ARREST PRACTICE AND ENFORCEMENT OF MARITIME CLAIMS IN CANADA
By Jason R. Kostyniuk
Bull Houser & Tupper LLP
3000 – 1055 West Georgia Street
Vancouver, Canada V6E 3R3
Tel: 604.687.6575
Fax: 604.641.4949
Email: jrk@bht.com
Introduction
This paper will provide a survey of Canadian arrest practice and procedure and an update on new developments in Canadian law with respect to enforcing maritime claims in Canada.
Canadian Courts with Arrest Procedures
1. Canada is divided into ten provinces and three territories. None of the courts of the individual provinces or territories, except the superior court of the province of British Columbia, permit in rem proceedings or have rules providing for the arrest of vessels or property.
2. The Federal Court of Canada is designated as the Admiralty Court. As such, it is the Court usually used in maritime matters for the arrest of vessels.
3. The British Columbia Supreme Court Rules provide for the arrest of vessels and other property under Rule 55. The British Columbia provision mirrors the Federal Court procedure. Virtually any arrest order that can be obtained from the Federal Court can also be obtained from the B.C. Supreme Court, with the exception of sistership arrests.
4. As the great majority of arrests in Canada take place in Federal Court proceedings this paper will focus on Federal Court arrest procedures.
Federal Court Admiralty Jurisdiction
5. Section 22 of the Federal Courts Act (the “Act”) gives the Federal Court jurisdiction in essentially any matter relating to navigation and shipping. Section 22(2) itemizes a variety of particular claims that can be brought in the Federal Court, but that particularization does not diminish the broad jurisdiction over navigation and shipping set out in Section 22(1).
6. The Federal Court’s in rem jurisdiction arises from Section 43 of the Act. Section 43(2) provides that the jurisdiction conferred by the Federal Court in Section 22 may be exercised in rem against a ship or other property that is the subject of the action or against any proceeds of sale of the ship or other property that have been paid into Court.
7. A significant exception to the in rem jurisdiction is found in Section 43(3). It provides that an action in rem shall not be made in respect of a claim mentioned in Section 22(2)(e), (f), (g), (h), (i), (j), (k), (m), (n), (p) or (q) unless at the time of the commencement of the action the ship or other property that is the subject of the action is beneficially owned by the person who was the beneficial owner when the cause of action arose. The claims referred to in those subsections are claims for the loading or carriage of goods, personal injury, charter party disputes, towage, necessaries, repairs or marine insurance.
8. This means that for those types of claims, known as statutory right in rem claims, if there has been a change in ownership between the time the cause of action arose and the time the action is commenced, then no in rem proceeding is possible.
9. It also means that unless the owner of the vessel is liable in personam for the claim, no in rem proceeding can be maintained. In the JENSEN STAR , a bare boat charterer was liable in personam for a necessaries claim, but the Court held that the in rem proceeding could not be maintained as the owner, as opposed to the bare boat charterer, was not liable in personam.
Sistership Arrest
10. The Act also provides for sistership arrest in Section 43(8). Sistership arrest is not possible in the British Columbia Supreme Court as there are no equivalent provisions.
11. In Canada legislation is drafted in both official languages, English and French. The English language version of Section 43(8) provides:
“43(8) The jurisdiction conferred on the Federal Court by section 22 may be exercised in rem against any ship that, at the time the action is brought, is beneficially owned by the person who is the owner of the ship that is the subject of the action.”
12. That wording has caused problems. It has been held that the term “owner” means only the registered owner and does not include a beneficial owner. Moreover, fractional ownership is not sufficient to meet the requirement of having the same ownership.
13. The Federal Court has held that if a ship causes damage, then the sistership must be beneficially owned by the registered owner of the ship that caused the damage. In practice, therefore, sistership arrests are difficult to maintain in Canada, as such a situation is almost never the case with one ship company fleets. Even if all of the one ship companies have the same parent and could be said to be all beneficially owned by the same entity, under the wording of section 43(8) there could still be no sistership arrest because the “registered owner” is not the same as the “beneficial owner”.
