a contract because the parties must not be allowed to renege on their bargain. It is difficult to understand how this justification applies when one deals with a substantive right granted against a fictive person, i.e. a ship not party to the contract. Although the approach taken by the Prothonotary was preferred, the Federal Court of Appeal’s decision in Richardson International, Ltd. v. Mys Chikhacheva (The) and its general view that the rule of conflict applicable to determine the proper law of a maritime lien is that used to determine the proper law of the contract, was binding. The evidence the claimants filed to support their contention that they had a contract directly with the shipowner through its managing agent and that the shipowner was therefore personally liable under the contract was insufficient. But, this point was only material to the determination of the applicable rule of conflict of law and pointed toward the application of the approach taken in Imperial Oil; it did not affect the substantive right created under American law. There was no reason to believe that in these particular cases the necessaries were not ordered by a person presumed to have authority to procure such necessaries and thus to create a right against the vessel.
The American and Greek suppliers had a lien under American law which was the proper law to be applied, either as the express choice of law or as the law having the closest connection with the transaction. Therefore, those two specific claimants were entitled to be paid in priority to the plaintiffs’ mortgage. As to the other claimants, even if the Court were to apply American law, they failed to establish by preponderance of evidence that their claims gave rise to a maritime lien under such law for the specific services rendered to the Lanner outside of the United States. In so concluding, more weight was given to the expert evidence that, American law does not provide for a lien with respect to necessaries provided by a foreign supplier to a foreign ship in a foreign port.
The Prothonotary’s refusal to reorder the creditors’ priorities was a question vital to the final issue of the matter. The Court reviewed the issue de novo and came to the same conclusion as the Prothonotary that this was not a case where judicial discretion based on equity should be exercised in favour of the claimants. There was no evidence that, because of the services they rendered, the plaintiffs were able to receive additional payments from the owner of the Lanner. It appears that the plaintiffs did not receive any money from the borrowers until they executed their securities. The claimants simply failed to meet their burden of establishing very special circumstances, which warranted departure from the law-established order of priorities to prevent an obvious injustice.
statutes and regulations judicially
considered
Carriage of Goods by Sea Act, 46 U.S.C. App. § 1300 (2000).
Federal Courts Act, R.S.C., 1985, c. F-7, ss. 1 (as am. by S.C. 2002, c. 8, s. 14), 22(2)(m) (as am. idem, s. 31), 43(3) (as am. idem, s. 40).
Harter Act, 46 U.S.C. App. § 181 (2000).
cases judicially considered
followed:
Richardson International, Ltd. v. Mys Chikhacheva (The), [2001] 3 F.C. 41; (2001), 200 F.T.R. 76; 2001 FCT 13; affd [2002] 4 F.C. 80; (2002), 288 N.R. 96; 2002 FCA 97.
applied:
Merck & Co., Inc. v. Apotex Inc., [2004] 2 F.C.R. 459; (2003), 30 C.P.R. (4th) 40; 315 N.R. 175; 2003 FCA 488; Royal Bank of Scotland plc v. Golden Trinity (The) (2000), 254 F.T.R. 1; 2004 FC 795; Todd Shipyards Corp. v. Altema Compania Maritima S.A., [1974] S.C.R. 1248; (1972), 32 D.L.R. (3d) 571; Imperial Oil Ltd. v. Petromar Inc., [2002] 3 F.C. 190; (2001), 209 D.L.R. (4th) 158; 283 N.R. 182; 2001 FCA 391.
distinguished:
Liverpool and London S.S. Prot. & Indem. Ass’n v. Queen of Leman MV, 296 F.3d 350 (5th Cir. 2002); Ryan-Walsh v. M/V Ocean Trader, 930 F. Supp. 210 (D. Md. 1996).
considered:
Governor and Company of the Bank of Scotland v. Nel (The), [2001] 1 F.C. 408; (2000), 189 F.T.R. 230 (T.D.); Backman v. Canada, [2000] 1 F.C. 555; (1999), 178 D.L.R. (4th) 126; 46 B.L.R. (2d) 225; [1999] 4 C.T.C. 177; 99 DTC 5602; 246 N.R. 309 (C.A.); affd [2001] 1 S.C.R. 367; (2001), 196 D.L.R. (4th) 193; 11 B.L.R. (3d) 165; [2001] 2 C.T.C. 11; 2001 DTC 5149; 277 N.R. 246; Lauritzen v. Larsen, 345 U.S. 571 (1953); Romero v. International Terminal Operating Co., 358 U.S. 354 (1959); Fraser Shipyard and Industrial Centre Ltd v. Expedient Maritime Co. (1999), 170 F.T.R. 1 (F.C.T.D.); Rainbow Line, Inc. v. M/V Tequila, 480 F.2d 1024 (2nd Cir. 1973); Gulf Trading & Transp. Co. v. Vessel Hoegh Shield, 658 F.2d 363 (5th Cir. 1981); Trinidad Foundry & Fabricating, Ltd. v. M/V K.A.S. Camilla, 966 F.2d 613 (11th Cir. 1992); Marine Oil Trading Ltd. v. Motor Tanker Paros, 287 F. Supp. 2d 638 (E.D.Va. 2003); Kirgan Holding S.A. v. Panamax Leader (The) (2002), 225 F.T.R. 273; 2002 FCT 1235.
referred to:
Ontario Bus Industries v. Federal Calumet (The) (1992), 150 N.R. 149 (F.C.A.); Rainbow Line, Inc. v. M/V Tequila, 341 F. Supp. 459 (S.D.N.Y. 1972); Assuranceforeningen Skuld Den Danske Afdeling v. Allfirst Bank, 2004 U.S. App. LEXIS 8131 (2nd Cir. 2004); Scott Steel Ltd. v. Alarissa (The) (1997), 125 F.T.R. 284 (F.C.T.D.).
authors cited
Castel, J.-G. Canadian Conflict of Laws, 4th ed. Toronto: Butterworths, 1997.
