Docket: T-1226-10
Citation: 2016 FC 27
ADMIRALTY
ACTION IN REM AGAINST THE VESSEL “QE014226C010”
AND IN PERSONAM
Ottawa, Ontario, January 8, 2016
PRESENT: The Honourable Mr. Justice Southcott
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BETWEEN:
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OFFSHORE
INTERIORS INC.
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Plaintiff
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and
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WORLDSPAN
MARINE INC., CRESCENT CUSTOM YACHTS INC., THE OWNERS AND ALL OTHER INTERESTED
IN THE VESSEL “QE014226C010” and THE VESSEL “QE014226C010”
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Defendants
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WOLRIGE
MAHON LIMITED in its capacity as Appointed Vessel Construction
Officer
of the Defendant Vessel “QE014226C010”, HARRY SARGANT
III,
MOHAMMAD
ANWAR FARID AL-SALEH,
and
642385 B.C. LTD.
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Intervenors
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ORDER AND REASONS
[1]
This decision results from two motions heard by
the Court in Vancouver, British Columbia on December 14, 2015, as well as a preliminary
evidentiary motion which I decided from the bench at the hearing.
I.
PRELIMINARY MOTION
[2]
At the hearing, Worldspan Marine Inc.
[Worldspan] brought a preliminary motion, seeking leave under Rule 312 to file
new evidence and written representations in support of its main motion dated
October 14, 2014 related to Section 12.1 of the Vessel Construction Agreement
[VCA] and in reply to the responding Motion Record of Harry Sargeant III
[Sargeant] filed on November 23, 2015. These reasons on the preliminary motion were
delivered orally from the bench at the hearing on December 14, 2015 and are now
being released in writing.
[3]
Sargeant argues that Rule 312, which allows
supplementary filings with leave of the Court, applies only to applications and
not to motions. However, he acknowledges that the Court has discretion to allow
such filings and refers the Court to the decision of the Federal Court of
Appeal in LaPointe Rosenstein v Atlantic Engraving Ltd, 2002 FCA 503 [Atlantic
Engraving], which set out the test that, for evidence to be adduced in
these circumstances, the applicant must show (in addition to other elements of
the test) that the evidence was not previously available. This requirement is
intended to prevent a party from splitting its case and ensure that the best
case is put forward at the first opportunity. Atlantic Engraving refers
to whether the evidence was available prior to a cross-examination. Sargeant
argues that in the case at hand, the relevant time to be examined, in
considering whether the evidence was available, was prior to the time at which
Worldspan filed its motion on October 14, 2014.
[4]
I agree with Sargeant’s submissions that,
regardless of the correct answer to the more technical question of whether Rule
312 applies to this motion, the test I should apply is that prescribed by Atlantic
Engraving. Specifically, I should consider whether Worldspan was in a
position to file the evidence and make the written representations, which it
now seeks to file, when it filed its original motion materials on October 14,
2014.
[5]
Worldspan argues that Sargeant’s Motion Record
raised new issues in arguing that the motion is res judicata, subject to
estoppel, or an abuse of process. Worldspan does not seek to adduce new
evidence on these issues and states that it relies primarily on Reasons of the
Court in previous interlocutory decisions in support of the written submissions
it wishes to file on these issues. Notwithstanding this, I consider the
principles in Atlantic Engraving to be applicable and have considered
whether Worldspan was in a position to make these submissions when it filed its
original motion materials on October 14, 2014. I find that it was in such a
position, as the Reasons of the Court in previous interlocutory decisions, upon
which its proposed submissions on the res judicata point seek to rely,
pre-date the filing of its motion.
[6]
Also, Sargeant demonstrated that his counsel had
raised in the past the fact that it was Sergeant’s position that the argument,
that Section 12.1 of the Vessel Construction Agreement gave amounts due to
Worldspan priority over Sargeant’s mortgage, was res judicata. The
record indicates that the issue of priority arising from Section 12.1 was
raised by the Plaintiff, Offshore Interiors Inc., in June 2014 on the motion to
sell the Vessel, and that Sargeant’s written representations in response argued
that this issue was res judicata. I do not read the Court’s subsequent
decision on that motion to decide this issue and therefore cannot accept
Worldspan’s argument that it thought the res judicata argument was
itself res judicata.
[7]
As Sargeant’s argument on estoppel and abuse of
process represent alternative formulations of the res judicata argument,
and as the written submissions that Worldspan wishes to file on all three
issues are essentially the same, my conclusion applies equally to all three
issues. Sargeant’s position was known prior to Worldspan filing its motion
materials on October 14, 2014. As such, there is no basis to exercise
discretion to provide Worldspan with leave to file additional submissions on
these issues.
[8]
Worldspan also argues that Sargeant’s Motion
Record raises new issues in asserting that equity favours Sargeant’s position
in relation to Section 12.1 and referring to Worldspan as being the party that
breached the VCA. However, I note that Worldspan’s original Motion Record filed
on October 14, 2014 raises arguments about equitable set-off including
arguments that Sargeant, in stopping payments to Worldspan without terminating
the VCA, does not have the clean hands necessary to invoke equity. Worldspan’s
Motion Record of October 14, 2014 expressly anticipates that Sargeant may raise
equitable set-off arguments. Sergeant’s Motion Record filed on November 23,
2015 did raise such arguments, in part in response to Worldspan’s own Written
Representations.
[9]
I have difficulty concluding that considerations
of equity are relevant to the motion to be argued involving the contractual
interpretation of section 12.1 of the VCA, although that is a decision for me
to make following the argument on the motion. Regardless, given that it is
clear from Worldspan’s Motion Record of October 14, 2014 that it expressly
anticipated that Sargeant would argue the application of equity in support of
its position, there is no basis to exercise discretion to provide Worldspan
with leave to file additional materials.
[10]
Worldspan’s preliminary motion is therefore
dismissed, with costs payable by Worldspan Marine Inc. to Harry Sargeant III in
the fixed amount, inclusive of disbursements, of $1500.
[11]
I noted at the hearing that, while Worldspan had
not been granted leave to file new written representations, it was at liberty
to make oral submissions, based on the record before the Court, in reply to
Sargeant’s arguments.
II.
MAIN MOTIONS
[12]
The remainder of this decision results from the
two main motions argued by the parties on December 14, 2015.
[13]
The first motion was originally filed by
Worldspan on October 14, 2014, seeking various relief. Pursuant to the Case
Management Order of Madam Prothonotary Tabib dated October 26, 2015 [the Case
Management Order], this hearing involved only the part of the motion seeking a
declaration that amounts that may be due and owing, by Sargeant to Worldspan
under the Vessel Construction Agreement [VCA] between those parties, have
priority over any security interest of Sargeant and its assignee, Comerica Bank
[the Worldspan Motion].