14. Currently there is a bill before the Canadian Parliament, which proposes a harmonizing of the English and French versions of Section 43(8). The bill proposes that the English version be replaced by the following:
(8) “the jurisdiction conferred on the Federal Court by s.22 may be exercised in rem against any ship that, at the time the action is brought, is owned by the beneficial owner of the ship that is the subject of the action.” (emphasis added)
It is widely considered that this amendment to Section 43(8) will broaden the scope of the section and effectively harmonize the English and French language versions.
Government Vessels
15. Government vessels, whether owned by Canada, a province or a foreign sovereign, may not be subject to an in rem proceeding if the vessel is a war ship, coast-guard ship or police vessel, is a ship owned or operated by Canada or a province when the ship is engaged in government service or, if owned or operated by a sovereign power, if the ship is being used exclusively for non-commercial governmental purposes.
16. This means that ships engaged in commercial purposes owned or operated by foreign governments are subject to in rem proceedings in Canada.
Arrest Procedure
17. Canada has not adopted any international conventions on ship arrest. It has its own system for the arrest of property.
18. In Canada ship arrest is usually simple and relatively inexpensive. If it is a straightforward matter a ship can be arrested in as little as two hours if it is located at port during business hours and all of the documents evidencing the claim are provided to enable the solicitor to swear the Affidavit to Lead Warrant. The cost of arrest can be as little as Cdn. $1500 to $2500.
19. The procedure for arresting vessels in Canada is set out in Part 13 of the Federal Courts Rules and, in particular, in Rule 481. In order to obtain a warrant for the arrest of a vessel, or indeed any property, a party must swear an Affidavit entitled “Affidavit to Lead Warrant”. It must state:
(a) the name, address and occupation of the party;
(b) the nature of the claim and the basis for invoking the in rem jurisdiction of the Court;
(c) that the claim has not been satisfied;
(d) the nature of the property to be arrested; and
(e) where the property is a ship, the name and nationality of the ship and the port to which it belongs.
20. If it is a sistership arrest, then it must also state that the deponent has reasonable grounds to believe that the ship against which the warrant is sought is beneficially owned by the person who is the owner of the ship that is the subject of the action.
21. The Affidavit may be on information and belief. In most cases, because of the urgency involved in arresting a ship, the Affidavits are sworn on information and belief, and frequently by counsel.
22. The Warrant of Arrest is served by a sheriff by attaching a certified copy on some conspicuous part of the ship or attaching it to the cargo. If it is freight that is to be arrested, then it is served on the person in possession of the monies.
23. Possession of and responsibility for property arrested does not vest in the sheriff but continues in the person in possession of the property immediately before the arrest.
24. In order for the sheriff to go into possession, an application must be made to the Court, and the party who brings such an application then becomes responsible for any costs or fees incurred and may be required to give security to the Court for those costs.
25. In the vast majority of cases, no application is made to put the sheriff into possession and, as a result, the sheriff’s fee for an arrest is usually only for service of the documents.
Release from Arrest
26. Vessels are released from arrest under the Federal Court Rules if the amount claimed is paid into Court, or if the amount claimed is greater than the appraised value of the property, if the appraised value is paid into Court. If cargo is arrested for freight, the amount of the freight is paid into Court. Alternatively, bail can be posted. Bail, under the Rules, is a guarantee of a bank or a bond from a surety company licensed to do business in Canada or a bail bond.
27. If the amount of the security cannot be agreed, then an application to Court may be made to fix the amount. A plaintiff is entitled to bail based on its reasonably arguable best case capped at the value of the property, plus an allowance for anticipated costs and pre-judgment interest which typically increases the bail amount by 25% to 50%.
28. It is usually the case that, where insurance is available to the vessel owner, whether through P&I Clubs or otherwise, a letter of undertaking is provided to the claimant instead of a bond.