Tetley, William. Maritime Liens and Claims, 2nd ed. Montréal: International Shipping Publications, 1998.
APPEAL from a Prothonotary’s decision ((2005), 275 F.T.R. 159; 2005 FC 864) that, with respect to the distribution of the proceeds of the judicial sale of the Liberian ship Lanner, the claims of creditors who had supplied necessaries did not outrank the plaintiff’s mortgage on the ship. Appeal allowed in part.
appearances:
Anil K. Mohan and James E. Gould, Q.C. for plaintiffs.
No one appearing for defendants.
Gassim Bangoura and Jean-Marie Fontaine for claimants.
solicitors of record:
Metcalf & Company, Halifax, for plaintiffs.
Borden Ladner Gervais LLP, Montréal, for claimants.
The following are the reasons for order and order rendered in English by
[1]Gauthier J.: On June 9, 2003, the Liberian ship Lanner was sold for US $6,900,000 by this Court in an admiralty action in rem at the behest of her mortgage holder, JP Morgan Chase.
[2]In accordance with sound practice, the sale was advertised and other creditors were given the opportunity of asserting their claims. As often happens, the amount of the claims exceeds the proceeds of the sale.
[3]It fell upon Prothonotary Morneau to rule on the validity of the claims and to determine which, if any, enjoyed priority. This is an appeal from his order dated June 17, 2005, by five creditors who supplied necessaries to the Lanner or to other ships alleged to be sister ships. They submit that their claims outrank the mortgage. Prothonotary Morneau held the opposite [sub nom. JP Morgan Chase v. Mystras Maritime Corp. (2005), 275 F.T.R. 159 (F.C.)].
[4]If all the claims were to be adjudged in accordance with domestic Canadian maritime law, Prothonotary Morneau’s decision would be unassailable. Although necessaries men are given a statutory right in rem and are entitled to arrest the ship if she has not been already sold, their claims carry no priority. They are outranked by a mortgage.
[5]However, most of the necessaries were supplied outside of Canada and pursuant to contracts allegedly governed by the law of the United States. Under that law, necessaries men enjoy in certain specific circumstances a maritime lien, which under Canadian law outranks a mortgage.
[6]Prothonotary Morneau also awarded costs to the mortgage holder. The five creditors who appealed his decision with respect to the distribution of the proceeds of the sale also appealed this order.
[7]There is no doubt, and the parties agree, that the distribution of the proceeds of the sale of the ship Lanner is an issue that is vital to the final outcome of this matter. Applying the standard of review set out in Merck & Co., Inc. v. Apotex Inc., [2004] 2 F.C.R. 459 (F.C.A.), at paragraph 19, where the Prothonotary exercised a discretionary power, the Court will exercise its discretion de novo. All other issues being issues of law, the standard will be correctness.
[8]As to costs, it is obvious that if my decision on the merits differs from that of the Prothonotary, this issue will also have to be considered de novo. With respect to the question of law raised by the creditors, the Court will intervene if the Prothonotary’s decision is incorrect.
BACKGROUND
[9]The five creditors who appealed the orders of the Prothonotary are:
(a) Ashland Specialty Chemical Company, an American company, which claims a maritime lien for the supply of necessaries to the Lanner at Cape Town, South Africa. In support of its claim, it filed the affidavit of Lawrence Steinhauser, manager of business analysis;
(b) Kent Trade & Finance Inc., a company from the British Virgin Islands, which supplied fuel and oil to the Lanner at Halifax, Canada and Cartagena, Spain. Kent Trade also claims a maritime lien for fuel and oil supplied to the ship Hobby, allegedly a sister ship of the Lanner, at St. Eustatius. In support of its claim, Kent Trade filed the affidavit of George Saroglou, managing director of Marine Fuels Ltd. dated July 25, 2003;
(c) Praxis Energy Agents S.A., a Greek company, which supplied bunker fuel to the Lanner at the port of Pointe à Pierre, Trinidad. It also appears from the invoice attached to the affidavit of Dimitris Chasabalis, filed in support of this claim and dated August 1, 2003, that Praxis claims a certain amount for the supply of necessaries to the Lanner at Charleston in the United States;1
(d) CP3500 International Ltd., a Cypriot company, which supplied various combustion catalysts to the Lanner at Singapore. The affidavit of Georgina Tsikkou, its account manager, dated July 29, 2003, was filed in support of its claim;
(e) Marine Fuels Ltd., another Greek company, which supplied fuel to the ship Peregrine, another alleged sister ship of the Lanner, at Houston. In support of its claim, Marine Fuels Ltd. filed the affidavit of George Saroglou, its managing director, also dated July 25, 2003;
[10]I shall hereinafter refer to the above creditors as the claimants.
[11]As mentioned, these claimants say that they contracted with the owner of the Lanner, through its managing agent Arrow Ltd., and that their contracts specified that the law applicable to these transactions was American law.
[12]The plaintiffs filed the affidavit of Parisa Suvarnatemee, an officer of JP Morgan Chase Bank, stating that the plaintiffs had lent a principal amount of US $27,500,000 to Mystras Maritime, the then-owner of the Lanner, as well as to Twin Seas Shipping, the then-owner of the Peregrine, and to Alchemy Shipping, the then-owner of the Hobby.