[14]
The second motion, filed by Sargeant on November
23, 2015, seeks an Order that the in personam claims between Sargeant
and Worldspan proceed in the Supreme Court of British Columbia, leaving the in
rem claims under the Builder’s Mortgage between those parties and any claim
under section 22(2)(n) of the Federal Courts Act, RSC 1985, c F-7 to be
addressed in this proceeding [the Sargeant Motion].
[15]
For the reasons that follow, both the Worldspan
Motion and the Sargeant Motion are dismissed.
III.
BACKGROUND
[16]
The context and history of this proceeding are
summarized in the following excerpt from the Case Management Order that
scheduled this hearing:
The underlying action is a claim by the
Plaintiff Offshore Interiors for unpaid supplies and services provided to the Defendant Worldspan
Marine for the construction of the Defendant vessel “QE014226C010”, in fact,
the hull of an unfinished yacht. Worldspan had been building the yacht for
Harry Sargeant III under the terms of a Vessel Construction Agreement (“VCA”).
Offshore arrested the vessel in 2010, and
numerous claimants filed caveat releases, indicating that they, too,
asserted in rem claims against the vessel. Offshore obtained a default
judgment against Worldspan and the vessel in the amount of $273,754.58 in May
2011. Meanwhile, Worldspan had filed for relief under the Companies
Creditors’ Arrangement Act in the BC Supreme Court. The BC Supreme Court
issued a claims process order in July 2011, requiring all creditors to deliver
proof of their claims by a certain date. The claims process order, recognizing
that the vessel appeared to be the main asset of Worldspan, provided that any
creditor could also assert a claim in rem against the vessel and pursue
that claim outside the CCAA proceedings, in the Federal Court. It asked the
Federal Court’s assistance in carrying out the order. On August 29, 2011, the
Federal Court issued an order setting out a claims process for any creditor
asserting an in rem claim against the vessel. The order required
claimants to file an affidavit containing particulars in support of their claim
and provided that “all questions relating to the right of any claimant in
rem against the Vessel and all questions respecting the priority of all in
rem creditors (…) shall be determined at a subsequent hearing date (…)”.
Sargeant and Comerica Bank both filed proofs
of claim in the CCAA process, and affidavits asserting a claim in rem
pursuant to the Federal Court’s order. Their claim, in the amount of some $20
million, is based on a Builder’s Mortgage granted to Sargeant by Worldspan to
secure the advances made by Sargeant to Worldspan towards the construction of
the vessel, and in turn assigned to Comerica by Sargeant to secure a
Construction Loan Agreement.
Affidavits were also filed by various trades
for outstanding invoices for goods and services provided to Worldspan in the
construction, totaling some $1.7 million. While all parties agree that, at law,
these claims would rank below the mortgage, the trade claimants have indicated
that they would seek an order for an equitable reallocation of the order of
priorities based on the conduct of Sargeant and Worldspan.
Finally, Worldspan itself filed an affidavit
asserting in rem rights and priorities. In particular, Worldspan claims
that advances amounting to nearly $5 million in capital remain due and owing to
it by Sargeant under the VCA. Worldspan claims that pursuant to s. 12.1 of the
VCA, these unpaid advances take priority over Sargeant’s mortgage. (Other
claimants also asserted in rem claims, but these have since been
dismissed, paid or withdrawn and are therefore not germane to this discussion).
In parallel, Sargeant, Comerica and Worldspan
have filed suits and counter suits in the BC Supreme Court.
The vessel was eventually sold under order
of this Court for the sum of $5 million, from which Marshall fees have already
been deducted.
Roughly, then, the situation as it stands
today could be described as follows: from what remains of the $5 million of the
proceeds of sale, Sargeant and Comerica claim to have priority under a
Builder’s Mortgage for a $20 million claim. Worldspan argues that unpaid
advances due to it by Sargeant in the amount of over $5 million (with interest)
take priority over the Mortgage. The trade claimants would like to see any
order of priority reallocated so that their claim of $1.7 million be satisfied
first.
From a thousand feet up, the situation
described above appears straightforward, but on the ground, it is anything but.
Although detailed affidavits of claim have been filed over four years ago in
the expectation that there would be cross examinations and eventually, a
priority hearing, neither have so far happened. Instead, the issues seem to
have been brought before the Court in the form of a series of preliminary
motions to strike or for various declarations. First, Offshore brought
preliminary motions to strike the claims of several trade claimants and Worldspan’s
in rem claim. It then brought a motion seeking a declaration that the
Builder’s Mortgage did not create a lien or charge in the vessel other than to
secure its delivery. Sargeant also brought a motion to strike another
claimant’s in rem claim based on the validity of the asserted claim as a
right in rem and this Court’s jurisdiction. While these motions have
resulted in the summary dismissal of several claims, they have not resolved
Sargeant’s, Comerica or Worldspan’s competing claims. And while these motions
have been argued, determined by the case management Prothonotary, appealed to a
Judge of this Court, and then appealed again to the Court of Appeal, cross
examinations on the affidavits of claim and the scheduling of a priorities
hearing have kept being postponed.
The last of the appeals was finally
determined in February 2015. …
[17]
Against this backdrop, the Case Management Order
set down the Worldspan Motion and the Sargeant Motion for hearing, on the
rationale that the issues raised by these motions can be severed from other
issues in this proceeding and that their determination may help to direct and
narrow issues still to be resolved in the future. While the issues raised in
the two motions before me are not entirely unrelated, they are sufficiently
discrete that I will address them separately in these Reasons.
IV.
WORLDSPAN MOTION
A.
Facts
[18]
The Worldspan Motion, seeking a declaration that
amounts that may be due and owing to it by Sargeant under the VCA have priority
over any security interest of Sargeant and Comerica Bank [Comerica], is based
on Worldspan’s interpretation of the meaning of Section 12.1 of the VCA, which
states as follows (with “Builder” meaning
Worldspan and “Owner” meaning Sargeant):
SECTION 12 – TITLE
12.1 Builder will retain title to the Vessel
until delivery to Owner. Builder grants to Owner a continuing first priority
security interest to the Vessel, including all work, materials, machinery, and
equipment relating to the Vessel, to secure any sums advanced or paid to
Builder under this Agreement; provided, however, that such security interest
shall be subordinate to Owner’s obligations under the Contract Documents
including Builder’s right to receive payments pursuant to this Agreement. In
support of Owner’s security interest in the Vessel Builder agrees to register a
Ship’s Mortgage in favour of Owner or Owner’s construction lender (the form of
the mortgage document is to be agreed upon between the parties acting
reasonably) if Owner requests that this be done for any purpose.