Movement of Arrested Property, Counter-Security and Wrongful Arrest
29. Movement of the property under arrest can only be done by consent of all parties and caveators, or by leave of the court. Unauthorized movement of arrested property is punishable as contempt of court.
30. In a recent case the Federal Court found the defendants guilty of contempt for removing fishing gear and other equipment a vessel that was under arrest. The Court assessed a fine of $5,000 jointly and severally against the defendants and ordered that they pay costs fixed at $15,000.
31. Payment of counter-security is not required to effect an arrest. However, where the plaintiff is a foreign entity, and upon the application of a defendant, the Court often orders security to be posted to cover the expected costs which would be payable by the plaintiff that defendant, should the plaintiff’s action not be successful.
32. In Canada damages for wrongful arrest may be awarded only where the plaintiff’s conduct amounts to malice or gross negligence.
Sale of Arrested Property
33. Federal Court Rule 490 governs the sale of a ship or other arrested property. The Court may order the property sold with or without an appraisal or advertisement, and by auction or private contract. Typically the Court orders a formal appraisal and advertisement before sale , however the terms and mechanics of the sale are discretionary and depend on the particular circumstances of each case.
34. When an arrested ship is sold by the Court the purchaser acquires complete title, free and clear of all liens, but that does not necessarily mean that claims under foreign law which are enforceable in foreign jurisdictions are extinguished.
35. On a motion for the sale of a ship pendente lite, the Court will consider, inter alia, whether there is an arguable defence to the claim; whether the condition of the ship is deteriorating from want of maintenance; whether there will be a diminution in value by reason of delay, including the effect of ongoing costs of maintaining and insuring the ship; and whether it is likely to be sold in any event.
Priorities in Canada
36. The law of priorities under Canadian maritime law is largely non-statutory. It is based on the principles of English admiralty law. With few exceptions, the ranking of claims in Canada is the same as English law.
37. Canada is not a party to any of the international conventions on maritime liens and mortgages and therefore, other than as a possible reference point, they have little or no application in determining maritime claims or their priority.
38. The ranking of claims in Canada is well established. It is:
(a) special legislative rights, being those rights granted by statute, such as dock, harbour and canal charges, pollution and wreck removal;
(b) the cost of arrest and sale of a vessel. As stated above, under Canadian law the sheriff does not go into possession of a vessel when an arrest is undertaken. If the Court should order that the vessel be placed into the possession of the sheriff, then those costs would also rank in this category;
(c) possessory liens;
(d) traditional maritime liens, such as collision, salvage, seamen’s wages and masters’ disbursements;
(e) mortgages; and
(f) statutory right in rem claims. The principal statutory right in rem claims are necessary claims, stevedore claims, cargo claims and general average claims.
39. Under Canadian law the necessaries claimant in Canada does not have a maritime lien but only a low ranking statutory right in rem.
Claims Subject to Foreign Law in Canada
40. In Canada validly created foreign maritime liens will be recognized and given the same priority as a lien created in Canada pursuant to Canadian maritime law, “unless opposed to some rule of domestic policy or procedure which prevents the recognition of the right.”
41. In the IOANNIS DASKALELIS , the Supreme Court of Canada held, on the basis of its earlier decision, the STRANDHILL , that a repair claim of an American shipyard against a Greek owned and Panamanian registered and mortgaged ship, which was arrested and sold in Vancouver, gave rise to a maritime lien under the laws of the United States, where the claim arose, and therefore it was enforceable in Canada as such. In the result, the ship repair claim ranked ahead of the mortgage.
42. It is firmly established under Canadian law that the nature of a maritime claim against the offending vessel will be determined by the law under which the claim arose. It is also well established that its priority against a vessel or its sale proceeds will then be determined pursuant to the laws of Canada.
43. The same does not apply with respect to sistership arrest. The Federal Court has held that where a claim arises in the United States against a ship that under American law gives rise to a maritime lien, where if the same claim arose in Canada it would only be a statutory right in rem, then such a claim cannot be enforced against a sistership as a maritime lien, but only as a statutory right in rem.