[13]As part security and under the terms of the loan agreement, Mystras Maritime executed in favour of the plaintiffs a general assignment dated August 2, 2000, and a first preferred mortgage on the Lanner.
[14]In February 2002, the borrowers failed to deposit the revenues derived from the operation of their ships with the bank. This was the initial event of default.
[15]At the end of June 2002 and at the end of December 2002, the borrowers failed to make their payments.
[16]After demanding immediate payment of all sums owed in early March 2003, the plaintiffs took possession of and later sold the Lanner.
[17]According to the affidavit of Maxine Graves, a second affidavit filed by the plaintiffs, as of December 30, 2004, the amount owed to the plaintiffs after deducting money obtained from the execution of other securities was US $10,772,659.37.
[18]The claimants have also relied on an expert affidavit from Andrew S. de Klerk, which deals with the American law applicable to their particular claims. The plaintiffs filed a reply affidavit from William Juska on the same subject.
[19]Originally, 15 creditors filed claims against the proceeds of sale of the Lanner. Only the claimants appealed the two decisions of the Prothonotary.
THE ISSUES
The claimants raise the following issues:
(i) have the plaintiffs established their right to claim against the Lanner?;
(ii) what law should be applied to determine the nature of their substantive rights?;
(iii) what is the nature of their rights under such law?;
(iv) should the Court depart from the normal order of priorities because the plaintiffs took an inordinate amount of time to arrest the vessel and execute their security?;
ANALYSIS
(A) Validity of plaintiffs’ claims
[20]As mentioned, the plaintiffs claim that they hold a first preferred mortgage on the ship Lanner which was registered on August 3, 2000 against the ship’s title, maintained by the Bureau of Maritime Affairs of the Republic of Liberia. This fact is attested to at paragraph 13 of the affidavit of Mrs. Suvarnatemee.
[21]The claimants submit that the Prothonotary erred in accepting the validity of the plaintiffs’ foreign mortgage without proof of its validity being put in evidence through experts’ affidavits on Liberian law.
[22]They rely on a passage of the decision of Prothonotary John A. Hargrave in Royal Bank of Scotland plc v. Golden Trinity (The) (2004), 254 F.T.R. 1 (F.C.) where at paragraph 23, the Prothonotary refers to the expert evidence filed by the mortgagee evidencing that its mortgage was properly authorized, executed and delivered and constituted a legal, valid and binding obligation.
[23]The claimants have not cross‑examined Mrs. Suvarnatemee on her affidavit and have produced no evidence that would put into question the validity of the loan agreement or of the registered mortgage. There is no evidence whatsoever that these documents are deficient in any way under the laws of Liberia or under the laws of Canada given that in the absence of evidence with respect to Liberian law, same is presumed to be identical to Canadian law.
[24]It is to be noted that the claimants did not themselves raise this issue at the hearing before the Prothonotary. This argument was originally made by other claimants who have not appealed from the Prothonotary’s decision.
[25]The Court agrees with the finding of the Prothonotary and particularly with his comment that it is unlikely that Prothonotary Hargrave intended to create a requirement with precedential value or to establish that the Court could not accept a mortgage registered outside of Canada as valid and effective without the production of expert evidence on the applicable foreign law.
[26]In a previous decision in Governor and Company of the Bank of Scotland v. Nel (The), [2001] 1 F.C. 408 (T.D.), Prothonotary Hargrave certainly did not allude to such a requirement.
[27]Obviously, that is not to say that evidence of foreign law is never required. It all depends on the circumstances and the evidence put forward by the party contesting the validity of the documents filed by a mortgagee in support of its claim.
[28]The Court subscribes to Prothonotary Hargrave’s comments in Golden Trinity, above, at paragraph 20 where he says:
In the determination of priorities by way of a motion a plaintiff seeking to establish a priority must lay out its case in advance. The plaintiff cannot necessarily forecast all of the approaches that the various other in rem claimants may take, or the attacks on the security or the position of the plaintiff that they might make.[2] In the result, from time to time, there may be a deficiency in the record before the court. It would be unfortunate if in future, priorities will come to be established with the full panoply of trial, rather than in a summary and inexpensive manner on a motion. . . .
[29]That being said, the plaintiffs and the claimants do have to establish the essential elements of their claims.
[30]The Court carefully reviewed the affidavit of Mrs. Suvarnatemee and her exhibits. She included a true copy of the loan agreement which was executed by Mystras Maritime and is subject to English law. It is not disputed that at the relevant times Mystras was the registered owner of the Lanner. This document clearly provides for a mortgage.
[31]Pursuant to paragraph 3 of Schedule 2 of the loan agreement entitled “Conditions Precedent Documents”, Mystras had to produce evidence that the mortgage in respect of the Lanner had been duly recorded in New York in accordance with Liberian law and constituted a first priority security over these vessels.
[32]Mystras also had to provide a legal opinion confirming same (paragraph 6 of the said schedule). These preconditions were to be met prior to the disbursement of the loan or they had to be provided at the latest 14 days from the date of the loan agreement. There is no evidence that there was a default in that respect and, as a matter of fact, it can logically be inferred that the documents produced as exhibit PS3 of the affidavit of Mrs. Suvarnatemee were transmitted to the plaintiffs in performance of such an obligation.