[19]
The Affidavit dated October 14, 2011 filed by
Sargeant pursuant to the Order of Prothonotary Lafrenière dated August 29, 2011[Federal
Claims Process Order], setting out the process for asserting in rem
claims against the Defendant Vessel [the Vessel], refers to US $20,945,924.05 and
CDN $20,000.00 in payments advanced by Sargeant to Worldspan for the
construction of the Vessel and a Builder’s Mortgage granted by Worldspan to
Sargeant and registered under the Canada Shipping Act, 2001, SC 2001, c
26 to secure such payments [the Mortgage].
[20]
The Affidavit of Michael Nesbitt, filed by
Worldspan on October 14, 2011 pursuant to the Federal Claim Process Order and
relied upon by Worldspan in its motion, refers to claims under the VCA for
payments due by Sargeant, and states that outstanding amounts due as of April
2010 totalled US $4,920,798.11 plus interest for a total of US $6,643,082.59
due and owing to the date of the Affidavit. Worldspan’s October 31, 2014 written
representations in this motion update this figure to US $6,757,362.36.
B.
Issues
[21]
As will be explained in more detail below, the
parties’ arguments raise the following issues to be decided on the Worldspan
Motion:
A.
Is the declaration of priority sought by
Worldspan precluded by the doctrine of res judicata, issue estoppel or
abuse of process?
B.
Does the interpretation of Section 12.1 of
the VCA support the declaration of priority sought by Worldspan?
C.
Does the doctrine of equitable set-off
affect the declaration of priority sought by Worldspan?
C.
Position of Worldspan
[22]
Worldspan filed Written Representations in
support of its motion, and supplemented its argument with oral submissions at
the hearing. Two in rem claimants, Capri Insurance Services Ltd. and
Raider-Hansen Inc., also filed written submissions adopting the submissions of
Worldspan.
[23]
Worldspan’s position is that the effect of
Section 12.1 of the VCA is to give the amounts said to be owing by Sargent to
Worldspan priority over the Mortgage. It refers in particular to the fact that
Section 12.1 states:
…that such security interest shall be subordinate
to Owner’s obligations under the Contract Documents including Builder’s right
to receive payments pursuant to this Agreement. [Worldspan’s emphasis]
[24]
Worldspan notes that the $6,757,362.36 it is
claiming from Sargeant exceeds the proceeds of sale of the Vessel and argues
that Section 12.1 represents an agreement between it and Sargeant that amounts
due from Sargeant would be paid prior to any exercise of rights under the
Mortgage. Worldspan’s position is that Sargeant is entitled to delivery of the
Vessel once it has paid all amounts owing to Worldspan, that the sale proceeds
have now replaced the res as a result of the Order of Prothonotary
Lafreniere dated June 23, 2014 approving the judicial sale of the Vessel [the
Sale Order], and that Sargeant is now entitled to delivery of the proceeds but
only once it has paid Worldspan in full.
[25]
Worldspan argues that this interpretation of
Section 12.1 is consistent with other provisions of the VCA. In particular,
Section 3.2 provides that the date by which Worldspan is obliged to deliver the
Vessel to Sargeant is to be extended to account for any delays caused by
Sargeant’s failure to comply with its obligations under the VCA, including
failure to make timely payment. Section 4.3(e) also contains an acknowledgment by
the parties that the payment arrangements prescribed by the VCA are intended to
maintain positive cash flow to Worldspan.
[26]
In addition to the wording of Section 12.1 and
other provisions of the VCA, Worldspan relies on the decision of Justice Mosely
in his interlocutory decision in this matter on July 4, 2014, dismissing
Sargeant’s appeal of the Sale Order [the Sale Appeal Decision]. Worldspan
refers to paragraphs 6 and 7 of the Sale Appeal Decision, in which Justice Mosley
quotes from the VCA and adds emphasis as follows:
[6] Section 12.1 of the VCA reads as
follows:
Builder will retain title to the
Vessel until delivery to the Owner. Builder grants to Owner a continuing first
priority security interest in the Vessel, including all work, materials,
machinery, and equipment relating to the Vessel, to secure any sums advanced or
paid to Builder under this Agreement; provided however, that such security
interest shall be subordinate to Owner’s obligations under the Contract Documents
including Builder’s right to receive payments pursuant to this Agreement.
In support of Owner’s security interest in the Vessel Builder agrees to
register a Ship’s Mortgage in favour of Owner or Owner’s construction lender
(the form of the mortgage document is to be agreed upon between the
parties acting reasonably) if Owner requests that this be done for any purpose.
[Emphasis added]
[7] Worldspan’s in personam rights
under section 12.1 of the VCA have yet to be adjudicated. It remains open to
Worldspan to participate in the Claims Process and challenge the in rem
claims, as owners of the Vessel.
[27]
Worldspan argues that the emphasis by Justice
Mosley in the above passage represents a judicial recognition that Sargeant’s
security interest is subordinate to Worldspan’s right to payment.
D.
Position of Sargeant and Comerica
[28]
Sargeant filed substantive written submissions
in response to the Worldspan Motion, and Comerica concurred with those
submissions. In addition to arguing their interpretation of the effect of
Section 12.1 of the VCA, Sargeant takes the position that the relief sought in
the Worldspan Motion is res judicata, subject to issue estoppel, or an
abuse of process. He also argues the application of the doctrine of equitable
set-off.
(1)
Res Judicata, Estoppel and Abuse of Process
[29]
Citing Danyluk v Ainsworth Technologies Inc,
2001 SCC 44 [Danyluk], Sargeant submits that the purpose of the doctrine
of res judicata and its related branches, issue estoppel and abuse of
process, is to bring finality to litigation. Sargeant argues that the meaning
of Section 12.1 and whether it gave Worldspan a priority claim was argued by
Worldspan when it sought a declaration of priority over the Builder’s Mortgage in
a motion heard on November 18, 2011. That motion was dismissed by Prothonotary Lafrenière
on November 30, 2011 [the Priority Decision], and its appeal was dismissed by Justice
Lemieux on January 18, 2012 [the Priority Appeal Decision]. Therefore, Sargeant
argues that Worldspan’s claim for priority is res judicata.
[30]
Sargeant also argues that the Worldspan Motion
is precluded by the doctrine of issue estoppel, which is similar to res
judicata and prevents parties from relitigating “any
right, question or fact distinctly put in and directly determined by a court of
competent jurisdiction” (Danyluk at para 25). Its application
requires that the earlier decision which is said to create the estoppel: (a)
involved the same question; (b) is final; and (c) was between the same parties.
Any discretion afforded to the Court not to apply the doctrine is limited to
instances of fraud or dishonesty.
[31]
Sargeant submits that the Priority Appeal
Decision was based upon, inter alia, Section 12.1 of the VCA. Applying
the three criteria for issue estoppel, it submits that the question before
Justice Lemieux was the same question now raised in the Worldspan Motion, that
the decision was final and that it involved the same parties. Sargeant argues
that there are no circumstances that warrant the Court exercising discretion to
not apply the doctrine.
