PRIORITIES AND RANKING IN MARITIME CLAIMS

Transcription

1 PRIORITIES AND RANKING IN MARITIME CLAIMS 1. "NOT ALL CLAIMS ARE CREATED EQUAL" Once the claims of the creditors have been proven, and a fund is established from the proceeds of sale of the vessel, those claims can be paid from the fund. However, the claims of the creditors are rarely on an equal footing. Instead, they are paid according to a scheme of priorities. [1] Thus one must establish the nature of the claim being made, in order to determine the priority that such a claim will have against the proceeds of sale. I I. "A WORD ABOUT CONFL I CTS OF LAWS" A brief, but crucial aside. As might be expected, maritime claims arise in different jurisdictions, under different laws. Often, the law that applies is not Canadian law. This has been dealt with by Canadian courts in the following way: The nature of a claim is governed by the law where the incident took place (the lex loci), or the law of the contract (the lex contractu). The ranking, or priority of claims is governed by the law of the forum where the case is heard (the lex fori). [2]

2 Thus the law of a foreign jurisdiction, (either as the lex loci, or incorporated as the lex contractu) can accord to a particular claim a different nature than it would be accorded under Canadian law.[3] For example, under Canadian law, a claim for necessaries supplied to a ship gives rise only to a statutory right in rem; [4] whereas, under u.s. law, such a claim is, by statute, accorded that status of a maritime lien.[5] As noted above, once the nature of the claim is determined (by the lex loci or lex contractu) then it will be ranked according to the scheme of priorities of the forum (the lex fori). So, to continue with the "necessaries" example, since a claim for necessaries arising under u.s. law is a maritime lien (at least, under u.s. law) it will be ranked as such, and enjoy a fairly high priority; whereas such a claim arising under Canadian law is is only a statutory right in rem, with a very low priority.[6] A word of caution, however. This approach has not been accepted in some jurisdictions - in particular, by the English courts. [7] So, while English precedent is usually reliable in matters of maritime law before Canadian courts, such is not the case on this particular issue, e.g. the priority accorded to claims whose nature is established under foreign law. Indeed, if you are representing a client who is pursuing a claim in a foreign forum, you would do well to inquire whether the courts of the forum have adopted the Canadian or English approach.

3 III. "THE RANKING OF PRIORITIES UNDER CANADIAN LAW" Under Canadian law, the priorities are generally ranked in the following order: [8] 1. Special legislative rights 2. Costs of arrest and sale, and custodia legis (including Marshal's costs) 3. Possessory liens 4. Traditional maritime liens 5. Mortgages 7. Statutory rights in rem. This general order of ranking can be altered, however, by the date on which the claim accrues against the vessel. In this regard, the following must be remembered: (i) a maritime lien accrues on the date of the event that gives rise to the lien; (ii) a possessory lien accrues upon possession; (iii) a mortgage accrues upon registration; (iv) a statutory right in rem accrues upon arrest. effects: The time of accrual of the claim has the following - a maritime lien which has accrued will rank ahead of (i) all mortgages, regardless of date; (ii) a subsequent possessory lien; and (iii) a subsequent statutory right in rem.

4 - a possessory lien which has accrued will rank ahead of (i) all mortgages, regardless of date; (ii) a subsequent maritime lien; and (iii) a subsequent statutory right in rem. - a statutory right in rem which has accrued will rank ahead of (i) a subsequent maritime lien; (ii) a subsequent possessory lien; and (iii) a subsequent mortgage. To further complicate the situation, Canadian courts have also resorted to equitable considerations when the traditional ranking of claims against the vessel would cause undue hardship to one or more of the claimants who have acted in good faith.[9] IV. "WHAT I S THE NATURE OF THE CLAIM?" 1. Special legislative rights By legislation the Federal government has accorded certain claims a priority over all other claims against a vessel. These include (i) dock, harbour, and canal charges; (ii) wreck removal; and (iii) pollution prevention.[10] The priority of special legislative rights inter se depends upon the interpretation of the particular statutes under which they are granted.

