By Marc de Man
THE CANADIAN INSTITUTE OF MARINE ENGINEERING
“What happens if the shipowner decides not to pay for ship repairs?”
I am grateful for your kind invitation to address such an illustrious gathering. In fact, it reminds me of the marine engineer who was working diligently on board a bulk carrier in an attempt to repair a steel perforation on a bulkhead, and who fell to his death. Immediately, he reported to the Gates of Heaven as it is well known that marine engineers always go to Heaven on account of their honesty and integrity. St. Peter checked his archives, but he had been quite disorganized of late, and did not find the name of the marine engineer in his list. Thus, St. Peter said to the marine engineer, I am so sorry, you are not on our list.
The marine engineer had no other choice but to knock at Hell’s door, where he was greeted by Lucifer himself, and he was immediately provided with food and lodging. Some time passed, and the marine engineer became sick and tired of the miseries of Hell, and he went to the drawing board to effect some improvements and repairs to Hell. As time passed, he obtained an ISO 9002 approval, a system to channel and monitor the ashes, he installed air conditioning, special deodorizers for toilet bowls, electric staircases, electronic equipment, communication networks, preventive maintenance programs, visual control systems, fire detection systems, digital thermostats, etc., etc., etc. and the marine engineer acquired a privileged status in Hell, and the place looked better than Heaven.
One day God called Lucifer by telephone and with a suspicious tone asked him “How are things in Hell?”. Lucifer replied: “We have never been better, we have ISO 9002, a system which monitors discharge of ash, air conditioning, deodorized toilets, electric equipment, Internet, etc. My e-mail address, dear God, is thedevil@hell.com. I don’t know what other surprises the marine engineer will come up with!”
“What?” said God. “You have a marine engineer with you? That is a big mistake. All engineers go to Heaven. That is written and resolved. Send him to me at once!”.
The devil responded: “Are you crazy? I want to have the marine engineer in my organization and he is staying with me for eternity”.
God replied: “If you do not send him here, I shall SUE YOU!”
The Devil, with a big laugh, responded: “Oh, yes? And may I ask, where the heck are you going to find a LAWYER?!”
Here I am, a lawyer amongst marine engineers, and I am here to address you on the topic of “What happens in Canada if the shipowner decides not to pay for ship repairs?
Let me set out the law.
Section 22(2)n of the Federal Court Act gives the Federal Court of Canada jurisdiction over:
“any claim arising out of a contract relating to the construction, repair or equipping of a ship.”
Section 22(2)m further states:
any claim in respect of goods, materials or services wherever supplied to a ship for the operation or maintenance of the ship, including, without restricting the generality of the foregoing, claims in respect of stevedoring and lighterage.
These two provisions allow the repairman, builder and equipper to arrest the ship where the goods, equipment or services were supplied through an action in rem.
The action in rem necessitates a statement of claim and an affidavit to lead warrant. The documentation is prepared, brought to the Federal Court of Canada and a Warrant of Arrest is issued. The Warrant is given to the Sheriff, Bailiff, Marshall, and he in turn contacts the Coast Guard, the Pilotage Authority and Customs. Upon service of the Warrant of Arrest, the vessel is paralyzed.
The action in rem is a recourse against the ship (“thing” in Latin). In old times, in England, the Warrant of Arrest was issued and nailed to the wooden mast of the ship and a fouled anchor was drawn with chalk on the deck of the ship. Today, no wooden masts exist, and the Marshall/Bailiff/Sheriff does not carry chalk in his pocket. Now, he just walks into the bridge of the ship and scotch tapes the Warrant of Arrest on the window of the bridge, in front of the helm.
The action in rem can be exercised against the vessel concerned provided the ship is still beneficially owned when the action is commenced by the party who beneficially owned it when the cause of the action arose, that is to say, when the repairs were effected. The same beneficial owner must also be liable personally or in personam on the claim.
Upon use of this recourse, the ship may pay the claim, or may put up security, in order that the vessel be permitted to sail. The issue on the merits is then either settled subsequently or at trial.