[33]Moreover, as mentioned, where foreign law is relevant, it is a question of fact that needs to be established. As indicated in Golden Trinity, above, and in Backman v. Canada, [2000] 1 F.C. 555 (C.A.), at paragraphs 38‑41; affd [2001] 1 S.C.R. 367, “[i]f foreign law is not pleaded and proved or insufficiently proved, it is assumed to be the same as the lex fori”.3
[34]A review of the documentation produced satisfies the Court that under Canadian law, the loan agreement and the registered mortgage are valid. Like the Prothonotary, I am satisfied that the plaintiffs have established the basis of their claim.
(B) Applicable law
[35]Since the decision of the Supreme Court of Canada in Todd Shipyards Corp. v. Altema Compania Maritima S.A., [1974] S.C.R. 1248, it is clear that a maritime lien acquired under a foreign law will be recognized and may be enforced by the Federal Court. In coming to that conclusion, the Supreme Court of Canada recognized the substantive nature of maritime liens. But once the nature of the right has been assessed under its proper law, the priority to be given to that right will be assessed under Canadian law (lex fori).
[36]In ascertaining what proper law should be applied to determine whether a maritime lien exists, the Court must use Canadian rules of conflict of laws.
[37]Naturally, before doing this, the Court must ascertain that there are significant differences between Canadian and American law creating a conflict. There is no evidence that any other law might apply in this case.
[38]It is not disputed that the claimants are ship suppliers and that the supplies they provided are necessaries. As mentioned, under Canadian law, such suppliers of necessaries do not have the benefit of a maritime lien. They only have a statutory right in rem, sometimes referred to as a “statutory lien” (paragraph 25 of Imperial Oil Ltd. v. Petromar Inc., [2002] 3 F.C. 190 (C.A.) and paragraph 22(2)(m) [as am. by S.C. 2002, c. 8, s. 31] and subsection 43(3) [as am. idem, s. 40] of the Federal Courts Act [R.S.C., 1985, c. F-7, s. 1 (as am. idem, s. 14)]), which ranks after a mortgage.
[39]It is common ground that under American law, an American supplier of necessaries will benefit from a maritime lien even if the services were provided to the Lanner in a foreign port. The same will also apply if a foreign supplier uses an American agent to provide those services on his behalf. As was said, under the Canadian law of priority and ranking, such a lien would rank before the plaintiffs’ mortgage.4
[40]The Court is satisfied that a conflict of laws arises with respect to these claims.
[41]There is a dispute between the parties as to whether American law actually provides for a maritime lien for necessaries supplied directly by a foreign supplier to a foreign ship in a foreign port. The Court is not satisfied that the claimants have met their burden of establishing on a balance of probability that American law does grant a maritime lien for such services, even if it was the proper law to be applied. This issue will be discussed later.
[42]Finally, at the hearing, Kent Trade and Marine Fuels advised the Court that they now recognize that under American law, they would have no maritime lien on the Lanner for necessaries provided to a sister ship of that vessel.5
[43]There is therefore no issue of conflict of laws arising with respect to those specific claims.
[44]That said, the claimants and the plaintiffs disagree as to what Canadian rule of conflict of laws the Court should apply to determine the law applicable to these claims.
[45]The Prothonotary found that he should adopt the approach taken by the Federal Court of Appeal in Imperial Oil, above, where Justice Arthur J. Stone applied the law that had the closest and most substantial connection with the supply of necessaries.
[46]The Prothonotary chose this approach because there was no direct contractual relationship between the plaintiffs and the claimants and he felt bound to apply Imperial Oil, above. The Prothonotary did not accept the claimants’ argument that Imperial Oil, above, should be distinguished on the ground that, in that case, the contracts were twice removed from the plaintiff shipowner6 whereas, here, the contract was made directly between the claimants and the then-owner of the Lanner.
[47]In coming to this conclusion as to the appropriate rule of conflict, the Prothonotary found that in Imperial Oil, above, the Federal Court of Appeal was looking at a contractual situation and had decided to apply the rule of the closest and most substantial connection, which had also been adopted by the U.S. Supreme Court in Lauritzen v. Larsen, 345 U.S. 571 (1953) and had been described as a suitable guide in the application of maritime law generally by the U.S. Supreme Court in Romero v. International Terminal Operating Co., 358 U.S. 354 (1959).
[48]Applying this approach, he found that no connecting factor other than Ashland’s residence in the U.S. linked the procurements by the claimants to the United States. He added at paragraph 61 that even considering Ashland’s residence and the choice of law clauses in each of the contracts referred to by the claimants, the United States cannot be taken to be the jurisdiction with the closest and most substantial connection. In Imperial Oil, above, Justice Stone had indicated that the choice of law in the supply contract was not necessarily the most determining factor.
[49]The Prothonotary concluded that the claimants were not maritime lien holders against the balance of the proceeds of the judicial sale of the Lanner.
[50]The difficulty here lies in the fact that there are two ways of looking at this problem. Are we looking strictly at a matter of contract or is it a question of general maritime law where the “transaction” is the set of facts which, according to the proper law, will give rise to a maritime lien?
[51]The approach taken by the Prothonotary appears to be the right one when one considers the nature of maritime liens.
[52]As mentioned by Justice Stone in Imperial Oil, above, at paragraph 23, “a maritime lien constitutes a bundle of rights rather than a single right”.
[53]In Maritime Liens and Claims, 2nd ed., Montréal, International Shipping Publication, 1998, at pages 59 and 60, Professor W. Tetley defines maritime liens as follows:
A traditional maritime lien is a secured right peculiar to maritime law (the lex maritima). It is a privilege against property (a ship) which attaches and gains priority without any Court action or any deed or any registration. It passes with the ship when the ship is sold to another owner, who may not know of the existence of the lien. In this sense the maritime lien is a secret lien which has no equivalent in the common law; rather, it fulfills the concept of a “privilege” under the civil law and the lex mercatoria.
