On the lien

BELGIAN trustees for the bankrupt ABC Containerline recently found to their amazement just how far the Canadian courts were prepared to go when they refused to turn over the judicial proceeds of sale of a ship, the Brussel, to the Belgian bankruptcy court for further adjudication without first paying down, in Canada, the claims of American stevedores who asserted liens against the fund, knowing that such liens would never be recognised in Belgium. Amazement turned to astonishment when the claims of Canadian suppliers of goods and services were not even given the same consideration.

The maritime supply and service industry has recently been discovering that properly drafted US lien clauses in their contracts can also benefit their cause in Canada, even where the laws of their residence do not grant them any protection as secured creditors. To qualify as a supplier, a claimant has to show that its contribution was necessary for the commercial operation of the vessel in the current trade. Then, to obtain the benefit of a US lien clause, the claimant has to show that the law governing the lien – not just the contract – is the law stipulated in its contract.

Unlike most countries in the world, Canada is not a party to any convention with respect to the arrest of ships or the recognition of maritime liens and mortgages. Canadian courts purportedly follow and apply the law as applied by the former English Admiralty courts and ‘what would have been so administered if that court had had unlimited jurisdiction’.

The subject matter covered by maritime law is wider than that covered in the UK. One of those subjects is the recognition and enforcement of maritime liens created by a law other than Canadian law. The significance of a maritime lien is that it attaches against the ship itself, notwithstanding the lack of consent or the personal liability of the shipowner, and the lien is opposable against successive purchasers of that ship.

Canada’s statute-created law on ship arrest is somewhat similar to the English counterpart. For example, the ship must be the subject matter of the cause of action and, with some exceptions - including when a maritime lien is asserted - the owner of the ship must be personally liable for the claim, and the ownership of the ship must be the same at the start of the lawsuit as at the time the cause of action arose. Sistership arrest is also available provided the ownership of the sisterships is at all times the same.

In 1926, the Supreme Court of Canada suggested in the Strandhill that, as a matter of comity and due respect for the laws of other nations, it saw no reason to refuse recognising and enforcing maritime liens granted by the foreign laws governing the formation and performance of contracts, even though those laws extended the benefit of a maritime lien to creditors whose Canadian counterparts do not enjoy the same advantage under Canadian maritime law. This decision went unnoticed in the common law world.

In 1974, the Supreme Court of Canada, in the Ioannis Daskaledis, referred to the Strandhill as the governing authority and upheld the US lien rights asserted by a US-domiciled shiprepairer. It then said that, since the right asserted was a maritime lien, then following traditional creditor ranking in maritime law, the ship repair claim, because it was secured by a maritime lien, was to be ranked ahead of the bank’s mortgage.

This set the stage for the inevitable showdown in the English law world where the same US-domiciled shiprepairer asserted the same case in the courts of Singapore against a British ship, the Halcyon Isle, for repair work effected in the US. An appeal was taken to the Privy Council. The latter court, purportedly speaking for all courts which follow English maritime law, directed that the characterisation of lien rights was a matter of procedure for the particular court seized with the case, and not a matter of substantive law. Accordingly, if there is no maritime lien for the subject matter of the claim asserted under the law where the lawsuit is instituted, then the maritime lien, wherever it was created, will not be enforced.

In 1984, in the Hai Rai, the Canadian Supreme Court dismissed the Privy Council’s criticisms of its earlier decisions and averred that it was following a different policy path. In this case, the court upheld a US bunker broker’s lien claim which arose from a contract with the time-charterer for supplies delivered in Long Beach, California. What made this case such a departure from the norm is that the court held that, notwithstanding the usual rule that there must be personal liability of the shipowner for the debt claimed in order to exercise the right to arrest the ship, the fact that a claimant held a maritime lien under the governing law was a sufficient basis to arrest the ship and force the shipowner, a purchaser subsequent to the delivery of the bunkers, to pay the claim.