44. Where a claim arises in Canada pursuant to a contract for the supply of necessaries or bunkers which states that a foreign law governs, the Canadian courts will apply a “choice of law” analysis, using Canadian conflict of laws rules. Where there is an express or implied choice of law by the parties to the contract, that law will normally govern the contract.
45. In the absence of an express contractual provision, the proper law of the contract is determined by assessing which jurisdiction has the closest and most substantial connection.
The “LANNER”
46. An important decision regarding foreign necessary claims has recently been handed down by the Federal Court of Appeal in Kent Trade and Finance v. JPMorgan Chase Bank. In this case a Liberian owned and flagged vessel, LANNER, was sold by Federal Court order at the behest of its mortgagees. At issue was whether the appellants’ necessaries claims ought to be afforded the status of maritime liens which would rank in priority to the claim of the respondent mortgagees.
47. The appellants were suppliers of necessaries, including bunkers, to the LANNER in various jurisdictions. None of the appellants were based or incorporated in the U.S. All of the contracts for the supplies had a choice of law clause providing that American law governed the contract.
48. The Federal Court of Appeal went through a “choice of law” analysis using Canadian conflict of laws rules and concluded that American law would apply since the contractual choice of law clause should normally govern and because no other jurisdiction had a closer or more substantial connection to the transactions at issue. The Court declined to decide whether personal liability of the ship owner is necessary for the choice of law clause to determine the proper law.
49. The Court then considered conflicting expert evidence on the law in the U.S. and concluded that American law would recognize a maritime lien for a foreign supplier of necessaries to foreign ships in a foreign port. The Court, in a 2 to 1 decision, then concluded that the appellant necessaries suppliers each had a maritime lien against the LANNER which out ranked the respondent mortgagee’s claim.
50. The Court left it open that there could be situations where the supply of necessaries is so closely or substantially connected to another jurisdiction that the contractual choice of law would be displaced.
51. This case is a helpful development for foreign necessaries suppliers outside of Canada/U.S whose claims can now be recognized in Canada as valid maritime liens, which out rank ship mortgages, if their supply contract contains a carefully worded clause incorporating American law.
Conclusion
The arrest of property in Canada is a relatively straightforward and inexpensive procedure which, if done properly, can quickly provide security for claims. With the recent “LANNER” decision, foreign ship suppliers are better positioned to enforce their claims as high ranking maritime liens in Canada where their supply contract incorporates U.S. law.
*This paper contains excerpts from the “Canadian Practice and Procedure in the Enforcement of Maritime Claims”, a paper prepared by John W. Bromely presented at the Pacific Admiralty Seminar, Enduring and Emerging Issues in Maritime Law, held on October 6, 2006, in San Francisco, California.