[54]In Fraser Shipyard and Industrial Centre Ltd. v. Expedient Maritime Co. (1999), 170 F.T.R. 1 (F.C.T.D.), Prothonotary Hargrave defines United States maritime liens as follows [at paragraph 90]:
My understanding of an American maritime lien is that it is a privilege in the form of a substantive right in property, a right against a given ship, travelling with the ship, unconditionally, until discharged and which is the foundation of an American in rem proceeding. Under the American theory of maritime liens the lien is separate and apart from the action in personam. . . . It is this substantive right, a right against a given ship, which the American maritime lien holder brings into Canada to enforce, procedurally under Canadian law, against the particular ship with which the lien is travelling. The lien is not a substantive right against or attached to any other ship.
[55]At paragraphs 26 and 27 of his decision in Imperial Oil, above, Justice Stone specifies that:
A maritime lien for claims of this nature arises by operation of law rather than from the fact that they may originate either in tort or in contract.
The courts of the United States have recognized that the lien arises by operation of law.
[56]Strictly speaking, the ship is not a party to the contract for the supply of necessaries. Nevertheless, the law will create a substantive right against her in certain circumstances. For example, under American law, certain persons are presumed to have authority to procure such necessaries to the ship and a lien will arise when the necessaries are ordered by an owner from an American supplier or when an agent appointed by a charterer contracts for such supply with an American company.7
[57]In such a context, it is difficult to see why one should apply a rule of conflict which gives a determinative effect to the choice of law clause found in a contract between a shipowner acting through a managing agent, and a supplier when one does not give such a determinative effect to the choice of law clause in a contract between a demise charterer acting through its managing agent, and a supplier.
[58]In fact, the United States Court of Appeals in Rainbow Line, Inc. v. M/V Tequila, 480 F.2d 1024 (2nd Cir. 1973), found that even though the lien holder (in that case a charterer) had a direct contract with the owner of the Tequila in respect of the damages resulting from a breach of the charter party, it should not apply American law simply because it was the law applicable to the charter party. In that respect, the Court said [at page 1026]:
Rainbow argues that the court below was correct in applying United States law because it was so intended by the parties to the charter. But maritime liens arise separately and independently from the agreement of the parties, and rights of third persons cannot be affected by the intent of the parties to the contract. . . .
[59]Even if it were clear that the parties intended to apply U.S. law to their contract,8 the United States Court of Appeals proceeded to examine the factors described in Lauritzen by the Supreme Court of the United States for ascertaining which law had the closest connection to the transaction. This is exactly what was done by the Federal Court of Appeal in Imperial Oil, above. This was the approach taken by the Prothonotary.
[60]But the claimants argue that, all along, Justice Stone meant to apply the rule of conflict of laws applicable to contracts (paragraphs 28 and 29 of the decision). In doing so, he recognized the validity of the rule of conflict set out in the decision of the Federal Court of Appeal in Ontario Bus Industries Inc. v. Federal Calumet (The) (1992), 150 N.R. 149 (F.C.A.) and applied by Justice Dubé in Richardson International, Ltd. v. Mys Chikhacheva (The), [2001] 3 F.C. 41 (T.D.), at paragraph 34. Such rule is described as follows in Richardson, above, at paragraph 34:
1. Where the parties expressly or by implication choose the system of law that is to govern the contract, that will normally be held to be the proper law of the contract.
2. Where the parties have not chosen the proper law, the court determines, in light of all the circumstances, the system of law with which the contract has the closest and most real connection.
[61]In Richardson International, Ltd. v. Mys Chikhacheva (The), [2002] 4 F.C. 80 (C.A.), at paragraphs 27 and 28, the Federal Court of Appeal referred to its then recent decision in Imperial Oil, above, and found that that case confirmed the applicability of the usual rules for determining the proper law of a contract.
[62]In Richardson, above, the Court of Appeal confirmed Justice Dubé’s finding that the contract under which the necessaries were provided contained an express choice of law and found that, in any event, if he was wrong on this point, the parties should be taken to have implicitly chosen to apply American law to their contract when they agreed to arbitrate their dispute in Seattle, Washington, U.S.A.
[63]In Richardson, above, it is clear that the American supplier never contracted with the owner of the Mys Chikhacheva. Its contract was with the demise charterer like in Imperial Oil, above.
[64]At first glance, these decisions appear contradictory for Justice Stone expressly found that the choice of law in the supply contract with the demise charterer was only one factor among many to consider. He stated that the Court should still go on to examine all the factors to determine the law that has the closest and most substantial connection to the transaction.
[65]Although the Court is not bound by American precedents, it can, as mentioned by Justice Stone, still be useful to review them and look at the reasoning adopted to determine the rule of conflict applicable to maritime liens.
[66]There is no decision of the U.S. Supreme Court directly on this point. As mentioned in Rainbow, above, the U.S. Court of Appeals (Second Circuit) found that the approach set out by the U.S. Supreme Court in Lauritzen, above, should apply even when the contract from which the lien arises contains a choice of law.