This is what occurs when the ship is prepared to pay for the claim or put up security. If not, the ship remains under arrest, and is put up for sale.
This is where the plot thickens. If the vessel is put up for sale, the claim of the repairman, builder or equipper is only a STATUTORY RIGHT IN REM. That means that he has a right by statute to arrest the ship, but he is ranked below the mortgage creditor.
Sometimes, the ship has already been arrested by another creditor, and in this situation, a Notice of Caveat Release is filed which is the equivalent of a second or third arrest. If no security is presented, or if the claim is not settled, the Caveator has the same rights as the arresting creditor, and is ranked depending on the nature of his claim.
The problem that arises is that the claim of the repairman, builder and equipper is not a MARITIME LIEN, but simply a statutory right in rem. If it was characterized as a maritime lien, it would rank ahead of the mortgage creditor, should the vessel be sold and the proceeds of sale distributed amongst the creditors. This is manifestly unjust, particularly since the mortgage creditor usually has a large claim which in practice eats up all the proceeds of the sale once maritime liens, sheriff’s fees and crew wages are paid.
Moreover, in the United States of America, the repairman, builder or equipper of a ship has a true maritime lien which ranks before the mortgage, if the work was carried out before the mortgage was filed. In addition, the US lien also travels with the ship when the ship passes into new ownership. In Canada, the UK and most jurisdictions, it is expunged by change of ownership of the ship. In general, throughout the world, with the exception of the US, repairmen have a right against the ship, but it unfortunately ranks after traditional liens and the ship mortgage.
There is another recourse available through the Federal Court, namely the sister ship arrest. In other words, if you effect repairs on the ZIM HAIFA, you may arrest the ZIM TEL AVIV. This recourse has been curtailed by the jurisprudence in Canada, because it is only available if the ships are both owned by the same registered owner. In reality, particularly with tramp vessels, you rarely have the same registered owner for two ships.
There is another lien that benefits the repairman, builder and equipper which is called the POSSESSORY LIEN. The possessory lien only survives during actual possession and does not give a right to proceed in rem or to sell the vessel. This lien, however, is protected by the court, which will recognize the lien holder’s rights once the ship has been arrested in another proceeding. At this point the ship repairer may intervene and request protection.
If no other party arrests the ship, the ship repairer may also obtain judgment in personam and then seize the ship for sale, subject to the possessory lien.
The leading case on the repairman’s possessory lien in Canada is The Montreal Dry Docks and Ship Repairing Co. v. The Halifax Shipyards. A ship repairer was working on the ship in its yard when the ship was arrested by another claimant. It was held that the ship repairer had a possessory lien for the cost of repairs carried out at the time of the arrest and ranked ahead of the other ordinary creditors on the proceeds when the ship was sold by the court.
The possession need not be exclusive so that if the contractor hands over the vessel to a sub-contractor to work on, the latter may hold the vessel for both his own claim and that of the contractor. However, a clear agreement whereby one of these possessory lien holders authorizes the other to hold the ship for him is required.
The ship repairer without possession only has a statutory right in rem.
Mr. Justice Addy, in the case of the Miss Dona [1978] 1 F.C. 379 noted as follows at page 383:
“A person who has effected repairs on a ship, once he has relinquished possession of it and has therefore abandoned any possessory lien to which he might have been entitled, is therefore in the same position as an ordinary creditor since he has no maritime lien. when such a person seeks to recover the monies due him by action in rem and arrests the ship, he does not by so doing put himself in any higher category.”
He further adds at page 386:
“Since an action in rem is merely procedural, the arrest of a ship, following the instituting of the action, must also be merely procedural: it merely provides a remedy and does not create any special legal vested right in the creditor or claimant which did not exist previously.”
Therefore, to summarize: The ship repairer, equipper, builder of a ship has both a statutory right in rem and a possessory lien. The possessory lien requires possession at all times and ranks ahead of the mortgage and statutory rights in rem. The repairman’s statutory right in rem gives only a right of arrest.
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