1. Federal Courts Act, R.S.C. 1985 c.F-7, ss. 3 and 4 as amended. This legislation can be found at: http://laws.justice.gc.ca /en/showtdm/cs/F-7 2.Rules of Court, B.C. Reg. 221/90 3. Federal Courts Act, R.S.C. 1985 c.F-7, s. 224. Ibid. 5. Ibid. , s. 43 6. Mount Royal/Walsh Inc. v. “Jensen Star” [1990] 1 F.C. 199 (F.C.A.) 7. (Supra), Note 1, S.43(8) 8. Hollandshse Aanaming Maatschappij v.”Ryan Leet” (1997), 135 F.T.R. 67. This decision has been criticized but never overruled. See Governor and Company of the Bank of Scotland v.”Nel” [2001] 1 F.C. 408 (Proth); Royal Bank of Scotland plc v.”Golden Trinity” 2004 F.C. 795 (Proth.) 9. Ssangyong Australia Pty Co. v. “Looiersgracht” (1994) 85 F.T.R. 265 (Proth.) 10. Noranda Sales Corp. v. “British Tay” (1994), 77 F.T.R. 8 11. Bill C-7, An Act to Amend the Marine Liability Act and the Federal Courts Act and to make consequential amendments to other Acts, 2nd Sess., 40th Parl., 2009 12. Federal Courts Act, (supra), S.43(7); State Immunity Act R.S.C. 1985 c.S-18 s.7; Sarafi v. “Iran Afzal” [1996] 2 F.C. 954 (T.D.) 13. Federal Courts Rules SOR 98-106, as amended, Rule 481 14. Magnolia Ocean Shipping Corp. v.”Soledad Maria”, [1982] 1 F.C. 205 (T.D.) 15. Federal Courts Rules, (supra), Note 13, Rule 479 16. Federal Court Rules, (supra), Note 13, Rule 483(1) 17. Federal Court Rules, (supra), Note 13, Rule 483(2) 18. Federal Court Rules, (supra), Note 13, Rule 486(1) 19. Federal Court Rules, (supra), Note 13, Rule 485 20. Canadian Sub Sea Hydraulics Ltd. v. “Cormorant” (Ship), 2006 FC 1051 21. However, there is no provision in the Federal Courts Rules for a letter of undertaking to be ordered by the Court and, as such, acceptance of that form of security and its terms are a matter to be negotiated between the parties. 22. Federal Courts Rules, (supra), Note 13, Rule 484 23. Labrador Sea Products Incorporated v.” Northern Auk” (Ship), 2007 FC 679 24. Armada Lines Ltd. v. Chaleur Fertilizers Ltd. [1997] 2 S.C.R. 617 25. Federal Courts Rules, (supra), Note 13, Rule 490 26. Federal Courts Rules, (supra), Note 13, Rule 490(1)(a),(b),(c) 27. Nordea Bank Norge ASA v. “Kingkuk” (Ship), 2006 FC 1290 28. Canada (Deputy Marshall, Federal Court of Canada) v. “Galaxias” (The), [1989] 1 F.C. 375 29. Franklin Lumber Ltd. v. “Essington II” (The), 2005 FC 95 (Proth.) 30. Comeau’s Sea Foods Ltd. v. “Frank and Troy” (The), [1971] F.C. 556 31. Bill C-7, supra, proposes to create a new maritime lien for Canadian necessary suppliers against foreign vessels. This provision would redress the imbalance between Canadian and U.S. necessary suppliers but only with respect to foreign ships. Canadian suppliers will not have a lien in relation to supplies made to a Canadian ship, and therefore they will still be out ranked by American suppliers who do enjoy a lien status for their supplies to that Canadian ship 32. Holt Cargo systems Inc. v. ABC Container Line N.V. (Trustees of), 2001 SCC 90 (CanLII) 33. The Strandhill v. Walter W. Hodder Co., [1926] S.C.R. 680 at 685 34. [1974] S.C.R. 1248. This decision was more recently confirmed by the Supreme Court of Canada in The Har Rai, [1987] 1 S.C.R. 57 35. [1926] S.C.R. 680 36. There is a caveat to that proposition in that the foreign maritime lien must not be of such a nature as to be considered against public policy under Canadian law. See for example The“Galaxias” [1989] 1 F.C. 386 (T.D.), where the court indicated that creating a maritime lien for income tax obligations would be contrary to Canadian public policy. 37. Fraser Shipyard and Industrial Centre Ltd. v. Expedient Maritime et al. (1999), 170 F.T.R. 1 (Proth); varied on a different point (1999), 170 F.T.R. 57 (T.D.) 38. Dell Computer Corp. v. Union des Consommateurs, [2007] 2 S.C.R. 801 at para. 29 39. Drew Brown Ltd. v. “Orient Trader” (The), [1974] S.C.R. 1286 at 1288, 1314 & 1318 40. Imperial Life Assurance Co. of Canada v. “Colemenares”, [1967] S.C.R. 443 at 448 41. 2008 FCA 399