[67]The claimants relied heavily on the decision of the U.S. Court of Appeals in Liverpool and London S.S. Prot. & Indem. Ass’n v. Queen of Leman MV, 296 F.3d 350 (5th Cir. 2002). This decision deals with two consolidated appeals involving the interpretation of a choice of law provision in an insurance contract ( P& I [protection and indemnity] cover). The essential question in both cases was how to construe the choice of law clause and whether English or American law was chosen to determine the existence of a maritime lien for unpaid insurance premiums.9
[68]In the Queen of Leman, the U.S. Court of Appeals did not specifically refer to the decision in Rainbow. The party contesting the application of the express choice of law was relying on Gulf Trading & Transp. Co. v. Vessel Hoegh Shield, 658 F.2d 363 (5th Cir. 1981).10 The Court said the following in respect of this decision [at page 355]:
Interforce relies primarily, but unpersuasively, on Gulf Trading & Transp. Co. v. Vessel Hoegh Shield, 658 F.2d 363 (5th Cir. 1981). It characterizes Gulf Trading as holding that because a maritime lien arises by operation of law, not by contract, the P&I choice of law provisions do not bind those who are not parties to the contract. Gulf Trading, however, does not control the outcome here. In that case, the court applied a conflict of laws analysis to the issue of a maritime lien. Id. at 367‑68. In doing so, it declined to use the conflicts analysis appropriate to contracts, see Restatement (Second) Conflicts of Law § 188, noting that the maritime lien was not contractual in nature. Id. at 366‑68. Importantly, however, it noted that the contract at issue there did not have a choice of law provision governing the existence of a maritime lien. Id. at 368. In light of this distinction with the present case, we decline to read Gulf Trading as invalidating the parties’ decision in the P&I rules to apply local law to the issue of the existence of a maritime lien. See also Arochem Corp. v. Wilomi, Inc., 962 F.2d 496, 498‑99 (5th Cir. 1992) (applying conflicts analysis in absence of any indication that contract dictated choice of law for existence of maritime lien).
[69]It is evident that the U.S. Court of Appeals in Queen of Leman, could not so easily have distinguished the decision in Rainbow.
[70]By simply applying the choice of law made by the two parties to the contract, one is in fact permitting such parties to do indirectly what they could not do directly, that is create a maritime lien that will be opposable to third parties and may well outrank them.
[71]Courts respect and enforce the choice of a law provisions because the parties must not be allowed to renege on their bargain. It is difficult to understand how this justification applies when one deals with a substantive right granted against a fictive person, i.e. a ship which is not a party to the contract, and which will affect third parties that have nothing to do with this contract.
[72]Based on the foregoing, the Court would have adopted the approach taken by Prothonotary Morneau. But, the Court is bound by Richardson, and the general view taken by the Federal Court of Appeal that the rule of conflict applicable to determine the proper law of a maritime lien is the rule of conflict applicable to determine the proper law of the contract.
[73]Although the claimants have argued their case on the basis that they have a contract directly with the shipowner through its managing agent, the evidence they filed in support of that contention is not clear. In fact, none of the affiants actually aver that they have contracted with the shipowner. It appears from some of the documentation attached to the affidavits that the supplies were ordered by Arrow Ltd. and that in certain cases receipts were signed by the master of the vessel.
[74]The contract between Arrow Ltd. and the ship owner is not before the Court.11 There is no evidence as to whether or not the Lanner was under charter at any of the relevant times when those supplies were delivered to the vessel. The various invoices filed in support of the claims are vaguely addressed to a number of parties:
Kent Trade: Master and Owners and/or Charterers and/or Operators and/or Managers and/or Disponent Owners of M/V Hobby and Arrow Co. Ltd.;
Marine Fuels: M/V Lanner and/or Owners / Managing Owners / Operators / Managers / Disponent Owners / Charterers and Arrow Co. Ltd.;
Praxis: M/V Lanner and/or Master and/or Owners and/or Managers and/or Operators and/or Aran Shipping & Trading S.A. and/or Pegasus Ocean Services Ltd. and/or Arrow Co. Ltd.;
Ashland and CP3500: Arrow Co. Ltd.
[75]Like Justice Stone in Imperial Oil, I find that this evidence is insufficient to establish that the shipowner was personally liable under the contract. But this point is only material to the determination of the applicable rule of conflict of law. It points toward the application of the approach taken in Imperial Oil; it does not affect the substantive right created under American law.
[76]In effect, like Mr. de Klerk, the expert on American law produced by the claimants, I find no reason to believe that in these particular cases the necessaries were not ordered by a person presumed to have authority to procure such necessaries and thus to create a right against the vessel.
[77]Having considered the two expert affidavits, the Court finds that Ashland, the American supplier, has a lien under American law and that in respect of this transaction, American law is the proper law to be applied whether one looks only at the express choice of law or one weights all the factors considered in Imperial Oil and in Richardson, which includes the residence of the supplier and the choice of law in the contract with such supplier.
[78]The same conclusion applies to the supply of fuel by Praxis at Charleston in the United States. Here again, the Court is prepared to accept that American law would apply either because of the express choice of law or as the law having the closest connection with the transaction because of the relative weight I give to the fact that the supplies were provided in the United States under a contract which expressly provides for the application of that law.
[79]In respect of those two claims, the Court cannot agree with the analysis of the Prothonotary as to the law applicable to the determination of the maritime lien.
[80]With respect to Kent Trade (supply to the Lanner only), CP3500 and Praxis (supplies outside of the U.S.), the Court agrees with the analysis of the Prothonotary that American law is not the law that has the closest and most substantial connection with the transaction.
[81]Furthermore, in respect of those claims as mentioned earlier, even if the Court was to apply American law simply because of the express choice of law in those contracts,12 the Court finds that those claimants have failed to establish by preponderance of evidence that their claims give rise to a maritime lien under such law.