5 2. Cost of arrest and sale and custodia legis (including Marshal's costs) "Costs of arrest and sale" refers to the judicial or court costs of arresting the vessel and accomplishing the judicial sale of it. They are awarded according to the Federal Court tariff. They include associated disbursements for the cost of advertising, appraisals, etc. "Costs of custodia legis" can be generally described as the reasonable costs to maintain the ship between the time of her arrest, and the time of sale. This could include, for example, maintaining a fire watch, supply of shore power, supply of fuel, wharfage or anchoring charges, etc. In general, the courts have demonstrated a willingness to be somewhat liberal in the interpretation of this concept, so long as the expense is bona fide in the interest of preserving the vessel.[11] [When in doubt, before spending money on anything that you think might fall under this heading, it would be wise to obtain in advance the agreement of interested parties, or a court order, confirming that it will be accepted as such.] "Marshal's expenses" had far more significance when the consequence of arresting a vessel was deemed possession by the marshal, which made him responsible for it. That is no longer the case. [12] Thus the only marshal's expenses one usually encounters are those associated with the arrest and sale of the vessel (which are treated as costs - see above). Indeed, in practice, the marshal will often require an undertaking to indemnify him for any other expenses he is asked to incur. Competing claims of this nature will rank pari passu.

6 3. Possessory Lien This concept is the same as at common law. The lien arises only so long as the claimant maintains possession of the vessel. [13] Once possession is lost the nature of the claim reverts to one of the others in the priorities list (if it can be enforced by a proceeding in rem at all). A possessory lien ordinarily arises only in cases of (i) repairs to the ship, (ii) salvage (iii) claims by the shipowner for unpaid freight; or (iv) claims by a cargo owner for general average contribution. It must be noted that the possessory lien holder does not have a right in rem by virtue of his possession alone.[14] He has only a right to hold the ship as security for the payment of whatever judgement he may ultimately obtain against the owner. It therefore is recommended that a possessory lien holder intervene in an existing in rem proceeding against the vessel, to protect his interest. Even then, his claim will have priority only over claims which arise subsequent to him obtaining possession. There cannot be competing claims of possessory lien holders, as only one can have possession, and the lien is lost when possession is lost. 4. Maritime Liens The types of claim which give rise to the historical or "traditional" maritime liens are those by (i) a salvor for salvage; (ii) an aggrieved party for damages caused by collision; (iii) the master and seamen for their wages; (iv) the master for his disbursements made for the benefit of the ship; and (v) persons holding bonds in bottomry or respondentia.

7 (The last two, bottomry and respondentia, are historical anachronisms, involving the pledging by the master of, respectively, the vessel, or its cargo, to secure a loan to continue the voyage. They are now virtually non-existent). Subject to some notable exceptions, these are the only types of claims that will enjoy the priority of a traditional maritime lien. In Canada, a claim for pilotage has also been accorded the status of a maritime lien. [15] As well, one must remember that the types of claims which have the status of maritime lien can be expanded through the application of foreign law, or contracts governed under foreign law, as noted in the discussion above. With respect to their ranking inter se, maritime liens are divided into those which are ex dilecto (from collisions) and ex contractu (bottomry, respondentia, salvage and wage claims). Liens which are ex dilecto rank ahead of liens which are ex contractu [16](with the exception of salvage performed after a collision); competing liens which are ex dilecto rank pari passu;[17] and competing liens which are ex contractu rank in the reverse order of their accrual [18](with some exceptions). 5. Ships mortgages This refers to any registered mortgage, whether it be a chattel mortgage, a mortgage under the Canada Shipping Act, or a mortgage arising under the laws of, or registered in, a