In 2001, the Federal Court of Appeal, in the Imperial Oil case, had to decide whether a contract between a US resident shipmanager and a US bunker broker which stipulated that US law, including the US Maritime Lien Act, governed the relationship, created a maritime lien under US law, when the bunkers were supplied in Canada to a Canadian-owned ship operated by a Canadian demise-charterer. The Canadian demise-charterer had subcontracted the management of the ship to the US resident shipmanager.

In the Trial Division it was held that US law governed, and a lien was created. In appeal, since the court was not satisfied with the evidence, which did not disclose the nature or authority given by the Canadian companies to the US shipmanager, it was held that the closest connecting factor available was Canadian law that governed the lien, which does not provide a maritime lien for bunker suppliers, only a right to arrest subject to strict procedural conditions. The bunker broker’s action was dismissed.

The decision has left the question wide open – suppose the Canadian demise-charterer gave the fullest authority to the US shipmanager to contract on its behalf and on behalf of the ship. Would a supply of bunkers to a Canadian ship in Canada be exceptionally subject to a US maritime lien?

Early in 2002, the Federal Court of Appeal, in the MYS Chikhacheva, followed the closest connecting factors analysis. The plaintiff, a US resident, entered into a financing, management and supply contract with a Russian demise-charterer with respect to Russian fishing boats operating in the Bering Strait and the Ohanst Sea - that is, they were never going to visit US ports to be supplied. The plaintiff was to be given the exclusive right to market their catch. The contract provided that US law was to govern their relationship. The Canadian court found that US law was a significant and substantial connecting factor because otherwise the vessels would never have received the benefit of the financing, supplies and various services. Accordingly, the US maritime lien agreed to between the parties was upheld to be opposable against a shipowner who disclaimed any knowledge of how the demise-charterer was financing its operations.

Later on in 2002, the Trial Division of the Federal Court dealt, in the case of the Panamax Leader, with a claim involving a Panamanian bunker broker operating in the Ukraine who caused bunkers to be supplied in Malta to a Maltese-flag ship pursuant to a contract which stipulated that US law governed their relationship, at the request of a Ukrainian agent acting on behalf the demise-charterer, a Caribbean company. The bunkers were not paid for and a claim was made against the ship following redelivery by the demise charterer. Neither the place of supply, Malta, nor the residence of the supplier, Panama, nor the Ukraine, confers the benefit of a maritime lien on ship bunker brokers.

At the trial, the shipowner gave uncontradicted evidence of the presence of a Prohibition of Lien Notice in prominent places on the ship. The trial judge held that this was not sufficient, particularly as it was not the broker who was delivering the bunkers. None of the parties had any connection whatsoever to the US and the only connection to Canada was the misfortune of the ship to be there on another voyage when it was arrested. The court held that part of the risks of ownership when an owner demised its vessel was that the charterer would be entering into these types of agreements. The court also held that US law governed the lien as that was the agreement of the parties. The case is under appeal, but its progeny should be followed closely.

The three cases above show Canadian willingness to bind shipowners to the consequences of contracts entered into by demise-charterers and their agents acting on their behalf with third party suppliers. It should be noted that, unlike in the US, under Canadian maritime law a time or voyage-charterer can never bind the shipowner because neither can be said to be in possession of the ship. However, the door may now be left slightly ajar for an attempt to be made by a maritime supplier on the account of a time charterer on the ground that shipowners know or must be assumed to be aware that their time-charterers will likely be entering into contracts which may contain US lien clauses.

Shipowners should be reviewing what they can do to advise suppliers of the charterer’s lack of authority to create liens against the vessel and how their receipt expressly qualifies the ship’s understanding with the supplier prior to the commencement of delivery that the ship was not subject to lien. Suppliers should consult their legal counsel to review their contracts as to whether the choice of law and the specificity of the maritime lien is sufficient in order to give themselves a remedy they might be able to use in North America.

This stew of developments has given rise to some interesting strategies and debt collection tactics. If a supplier can show that the governing law of its contract or lien is US law, which its debtor is able to agree to, then regardless or whether the activity was even done in the US, whether any of the parties are US citizens or even whether the shipowner had actual knowledge of what was being done on its behalf, a supplier may benefit from a US lien clause according to its agreement. And Canada may be a willing forum to enforce the claim.