[82]In coming to that conclusion, the Court has very carefully examined the affidavit of both experts and gives more weight to the evidence of Mr. Juska that American law does not provide for a lien with respect to necessaries provided by a foreign supplier to a foreign ship in a foreign port.
[83]The affidavit of Mr. de Klerk is more general and vague when it touches on issues where the claimants’ rights appear to be weaker. For example, it is evident from a review of the affidavit filed in support of Kent Trade’s claim that such claim includes the supplies provided to the Hobby.
[84]In his affidavit, Mr. de Klerk deals generally with the claims of Ashland, Praxis, Kent Trade and CP3500. Even though the invoices relating to the services provided to the Hobby are included as part of the claim of Kent Trade, he does not expressly state that he excludes those services from the ambit of his opinion. The only way one is alerted to the fact that these services may be excluded is that in the last sentence of paragraph 5, Mr. de Klerk states:
In my opinion, these four claimants have a maritime lien pursuant to the laws of the United States against the M/V LANNER for necessaries provided to the vessel. [My emphasis.]
[85]In the same manner, the affidavit is not specific when it states at paragraph 15 that: “even if the necessaries are not actually delivered in the United States, their supply is still accorded lien status, where the parties have chosen to apply United States law”. The affiant does not say whether this statement applies to all cases of foreign supply including those by foreign suppliers to foreign ships.
[86]As noted by Mr. Juska, the only case referred to by Mr. de Klerk to support this statement at paragraph 15 is Ryan‑Walsh v. M/V Ocean Trader, 930 F. Supp. 210 (D.M. 1996). This case does involve the supply of necessaries outside of the United States but those necessaries were provided by an American supplier.
[87]The main premise of Mr. de Klerk’s opinion is that American courts will give effect to the choice of law clauses in the supply contracts. This is a general concept that is firmly established but was apparently only recently applied in a context involving a maritime lien. Mr. de Klerk relies on the U.S. Court of Appeals decision in the Queen of Leman.13
[88]But in that case, the U.S. Court of Appeals never considered the issue of whether American law provides for a lien when these necessaries are supplied by a foreign supplier to a foreign ship in a foreign country.14
[89]In contrast, Mr. Juska’s evidence is very specific. At paragraphs 11-14, he explains why in his view, even if one gives effect to the choice of law clauses, this does not mean that all the claimants would have a maritime lien. He cites the decision of the U.S. Court of Appeals in Trinidad Foundry & Fabricating, Ltd. v. M/V K.A.S. Camilla, 966 F.2d 613 (11th Cir. 1992) where the Court said [at page 617]:
Alternatively, Trinidad argues that the in rem action against the Camilla was permissible under Rule C(1)(b), pursuant to the Maritime Lien Act, 46 U.S.C. § 31342 (1990). We reject that argument for two reasons. First, § 31342 does not provide for a maritime lien for goods and services supplied by a foreign plaintiff to foreign flag vessels in foreign ports. Tramp Oil and Marine, Ltd. v. M/V Mermaid I, 805 F.2d 42, 46 (1st Cir.1986); Swedish Telecom Radio v. M/V Discovery I, 712 F.Supp. 1542, 1545‑46 (S.D.Fla.1989). In the present case, it is undisputed that all of the parties and the vessel are foreign, and the repairs to the vessel were furnished in a foreign port. Accordingly, Trinidad has no lien under § 31342.
[90]More recently in Marine Oil Trading Ltd. v. Motor Tanker Paros, 287 F. Supp. 2d 638 (E.D. Va. 2003), at page 641, note 2, the Court noted:
The existence of a lien is not a foregone conclusion even if American law applies. The court notes that this case involves a contract amongst foreign parties, over a foreign ship, regarding transactions that occurred in foreign ports. There is case law holding that a lien does not arise under such circumstances. See Trinidad Foundry and Fabricating, Ltd. v. M/V K.A.S. CAMILLA, 966 F.2d 613 (11th Cir. 1992).
[91]Mr. Juska’s opinion was also accurate when he said that there is no maritime lien for supplies provided to a sister ship. This was acknowledged by the claimants.
[92]The claimants argue that the Court should accept Mr. de Klerk’s opinion because his evidence was accepted by Justice Blais in Kirgan Holding S.A. v. Panamax Leader (The) (2002), 225 F.T.R. 273 (F.C.T.D.), a case where the supplier was foreign, the ship was foreign and the supply was made in a foreign port.
[93]As I said at the hearing, those issues are issues of fact which depend entirely on the evidence before the Court. It may well be that Mr. de Klerk’s opinion in that case was more detailed or that the affidavit in reply to his evidence was different. It may be that this specific point was not raised.
[94]The Court is bound to make its own detailed analysis of the evidence before it. I have done so and decided that these foreign claimants have not clearly established by preponderance of evidence that they have a maritime lien under American law for the specific services rendered to the Lanner outside of the United States.
(C) Should the Court depart from the normal order of priorities
[95]Thus, apart from Ashland’s claim and Praxis’ claim with respect to the services provided at Charleston, none of the claimants would normally rank before the plaintiffs’ mortgage.
[96]The claimants argue that the plaintiffs were negligent in failing to realize on their securities without undue delay and that the inordinate delay between the first event of default in February 2002 and the time the vessel was arrested by the bank in March 2003 constitutes a special circumstance which justifies the Court to conduct an equity-based arrangement in which all the other claimants would rank before the plaintiffs’ claim.