8 foreign jurisdiction. (Again, under some foreign laws such mortgages are accorded the status of a maritime lien and this would elevate the priority of such a claim.) registration.[19] Competing ships mortgages rank in the order of their 6. Statutory rights in rem The jurisdiction of the Federal Court in proceedings in rem exists by virtue of Section 43 of the Federal Court Act, and can be exercised over all claims of the type listed in Section 22(2). These include the "traditional" maritime liens [in sub paras. (c), (d), (j), (0) and (p)]. However, it also includes other types of claims which, although not "traditional" maritime liens, can, by virtue of the Act, be the subject of proceedings in rem, i.e. claimants with these types of claim have a statutory right to proceed in rem. It should be noted that, for some of these claims, the right to an in rem procedure given by the Federal Court Act also has a substantive aspect which was historically accorded only to maritime liens - that is, the claim is not defeated by a transfer of ownership of the res, be it vessel or cargo. That is the combined effect of sections 22(2)(1) and (s), and 43(2) of the Federal Court Act, which creates a class of "quasi-maritime liens", which are not defeated by a change in ownership. These include claims for (i) dock charges, harbour dues, or canal tolls, and (ii) pilotage.

9 [It should also be noted that the effect of these sections seems to be that, at least in Canada, a change in ownership would defeat the "traditional" maritime lien for master's disbursements [see section 22(2)(p)]. passu. [20] Competing statutory rights in rem are ranked pari V. BANKRUPTCY AND INSOLVENCY The nature of the claim is also crucial in instances of bankruptcy and insolvency. Only those claims which are "secured" or "preferred", as contemplated by the federal Bankrupt cy and I nso 1 vency Ac t, ("BIA") wi 11 be enforceab I e against the trustee in bankruptcy, and will enjoy any priority over the claims of unsecured creditors. Thus, from the "list of priorities" described above; - "special legislative rights", even though they may be a debt owed to the Crown or an agency of the Crown are, as a result of the recent overhaul of the BIA, an unsecured claim. It is unlikely that the wording establishing any of these rights would override the clear provisions of the BIA. - costs of arrest and sale, and custodia legis (including Marshal's costs), are not secured claims of themselves. However, they may be payable in priority by the Trustee out of the property of the bankrupt if they can be categorized as the "costs of the first execution creditor". [21] It is unclear (and also unlikely) that this would extend to the costs of custodia legis which, in any event, should be assumed by the Trustee upon bankruptcy.

10 If the costs are incurred to enforce a secured claim (i.e. a maritime lien) they will enjoy the same priority as the claim being enforced. [22] - a possessory lien although it is by no means certain, it is submitted that a possessory lien can be enforced against the Trustee - that is, the right to retain possession. However, since such a lien gives only a right of sale to enforce a judgement, and since the assignment in bankruptcy results in a stay of proceedings, obtaining such a judgement may prove difficult. On the other hand, if the possessory lien holder is a "secured creditor" as contemplated by the BIA, there is no stay of the proceedings to enforce his security. - a ship's mortgage given under the Canada Shipping Act is a secured claim, whether registered or not. [23] However, if the security is only a chattel mortgage, the registration requirements must be strictly complied with - including those which apply when the chattel moves to another jurisdiction. - a "traditional" maritime lien has been accepted by Canadian courts as a secured claim. [24] So has a maritime lien which arises as a result of the application of foreign law. [25] - a statutory right in rem, including a "quasi maritime lien", is not a secured claim, and does not become one by the taking of in rem proceedings or the arrest of the vessel. These claims accord the claimant no higher priority than that of an ordinary unsecured creditor. [26]

11 LIMITATION OF LIABILITY Another concept which is unique to Maritime law is the ability of a shipowner (and others involved in a maritime enterprise) to limit their liability. This arises in three significant areas: with respect to damage to persons or property caused by negligent operation of the ship; with respect to damage to cargo carried on the ship; and with respect to pollution damage caused by the ship. A. Limitation of liability for damage to persons or property caused by negligent operation of the ship. This long established principle of maritime law is sufficiently recognized world wide as to be the subject of an international convention, The 1976 Convention on Limitation of Liability for Maritime Claims. It is also reflected in sections 647 to 655 of the Canada Shipping Act. The effect of the CSA provisions is that, even where negligence is proven against the operator of a ship, if the event occurred without the actual fault or privity of the owner, such owner will not be liable beyond certain stated limits for (i) loss of life or personal injury to any person on board the ship; (ii) damage to any goods, merchandise, or other thing whatever on board the ship; (iii) in certain cases, loss or damage to other property.