[32]
Finally, Sargeant argues that if issue estoppel
does not apply, Worldspan should still not be allowed to raise its argument as
a result of the doctrine of abuse of process. Sargeant refers to a requirement
that a party bring forward its whole case with all relevant arguments at the
same time and that an unsuccessful litigant cannot return to litigate a
question with a new legal theory.
[33]
In support of this argument, Sargeant refers to
a course of interlocutory litigation that commenced with a motion by the
Plaintiff, Offshore Interiors Inc. [Offshore], on February 9, 2012, seeking a
declaration that the Mortgage does not create a charge or lien over the Vessel
other than to secure delivery. Prothonotary Lafrenière granted the motion on
March 5, 2013, but this decision was set aside on appeal by Justice Strickland
on December 19, 2013 [the First Mortgage Appeal Decision]. Offshore’s appeal of
Justice Strickland’s decision was dismissed by the Federal Court of Appeal on
February 16, 2015 [the Second Mortgage Appeal Decision]. While that challenge
to the Mortgage was brought by Offshore rather than Worldspan, Sargeant notes
that Worldspan’s current counsel was then representing Offshore and was
appointed as counsel for Worldspan on February 15, 2013, in the early stages of
this interlocutory litigation.
[34]
Sargeant accordingly argues that the parties
opposed to the priority of the Mortgage were required to bring forward all
relevant challenges at the same time and that, given the previous litigation both
on the priority of Section 12.1, culminating in the Priority Appeal Decision, and
on the challenge to the Mortgage, culminating in the Second Mortgage Appeal
Decision, it would be an abuse of process to permit Worldspan now to relitigate
its position under new legal theories.
[35]
Worldspan’s response to Sargeant’s res
judicata, estoppel, and abuse of process arguments is that the Priority
Decision decided only that, because Worldspan was the Vessel’s owner and
therefore not able to establish in personam liability against itself, it
did not have an in rem claim against the Vessel. It argues that both the
Priority Decision and the Priority Appeal Decision contain language the effect
of which is to preserve Worldspan’s right to raise arguments, such as are being
made in the present motion, in defence of Sargeant’s claim.
(2)
Effect of Section 12.1 of the VCA
[36]
Sargeant’s position on the interpretation of
Section 12.1 is that the purpose of the subordination language was to delay
delivery of the Vessel until Worldspan was paid what it was owed but that, if
money was owed to Worldspan and Sargeant was also owed money, there would be a
set-off of these amounts. However, in the current circumstances, with the Vessel
having been sold by judicial sale, Sargeant takes the position that it does not
owe any money pursuant to the VCA and therefore the question of priority
between its and Worldspan’s claims does not arise.
[37]
Sargeant also argues that Worldspan’s
interpretation of Section 12.1 would result in commercial absurdity because, for
example, if Sargeant owed one dollar to Worldspan and Worldspan owed
$20,000,000 to Sargeant, Sargeant would on Worldspan’s interpretation be unable
to enforce his security interest.
[38]
Sargeant’s arguments in support of its
interpretation of Section 12.1 focus on the termination clauses of the VCA. In
the case of default by Worldspan, Section 13 of the VCA provides that Sargeant
that has the right to terminate the VCA and take possession of the Vessel and
complete it or alternatively sell it. Section 24 then sets out a formula
governing the distribution of the sale proceeds and the settlement of accounts
between the owner and the builder. Without descending into the detail of the
formula, in circumstances where a loss results from the sale price being less
than the intended purchase price under the VCA, the formula prescribes the
calculation of an amount to be paid by Worldspan to Sargeant to take into
account such loss. Section 24 further contemplates each party being entitled to
set-off any amounts owing by it against amounts owing to it by the other party.
[39]
Sargeant also notes that, in the case of default
by Sargeant and termination by Worldspan, Section 13.5 of the VCA requires Worldspan
to repay to Sargeant all the advances paid by Sargeant, less Worldspan’s costs
of storage and sale and an amount calculated by another formula which takes
into account losses resulting from sale of the Vessel for less than the intended
purchase price under the VCA.
[40]
Sargeant argues that, regardless of which party
breached and which terminated the VCA, these formulae applied to the amounts at
issue result in Sargeant being entitled to claim the entirety of the proceeds
from the judicial sale of the Vessel. Moreover, neither termination regime
contemplates that amounts owing from Sargeant to Worldspan would bar Sargeant
from receiving monies owing to it, other than though the application of a
set-off. Sargeant also argues that its interpretations of Sections 13 and 24 of
the VCA were endorsed by the Federal Court of Appeal in the Second Mortgage
Appeal Decision.
[41]
Worldspan responds to these arguments by submitting
that none of the provisions in Section 13 or 24 have been invoked or apply to
the circumstances of this case and that Sargeant’s argument amounts to a
position that those Sections override Section 12.1, which would result in the
subordination referenced in Section 12.1 having no effect. It also takes issue
with the figures used by Sargeant to support the conclusion that the formulae
prescribed by Section 13 and 24 would result in Sargeant being entitled to
claim the entirety of the proceeds of sale.
(3)
Equitable Set-Off
[42]
Finally, Sargeant argues in the alternative that,
even if it is wrong in its interpretation of Section 12.1, the doctrine of
equitable set-off allows Sargeant to enforce the Mortgage, as it would not be
equitable to allow Worldspan to prevent enforcement of the Mortgage when the
debt it owes is so much larger than any amount that Sargeant may owe it.
[43]
Sargeant relies on the test for equitable
set-off as prescribed in Telford v Holt, [1987] 2 S.C.R. 193 at para 35:
A.
The party relying on a set-off must show
some equitable ground for being protected against his adversary’s demands;
B.
The equitable ground must go to the very
root of the plaintiff’s claim before a set-off will be allowed;
C.
A cross-claim must be so clearly connected
with the demand of the plaintiff that it would be manifestly unjust to allow
the plaintiff to enforce payment without taking into consideration the
cross-claim;
D.
The plaintiff’s claim and the cross-claim
need not arise out of the same contract;
E.
Unliquidated claims are on the same footing
as liquidated claims.
[44]
In reply, Worldspan takes the position that the
Worldspan Motion is seeking a decision on the interpretation of Section 12.1 of
the VCA and that the doctrine of equitable set-off cannot be relevant to contractual
interpretation. It also argues that Sargeant cannot in any event rely on
equitable set-off because his hands are “not clean”.
Worldspan refers to Sargeant stopping paying claims certificates in December of
2009 but not terminating the VCA until November of 2010. Worldspan argues that
in the intervening months. Worldspan and its subcontractors were expending
substantial time and materials on the Vessel, with the effect of “feeding” Sargeant’s security. In response, Sargeant
says that there is no evidence to support the allegation of unclean hands and
that, even if there was such evidence, the parties that would be affected would
be the trade creditors rather than Worldspan. He argues that such
considerations may have some relevance in an application to reorder priorities
but are not relevant to an application to determine the meaning the VCA.