[97]Here again, there is no dispute that the Prothonotary’s refusal to reorder priorities is a question vital to the final issue of this matter (Scott Steel Ltd. v. Alarissa (The) (1997), 125 F.T.R. 284 (F.C.T.D.)).
[98]The Court reviewed this issue de novo and came to the same conclusion as the Prothonotary that this is not a case where judicial discretion based on equity should be exercised in favor of the claimants. The decision of the Prothonotary is very well articulated and the Court adopts the views expressed at paragraphs 80-91.
[99]The Court also agrees with Professor William Tetley who noted in Maritime Liens and Claims, at pages 855 and 856 that Courts should use their discretion in that respect with great prudence.
[100]The claimants have relied almost entirely on the simple fact that several months elapsed between the first technical event of default and the arrest of the ship by the plaintiffs. There is no evidence that, because of the services they rendered, the plaintiffs were able to receive additional payments from the owner of the Lanner. In fact, it appears that the plaintiffs did not receive any money from the borrowers until they executed their securities.
[101]There is no evidence that the supplies of necessaries in this case increased the value of the ship. There is no evidence that the plaintiffs knew that the borrowers were in a situation that could not be rectified with time.
[102]The claimants have simply failed to meet their burden of establishing very special circumstances which warranted departure from the law‑established order of priorities to prevent an obvious injustice.
(D) Costs
[103]As mentioned, the Court agrees that Ashland and Praxis with respect to the services supplied at Charleston, U.S.A., are entitled to be paid in priority to the plaintiffs’ mortgage. Because of the divided success of the appeal and considering the state of the law with respect to the issues raised in this matter, the Court finds that each party should support its own costs.
[104]With respect to costs awarded by the Prothonotary, the Court agrees with the claimants that in the particular circumstances of this case where the caveat releases were not transferred from T‑470‑03 and the claimants were not made parties to the proceedings, the Prothonotary should not have awarded costs against them.
[105]In the future, the parties to the action should ensure that claimants who file claims against the proceeds of a sale have either filed a caveat release or have been made a party (amending the style of cause). If they have not, the matter should be brought to the attention of the Court so that claimants do not take undue advantage of the situation to avoid payment of costs.
[106]That said, in the present case, the Court would not, for the reasons explained with respect to this appeal, have granted costs against the claimants.
ORDER
THIS COURT ORDERS that:
LA COUR ORDONNE :
1. The amounts owed to Ashland Specialty Chemical Company for services provided to the Lanner at Cape Town, South Africa, and any amount owed to Praxis Energy Agents S.A. with respect to the supply of necessaries to the Lanner at Charleston in the United States, shall be paid in priority to the plaintiffs’ claim out of the proceed of the sale of the Lanner. The plaintiffs shall then be entitled to receive the balance of the said proceeds;
2. The appeal in respect of the order dated October 5, 2005, is allowed and the said order is quashed. There shall be no costs against the claimants in respect of the proceedings before the Prothonotary and no costs in this appeal.
1 The claimants did not refer to this invoice at all in their representations but for the purpose of this analysis, the Court must assume that it has not been paid.
2 The affidavit of Mrs. Suvarnatemee and the documents attached to it were in the claimants’ possession for over 16 months when the Court set the deadline of December 10, 2004 for completion of all cross‑examinations. The first notice that any of the claimants might challenge the validity of the mortgage is found in the written representation of Kent Trade and Marine Fuels dated November 1, 2004, where these claimants simply say that in any event, they reserve the right to challenge the validity of the plaintiffs’ security as against the Lanner.
3 J.-G. Castel, Canadian Conflict of Laws, 4th ed. (Toronto: Butterworths, 1997) at p. 161.
4 Under American law, it would rank after a foreign mortgage registered before the lien arose.
5 Affidavit evidence had to be filed by the plaintiffs with respect to this issue of whether or not the Hobby and Peregrine were sister ships of the Lanner and on whether or not American law provides for a maritime lien for necessaries provided to such sister ships.
6 In Imperial Oil, the supplier had contracted with the demise charterer of the ship through a managing agent of the said charterer.
7 Affidavit of Mr. de Klerk, at para. 8.
8 The charter party was a NYPE Form and included an U.S. arbitration clause. It also specifically referred to the Harter Act [46 U.S.C. App. § 181 (2000)] and the United States Carriage of Goods by Sea Act [46 U.S.C. App. § 1300 (2000)] (Rainbow Line Inc. v. M/V Tequila, 341 F. Supp. 459 (S.D.N.Y. 1972) (Metzner S., District Judge).
9 One must exercise caution because the lien holder under American law is entitled to waive its right. One way of so doing is by choosing a law that does not recognize the existence of a maritime lien in the particular set of circumstances.
10 This decision is also referred to in Justice Stone’s decision, at para. 27.
11 The Court notes that the evidence with respect to Arrow Ltd. should have been easily available to the claimants as their counsel also represented Arrow Ltd. in a related action where the Lanner was also arrested.
12 At this stage, the Court is prepared to accept that the terms and conditions referred to in the exhibits were brought to the attention of Arrow Ltd. at the time the contracts were entered into.
13 The United States Court of Appeals for the Second Circuit reaffirmed this position that it will give effect to an appropriate choice of law provision in an insurance contract that is said to apply specifically to maritime liens in Assuranceforeningen Skuld Den Danske Afdeling v. Allfirst Bank, 2004 U.S. App. LEXIS 8131 (2nd Cir. 2004).
14 See note 5 of the decision which indicates that only the choice of law question was certified and that it would be premature to consider the issue of whether or not all the unpaid premiums gave rise to a maritime lien under United States law.