12 The limit of the shipowner's liability is a function of the size of the vessel, and a measurement of currency of the International Monetary Fund, known as a "Special Drawing Right". This limitation of liability is also extended to a charterer, manager, operator or agent of a ship, if the event occurs without their actual fault or privity; and to any master, crewmember, or servant of the owner, charterer, manager, operator or agent of the ship, regardless of their actual fault or privity. The onus of disproving actual fault or privity is upon the person seeking to limit their liability. [27] Willful blindness, or the failure to implement management systems which would alert the owner to potential problems cannot be relied upon to disprove actual fault or privity. [28] The effect of these sections for the practitioner is evident. Even in cases of serious injury, loss of life, or significant property damage, one must recognize that only a limited fund may be available to satisfy claims, if the absence of actual fault or privity can be established. B. Limitation of liability with respect to cargo. All cargo is carried on board a ship under the terms of a contract of carriage. Most, if not all, such modern contracts incorporate a specific set of "rules" which govern the carriage of the goods. These "rules" contain both "exception clauses" by which the carrier is relieved of all liability for damage caused by certain events; and limitation clauses, by which the amount recoverable as compensation for

13 -13- that damage is limited - usually in the form of a maximum liability per package, and thus generally referred to as the "per package limitation". The most common sets of "rules" are (i) the Hague Rules: (ii) the Hague-Visby Rules; and (iii) the Hamburg Rules. In cargo disputes, it is imperative that one determine which set of "rules" applies. Some jurisdictions have adopted legislation by which, notwithstanding any agreement to the contrary, all cargo moving in or out of that country is governed by one or the other set of "rules". For example, all cargo leaving Canada (but not that entering it) is subject to the Carriage of Goods by Water Act, [29] which essentially incorporates the Hague Rules. There is an abundance of case law interpreting the various "exception clauses" of the different "rules". [30] A review of that jurisprudence is beyond the scope of this brief discussion. However, one is cautioned that, while the terminology may be similar, each set of "rules" has interpretations peculiar to itself, and one must be wary of transposing the interpretation of terms from one set of "rules" to another. There is also abundant case law with respect to the "per package limitation" clauses found in these rules." [31] One need only consider, for example, a cargo consisting of a 40 foot container of 300 pallets, each holding 100 boxes, with each box containing twenty-four 200 ml jars of salt. How many "packages" are there - one, or 300, or 30,000, or 720,000?

14 Again, the scope of these materials does not allow a review of the extensive jurisprudence in this area. However, it can be generally said that the courts have considered the intent of the parties, as disclosed by the value declared per package on the shipping documents; the manner of packaging; and a reluctance to interpret the limitation in such a manner as to deny any realistic protection to the cargo owner. [32] C. Limitation of liability for oil pollution damage Section 677 of the Canada Shipping Act makes the owner of a ship liable for pollution damage caused by the discharge of a pollutant from that ship. However, under s. 679, the owner may limit its liability for that damage, if the occurrence giving rise to the liability occurred without his actual fault or privity. Once again, the limit of liability is a function of the tonnage of the ship, and the "special drawing right". The Canadian law in this regard reflects some of the concepts of the International Convention on Civil Liability for Oil Pollution Damage. Although Canada is not a signatory to that Convention (choosing instead to enact the more stringent provisions of the Canada Shipping Act), the Convention has been adopted by many countries and has been incorporated into their public statutes. The law which will apply in any particular case will be that of the country where the pollutant is discharged, or the damage is caused.

15 CONCLUSION Providing good legal advice to a client on a maritime claim sometimes means "putting the cart before the horse". There is a great temptation to jump at the opportunity to arrest a ship. It is, after all, one of the few "pre-emptive" processes still available in our legal system. However, a cautious practitioner will carefully assess the nature of the claim, the nature of other claims against the vessel, the likely fund that will arise from a sale (including any limitation considerations, whether as to liability or quantum), and the priority that will be accorded to his or her client's claim. Often, there will be insufficient funds to satisfy the claims of all creditors. While it may not be apparent at the outset of the proceeding, one must carefully monitor the situation and keep track of the claims that are brought against the vessel, so that an informed and prudent decision can be made if the likelihood of recovery is eliminated. As in all areas of litigation, while a client may initially be displeased to hear that he may recover nothing for his perfectly legitimate and provable claim against that "great big ship in the harbour", he will be far less happy to hear the same thing after spending a significant amount for legal fees.