E.
Analysis
[45]
Reduced to simple terms, Worldspan’s proposed
interpretation of the relevant language of Section 12.1 of the VCA is that
payment of any amounts owing by Sargeant to Worldspan represents a contractual
condition which must be satisfied before Sargeant has the right to invoke its
security under its Mortgage. In contrast, Sargeant’s interpretation is that
Section 12.1 operates in the present circumstances to give Worldspan a
contractual right of set-off, such that Worldspan can deduct, from the amount
of Sargeant’s Mortgage claim, any amounts that Sargeant owes Worldspan for
unpaid installments under the VCA. I note that it is Sargeant’s position that
no such amounts are owing by it to Worldspan, but the determination of that
issue is not before me on the Worldspan Motion.
[46]
Against the backdrop of these competing
interpretations of Section 12.1, I have considered the three issues raised on
this motion.
(1)
Res Judicata, Estoppel and Abuse of Process
[47]
Sargeant’s arguments on res judicata and
estoppel are based on the fact that the Notice of Motion filed by Worldspan is
framed as seeking a declaration of priority, which is the same manner Worldspan
framed its motion that was dismissed by Prothonotary Lafrenière and then
Justice Lemieux in, respectively, the Priority Decision and the Priority Appeal
Decision. If I were to consider these arguments based strictly on the words
used to frame the relief sought in the relevant Notice of Motion, I might agree
with Sargeant that this issue has already been decided by the Court. However,
it is clear from Worldspan’s written and oral submissions that, despite being framed
as a priority determination in its Notice of Motion, the issue raised by the
Worldspan Motion is not the same one that the Court has previously adjudicated.
[48]
The Priority Decision and the Priority Appeal
Decision were based on the conclusion that Worldspan, as the owner of the
Vessel, cannot have an in rem claim against its own property. While not
expressly stated in either the Priority Decision or the Priority Appeal
Decision, it naturally follows that Worldspan has no claim capable of being
afforded any particular priority among competing in rem claims against
the process of sale. However, the Worldspan Motion does not seek a priority
determination in that sense. Rather, it asks the Court to interpret Section
12.1 of the VCA in a manner which would give it a defence to the in rem
claim by Sargeant, i.e. that the mechanism contractually agreed by the parties
is that Sargeant cannot assert its claim under its Mortgage until it has made
all outstanding installment payments.
[49]
My conclusion is that this question, the
interpretation of Section 12.1, and in particular its reference to Sargeant’s
security interest being subordinate to Worldspan’s right to receive payments
under the VCA, has not previously been decided by the Court. This conclusion is
consistent with the language that Worldspan points to in the Priority Decision
and the Priority Appeal Decision. In his Reasons for the Priority Decision,
Prothonotary Lafrenière stated that “… such other
remedies as Worldspan may have are not before me and are not affected by the
decision.” Similarly, in the Priority Appeal Decision, Justice Lemieux
noted that statement by the Prothonotary, as well as the position expressed by
Offshore that Worldspan as owner of the Vessel will be entitled to participate
in the Federal Court claims process to challenge the in rem claims and
their in personam basis and will be the principal beneficiary of
whatever is available from the proceeds of sale after the in rem
distribution.
[50]
While neither the Priority Decision nor the Priority
Appeal Decision expressly refers to the particular remedies or challenges that
are available to Worldspan to be raised in defending the in rem claims,
I consider Worldspan’s present argument on the interpretation of Section 12.1
to be the sort of defence argument that remained available to Worldspan to
assert following these decisions.
[51]
I have considered separately Sargeant’s abuse of
process argument. Even though the Court has not previously ruled on the
interpretation of Section 12.1 that Worldspan advocates in the present motion,
it is still available for Sargeant to argue that this interpretation and the
defence position it supports should have been raised by Worldspan in earlier
interlocutory litigation in this proceeding. Sargeant’s Written Representations
focus in particular on the motion and subsequent appeals related to the
question of whether the Mortgage secures advances made by Sargeant to
Worldspan, as opposed to securing just delivery of the Vessel as had been
argued by Offshore on that motion.
[52]
I note first that the motion on the effect of
the Mortgage was brought by Offshore, not by Worldspan. Notwithstanding
Sargeant’s argument that, in the course of the litigation of this issue (but
subsequent to the argument on the motion before Prothonotary Lafrenière),
Offshore’s counsel Mr. Wharton also assumed representation of Worldspan, I find
it difficult to conclude that Worldspan should have been expected to raise its
present argument on the interpretation of Section 12.1 in the context of Offshore’s
challenge of the Mortgage.
[53]
I would also consider such a conclusion to be
contrary to the rationale which sometimes underlies an early determination being
sought on certain issues relevant to a priorities dispute in an in rem
proceeding. An early determination on a particular issue can sometimes
eliminate the necessity for the litigation of other issues. There are various
arguments which can potentially be raised by a vessel owner or unsecured in
rem creditors to challenge a mortgage claim, including for instance seeking
a reordering of the traditional priorities on equitable grounds, which Sargeant
acknowledges in the present case is an issue that, depending on the outcome of
the Worldspan Motion, even now still remains to be addressed. In the case at
hand, if the motion on the nature of the Mortgage had resulted in Offshore’s
position being accepted by the Court, it may have eliminated the need for
various other issues to be litigated including the interpretation of Section
12.1 of the VCA. I am therefore not prepared to conclude that it represents an
abuse of process for Worldspan not to have raised all possible issues that
might have favoured its position over that of Sargeant, in particular seeking a
contractual interpretation of Section 12.1 of the VCA, in the context of Offshore’s
motion on the nature of the Mortgage.
[54]
Sargeant also raises the abuse of process
argument in the context of the motion leading to the Priority Decision and the
Priority Appeal Decision, arguing that the contractual interpretation question
should have been raised in that motion. In relation to that motion, Sargeant’s
argument benefits from the fact that the moving party was Worldspan, not
Offshore. However, I note that Worldspan’s motion appears to have been brought
in response to a motion by Offshore seeking to dismiss Worldspan’s in rem
claim, both motions then being addressed by Prothonotary Lafreniere for the
same reasons, granting Offshore’s motion and dismissing that of Worldspan.
[55]
Again, my conclusion is that the issue that was
raised in those motions, being Worldspan’s entitlement to assert an in rem
claim, is discrete from the contractual interpretation question it is now
raising. It should not be considered an abuse of process for Worldspan not to
have raised the contractual interpretation in its earlier motion. To conclude
this to be an abuse of process would also be inconsistent with the language in
the Priority Decision and the Priority Appeal Decision to the effect that other
remedies that Worldspan may have were not affected by the Prothonotary’s
decision and that Worldspan, as owner of the Vessel, will be entitled to
participate in the Federal Court claims process to challenge the in rem
claims.