16 see Comeau's Sea Foods Ltd v. The Frank and Troy, [1971) F.C. 556; Osborn Refrigeration Sales & Service Inc. v. The Atlantean I, [1979] 2 F.C. 661; Llido v. The Lowell Thomas Explorer [1980) 1 F.C. 339; Scott Steel Ltd. v. The Alarissa, [1996] 2 F.C. 883 see Marlex Petroleum v. The Ship "Har Rai", (1984),4 D.L.R. (4th) 739, 53 N.R. 1; [1984] 2 F.C. 345 (C.A.), reversing [1982] 2 F.C. 617 (T.D.); aff'd (1987) 72 N.R. 75, [1987] 1 S.C.R. 57 see The Ship "Har Rai", supra, at note 2 The Federal Court Act, R.S.C. 1985, c. F-7, as amended, specifically s. 22(2)(m) see The Ship "Har Rai", supra, at note 2 see The Ship "Har Rai", supra, at note 2 7. see Banker Trust v. Todd Shipyards, "The Halcyon Isle", [1980] 2 Lloyd's Rep. 325, 3 All E.R see note 1, supra 9. see The Atlantean I and The Lowell Thomas Explorer, supra, note 1; also International Marine Banking Co. Ltd. v. The Dora, [1977] 2 F.C. 513; and Montreal Drydocks and Ship Repairing v. The Halifax Shipyards, (1920), 60 S.C.R Canada Ports Corporation Act, R.S.C. 1985, c. C-9; St. Lawrence Seaway Authority Act, R.S.C C-2; The Department of Transport Act, R.S.C. 1985, C. T-18 Navigable Waters Protection Act, R.S.C. 1985, c. W-22; Arctic Waters Pollution Prevention Act, R.S.C. 1985, c. A-12j and Canada Shipping Act, R.S.C. c. S see The Atlantean I and The Frank and Troy, supra, note Federal Court Rule 1003(9) 13. Benson Bros. Shipbuilding Co. (1960) Ltd. v. The Miss Donna [1978] 1 F.C see The Frank and Troy, supra, at note see The Frank and Troy, supra, at note The Veritas, [1907) P. 304; The Linda Flor, (1857) 166 E.R. 1150

17 17. The Stream Fisher, (1927] 26 Ll.L. Rep The Hope, (1873) 1 Asp. M.L.C. 563; The Veritas, supra, note Coombs v. Mansfield, (1855) 24.L.J. Ch See Coastal Equipment Agencies v. The Comer [1970] Ex. C.R. 13; The Miss Donna, supra at note 13; The Lowell Thomas Explorer, supra, at note 1; Scott Steel Ltd. v. The Alarissa, supra, at note Bankruptcy and Insolvency Act, s. 70(2) 22. see Royal Bank v. Sefel Geophysical Ltd., (1989), 76 C.B.R. (N.S.) see Re Doucet and Doucet; Armitage v. Wincott and Wincott, (1983), 24 O.R. (2d) 638, 46 C.B.R.(N.S.) 203, 150 D.L.R. (3d) see Ultramar Canada Inc. v. Pierson Steamships Ltd., (1982),43 C.B.R.(N.S.) 9; also "The Comer", supra, note see Todd Shipyards Corp v. Altima Compania Maritima S.A. (1974] S.C.R see "The Comer", supra, note see The "Lady Gwendolen, [1965] 1 Lloyd's Rep see Grand Champion Tanker Ltd. v. Norspipe A/S, "The Marion", [1984] 2 All E.R Carriage of Goods by Water Act, R.S.C. 1985, c. C For a detailed discussion of these issues see Tetley, Marine Cargo Claims, 2nd Ed. (Butterworths, see Tetley, at note 30, above, esp. chapter see Tetley, at note 30, above.,