(2)
Effect of Section 12.1 of the VCA
[56]
Sargeant notes that in the Second Mortgage
Appeal Decision, the Federal Court of Appeal referred to the relevant
principles of contractual interpretation. In Offshore Interiors Inc. v.
Harry Sargeant III et al., 2015 FCA 46 [Offshore Interiors], the
Court stated as follows at paragraphs 85 to 87
[85] It will be useful at this stage to
say a few words concerning contractual interpretation. Most recently in Sattva
Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] S.C.J. No. 53 (“Sattva”),
a unanimous Supreme Court reiterated the principles which should guide us in
interpreting contractual documents. In determining whether contractual
interpretation, i.e. the determination of rights and obligations under a
written agreement, was a question of law or mixed fact and law (the Court
answered that it was the latter), Rothstein J. wrote as follows at paragraph 46
to 48 of his reasons:
46. The shift away from the
historical approach in Canada [i.e. that determining rights of obligations
under a written contract was a question of law] appears to be based on two
developments. The first is the adoption of an approach to contractual
interpretation which directs courts to have regard for the surrounding
circumstances of the contract -- often referred to as the factual matrix
-- when interpreting a written contract […].
47. Regarding the first
development, the interpretation of contracts has evolved towards a practical,
common-sense approach not dominated by technical rules of construction. The
overriding concern is to determine "the intent of the parties and the
scope of their understanding" […]. To do so, a decision-maker must read
the contract as a whole, giving the words used their ordinary and
grammatical meaning, consistent with the surrounding circumstances known to the
parties at the time of formation of the contract. Consideration of the
surrounding circumstances recognizes that ascertaining contractual intention
can be difficult when looking at words on their own, because words alone do not
have an immutable or absolute meaning:
No contracts are made in a vacuum:
there is always a setting in which they have to be placed... . In a commercial
contract it is certainly right that the court should know the commercial
purpose of the contract and this in turn presupposes knowledge of the genesis
of the transaction, the background, the context, the market in which the
parties are operating.
(Reardon Smith
Line, at p. 574, per Lord Wilberforce)
48. The meaning of words is often
derived from a number of contextual factors, including the purpose of the
agreement and the nature of the relationship created by the agreement […]. As
stated by Lord Hoffmann in Investors Compensation Scheme Ltd. v. West
Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.):
The meaning which a document (or any
other utterance) would convey to a reasonable man is not the same thing as the
meaning of its words. The meaning of words is a matter of dictionaries and
grammars; the meaning of the document is what the parties using those words
against the relevant background would reasonably have been understood to mean.
[p. 115].
[Emphasis added]
[86] At paragraphs 56 to
58 of his reasons, Rothstein J. indicated that it was proper to consider
surrounding circumstances in interpreting the terms of a contract, but that the
circumstances, “must never be allowed to overwhelm the
words of that agreement,” adding that the purpose of considering
surrounding circumstances was to help the decision maker to obtain a better
understanding of the mutual and objective intentions of the parties as these
were expressed in the words of their contract. Further, “[t]he interpretation of a written contractual provision
must always be grounded in the text and read in light of the entire contract”
(Sattva, para. 57). Lastly, Rothstein J. made it clear that “surrounding circumstances” could only consist of, “objective evidence of the background and facts at the time
of the execution of the contract” (Sattva, para. 58).
[87] While there has been
some debate in the jurisprudence over what constitutes a “factual matrix,” at a bare minimum it encompasses
the contract’s genesis, its purpose and its commercial context (Primo Poloniato Grandchildren’s Trust (Trustee of) v. Browne, 2012 ONCA 862, [2012] O.J. No. 5772 at para. 69, leave to appeal
to S.C.C. refused, [2013] S.C.C.A. No. 68). As Chief Justice Winkler of the
Ontario Court of Appeal held in Salah v. Timothy’s
Coffees of the World Inc., 2010 ONCA 673, [2010]
O.J. No. 4336 at para. 16:
16. The basic principles of
commercial contractual interpretation may be summarized as follows. When
interpreting a contract, the court aims to determine the intentions of the
parties in accordance with the language used in the written document and
presumes that the parties have intended what they have said. The court
construes the contract as a whole, in a manner that gives meaning to all of its
terms, and avoids an interpretation that would render one or more of its terms
ineffective. In interpreting the contract, the court must have regard to
the objective evidence of the "factual matrix" or context underlying
the negotiation of the contract, but not the subjective evidence of the
intention of the parties. The court should interpret the contract so as to
accord with sound commercial principles and good business sense, and avoid
commercial absurdity. If the court finds that the contract is ambiguous, it
may then resort to extrinsic evidence to clear up the ambiguity. Where a
transaction involves the execution of several documents that form parts of a
larger composite whole -- like a complex commercial transaction -- and each
agreement is entered into on the faith of the others being executed, then
assistance in the interpretation of one agreement may be drawn from the related
agreements […].
[Emphasis added]
[57]
In keeping with these principles, in interpreting
Section 12.1, and in particular its use of the term “subordinate”,
I must determine the intention of the parties, by considering the meaning of
that term and the provision in which it is used, taking into account the words
used, the context of the contract as a whole, and the necessity that the
interpretation accord with sound commercial principles.
[58]
The term “subordinate”
on its face refers to a lower ranking. It was presumably on that basis that
Worldspan argued, in its motion resulting in the Priority Decision, that it had
a claim against the Vessel with “super priority”,
ranking above the Mortgage on the basis that Section 12.1 made the Mortgage
subordinate to Worldspan’s right to be paid under the VCA. As previously noted,
that argument was rejected in the Priority Decision and the Priority Appeal
Decision on the basis that Worldspan as owner of the Vessel has no in rem
claim against it. It is therefore not possible to afford the term “subordinate” what I would consider to be the
conventional meaning employed in commercial contracts, that of a lower priority
ranking among competing claims to an asset.
[59]
I must therefore consider whether the term “subordinate” can be interpreted either as Worldspan
now argues (as creating a condition that Worldspan be paid in full before
Sargeant can exercise its Mortgage security) or as Sargeant argues (creating a right
by Worldspan to deduct amounts owed to it from any Mortgage claim by Sargeant).
Neither party has advanced arguments that convince me that the other’s
interpretation is not an available interpretation based on the language used in
Section 12.1.
[60]
Nor do I consider either interpretation to be
inconsistent with sound commercial principles. Sargeant argues that Worldspan’s
interpretation would result in a commercial absurdity because, if Sargeant owed
one dollar to Worldspan and Worldspan owed $20,000,000 to Sargeant, Sargeant
would be unable to enforce his security interest. I disagree with Sargeant’s
argument. As Worldspan points out in response, Sargeant in this extreme example
would be able to enforce his mortgage by making the one dollar payment.
[61]
Similarly, I see no inconsistency between
Sargeant’s interpretation and sound commercial principles. Shipbuilding
contracts inevitably involve the allocation of risk between the parties. Where
the construction is being financed by the eventual purchaser through advances,
as in the case at hand, I see nothing commercially unusual about the purchaser
taking mortgage security for its advances and expecting to be able to exercise
that mortgage, subject to a reconciliation of accounts, if the contract does
not proceed to completion. The question is: what is the particular risk
allocation that the parties intended in this case? I have therefore turned to
other provisions of the VCA to assist in determining the intention of the
parties by considering Section 12.1 in the context of the contract as a whole.
[62]
In connection with this portion of the analysis,
Worldspan refers to Section 3.2 (providing for extension of the delivery date
to account for delays caused by Sargeant failing to make timely payment) and
Section 4.3(e) (acknowledging that the payment arrangements prescribed by the
VCA are intended to maintain positive cash flow to Worldspan). Sargeant refers
to the default and termination provisions in Section 13 and 24 of the VCA. I
consider Sargeant’s arguments in this regard to be the more compelling, as they
relate to the sort of circumstances in which enforcement of mortgage security
would arise. I note that Justice Strickland in the First Mortgage Appeal
Decision and the Federal Court of Appeal in the Second Mortgage Appeal Decision
relied on the remedy provisions in Sections 13 and 24 in reaching the
conclusion that the Mortgage secured advances made by Sargeant to Worldspan. In
upholding Justice Strickland’s decision, the Federal Court of Appeal in Offshore
Interiors stated as follows in paragraphs 108 to 110:
[108] I also agree with the
Judge that the remedy provisions of the VCA support the view that Worldspan was
required to return the advances to Sargeant, in particular through showing that
Sargeant’s rights in the Vessel, until payment of the Final Purchase Price,
were defined by the amounts advanced.
[109] Under section 13.5 of
the VCA, if Sargeant were to default on his obligations under the VCA,
Worldspan would have the right to terminate the VCA and sell the Vessel.
However, as noted by the Judge, in the event of sale by Worldspan, Worldspan is
still liable to return all “instalment payments”
(i.e. advances) made by Sargeant if the sale price is higher than the Capped
Purchase Price. Even if the sale price is lower than the Capped Purchase Price,
Worldspan would still have to return the advances, less the difference between
the Capped Purchase Price and the actual purchase price. This, in turn,
suggests that Sargeant has a surviving interest in the Vessel equal to the
amount of the advances paid.
[110] Likewise, under section
24 of the VCA, in the event that Sargeant sells the Vessel within three years
of the delivery date (whether complete or not), four different formulas are
used to determine the amount of money owing between Sargeant and Worldspan. As
noted by the Judge, whenever the sale results in a profit, Sargeant is liable
to pay a portion of that profit to Worldspan. However, whenever the sale
results in a loss, Worldspan is liable to indemnify Sargeant for a portion of
that loss. Moreover, under section 24.8, when making a payment under any of the
section 24 formulas, each party is entitled to deduct from the amount due the
other any amount owing to them under the VCA. In light of these formulas, I
entirely agree with the Judge that the proceeds from the sale of the Vessel
that are payable to Sargeant are, in effect, a repayment of the advances.
[63]
Worldspan correctly notes that these remedy
provisions are not directly applicable to the circumstances of this case.
Section 24 applies where Sargeant is selling the Vessel. Section 13.5 applies,
following default by Sargeant in making payments, where Worldspan elects to
terminate the VCA and is itself then selling the Vessel. Neither situation
applies in the case at hand, where the Vessel was subjected to judicial sale
following arrest by a creditor. However, what I do consider relevant is the
fact that, in the circumstances that are governed by Sections 24 and 13.5,
neither section contemplates Section 12.1 operating to bar Sargeant from
receiving monies owed to it until Worldspan has been paid in full. Rather, the
formulae prescribed by those sections involve, in one form or another, a
reconciliation of accounts between the parties.
[64]
Section 24.8 expressly provides that, when
making any payments under Section 24, each party will be entitled to set-off
and deduct from the amount due to the other party any amount then owing by that
party under the VCA. Particularly compelling is the fact that Section 13.5
applies in the situation where Sargeant has defaulted in making payments due to
Worldspan. The formula that then applies does not preclude Sargeant from
obtaining refund of its advances until it has paid Worldspan, but rather
provides for refund of those advances subject to prescribed adjustments. It is
difficult to reconcile these contractually prescribed mechanisms with
Worldspan’s proposed interpretation of Section 12.1. However, they can be
reconciled with Sargeant’s interpretation that Section 12.1 creates a right by
Worldspan to deduct amounts owed to it pursuant to the VCA from any Mortgage
claim by Sargeant.
[65]
In preferring Sargeant’s interpretation of
Section 12.1, I am guided both by the Federal Court of Appeal’s decision, which
relies on the contractual remedy provisions to inform its conclusion that the
Mortgage secures repayment of Sargeant’s advances, and by the interpretation
that I consider to result from construing the VCA as a whole, taking into
account these remedy provisions.
[66]
I have also considered Worldspan’s argument that,
as a result of the Sale Order, the sale proceeds have now replaced the vessel
for purposes of the VCA, and that Sargeant is now entitled to delivery of
the proceeds but only once it has paid Worldspan in full. I do not agree that
this is a correct interpretation of the Sale Order. The effect of an order for
judicial sale of a vessel is that the proceeds replace the vessel as the subject
of the competing in rem claims. It is not intended to be read as
supplementing the terms of the VCA as Worldspan argues.
[67]
Finally, I have considered Worldspan’s argument
that Justice Mosley’s reasons in the Sale Appeal Decision represent a judicial
recognition that Sargeant’s security interest is subordinate to Worldspan’s
right to payment. In paragraphs 6 and 7 of the Sale Appeal Decision, Justice Mosley
quotes from Section 12.1 of the VCA, following which he states that Worldspan’s
in personam rights under section 12.1 of the VCA have yet to be
adjudicated and that it remains open to Worldspan to participate in the claims
process and challenge the in rem claims as the owner of the Vessel.
These paragraphs merely acknowledge that it remains available to Worldspan to
raise the sort of arguments that it is asserting on the Worldspan Motion. I do
not read these paragraphs as expressing any conclusion on such arguments.
(3)
Equitable Set-Off
[68]
I raised with Sargeant’s counsel at the hearing
the question how the doctrine of equitable set-off could be relevant to the
contractual interpretation of Section 12.1. He explained that Sargeant has
raised this argument in the alternative, because of the manner in which the
Worldspan motion was framed, i.e. seeking a declaration of priority, not just a
contractual interpretation. Regardless, having rejected Worldspan’s
interpretation of Section 12.1, and as such interpretation was the basis for
Worldspan’s request for a declaration of priority, the Worldspan Motion must be
dismissed. It is accordingly unnecessary for me to consider Sargeant’s arguments
on equitable set-off.
V.
SARGEANT MOTION
A.
Facts
[69]
In addition to facts canvassed previously in
these Reasons, the following facts related to proceedings in the British
Columbia Supreme Court are relevant to the Sargeant Motion.
[70]
On April 29, 2011, Sargeant commenced an action
against Worldspan in the British Columbia Supreme Court [BCSC], alleging that
he had advanced US $20,655,926.00 to Worldspan, alleging dishonest business
practices on the part of Worldspan which inflated the cost of the Vessel, and alleging
that Worldspan had breached the VCA, committed breach of trust, and defrauded
Sargeant. Sargeant claimed various remedies including unquantified damages.
[71]
On May 27, 2011, Worldspan filed a petition in
the BCSC under the Company Creditors’ Arrangement Act RSC 1985 c-36
[CCAA], and on July 22, 2011, Justice Pearlman of the BCSC issued an Order [the
BC Claims Process Order] providing for a method for establishing claims in the
CCAA proceeding and seeking the aid and recognition of the Federal Court with
respect to in rem claims against the Vessel. On the same date, Justice
Pearlman also issued an Order [the BC Civil Claims Order] granting leave to
Worldspan to proceed against Sargeant and Comerica by way of civil claim in the
BCSC and granting leave to Sargeant and Comerica to proceed against Worldspan
by way of counterclaim to the civil claim.
[72]
On May 30, 2011, Worldspan filed a Response to
Civil Claim in the BCSC denying Sargeant’s allegations and defending its
claims, inter alia, on the basis that the VCA subordinates Sargeant’s
security interest to Worldspan’s right to be paid and that Sargeant breached
the VCA by failing to make payments due. Worldspan also filed a counterclaim against
Sargeant in the BCSC on June 1, 2011, alleging that Sargeant had failed to make
US$4,920,798.11 in payments due to Worldspan and that such failure represented
a breach of the VCA, causing Worldspan various categories of damages. Worldspan
claimed various remedies including unquantified damages
[73]
On January 15, 2014, Sargeant also commenced an
action against a principal of Worldspan, Steven Barnett [Barnett].
B.
Issue
[74]
The sole issue raised by the Sargeant Motion is
whether the Court should issue an Order that the in personam claims
between Sargeant and Worldspan proceed in the BCSC, leaving the in rem
claims under the Mortgage and any claim under section 22(2)(n) of the Federal
Courts Act to be addressed in the within Federal Court proceeding.
C.
Position of Sargeant
[75]
Sargeant submits that absent a substantive
reason to the contrary, a party is entitled to choose the jurisdiction in which
it wishes to proceed (Spar Aerospace Ltd v American Mobile Satellite Corp,
2002 SCC 78 at para 75). He explains that, from the beginning, he had chosen
the BCSC, having commenced his action against Worldspan in that Court in 2011,
and notes that the BCSC has in personam jurisdiction over that action,
which it has exercised.
[76]
Sargeant has also proceeded against Barnett in
the BCSC and submits that the allegations against Barnett and against Worldspan
are similar, such that a motion will be brought to have the two actions tried
together. He submits that the Federal Court may not have jurisdiction over the
claim against Barnett, as it is based on a guarantee and alleged tortious
action of Barnett in directing Worldspan.
[77]
Sargeant argues that the allegations against
Worldspan and Barnett require extensive production of documentation from
Worldspan and will also require examinations for discovery. He says these
allegations are outside the scope of the Federal Claims Process Order
established for the in rem claims in the within Federal Court proceeding
and that his claims against Worldspan and Barnett are not within the scope of
this proceeding.
[78]
Sargeant also submits that turning an in rem
proceeding between a lien claimant and the Vessel into an in personam
proceeding between Worldspan and Sargeant, as he understands Worldspan to be
proposing, is wrong in several ways:
A.
It violates the principle of comity that
exists between superior courts;
B.
It is contrary to the Rules of Court as it
denies Sargeant the usual rights of discovery and pleadings afforded to a
defendant in an action;
C.
It would create a “procedural fog”, by which
Sargeant means uncertainty as to how the other parties to the Federal Court
proceeding would fit into the in personam context, including whether
each would have discovery rights and document production rights; and
D.
It raises the question whether this Court
proposes to issue a stay order in respect of the same in personam
proceedings in the BCSC. Sargeant notes that, when Worldspan asked Justice
Pearlman of the BCSC to stay aspects of the Federal Court proceedings, he declined
to do so, citing comity.
[79]
Sargeant takes the position that the issue of in
rem entitlement would be delayed indefinitely if the BCSC actions were
subsumed in the Federal Court. Sargeant submits this would require the
initiation of a Federal Court action or some other proceeding with more robust
rights of oral and documentary discovery than are available in the summary
process typically used to adjudicate competing claims against the proceeds of
sale of a vessel. His proposed way forward is that the Federal Court proceeding
should be placed in abeyance while any in personam disputes, the
resolution of which is necessary to adjudicate Sargeant’s in rem
entitlement, are litigated in the BCSC. He says this will avoid the potentially
inconsistent results that could occur if some aspects of the in personam
disputes are adjudicated in the Federal Court and others in the BCSC.
[80]
Comerica supports Sargeant’s position, arguing
that the alternative would require this Court to stay the BCSC proceeding,
which is relief that courts are typically very reluctant to entertain.
D.
Position of Worldspan
[81]
Worldspan notes that, in the Priority Appeal
Decision, Justice Lemieux upheld Prothonotary Lafrenière’s ruling, based on the
Federal Court of Appeal’s decision in Maritima de Ecologica SA de CV v
Maersk Defender (The), 2007 FCA 194 [Maritima], that the Federal
Court’s in rem jurisdiction can only be exercised against a ship where
there is in personam liability on the part of the owner of that ship.
Worldspan’s position is that Sargeant is seeking to contradict the principle in
Maritima by having the Federal Court proceed with the in rem claims
without the establishment of the required underlying in personam
liability.
[82]
Worldspan also submits that Sargeant is seeking
to have the Federal Court abandon its jurisdiction over the in personam claims
for the purpose of circumventing the Federal Claims Process Order. It says that
Sargeant wishes to litigate in the BCSC the in personam claims that are
now barred by the Federal Claims Process Order and, after litigating the claims
in the BCSC, he hopes to have the Federal Court rubber stamp the in personam
findings of the BCSC and convert them to in rem claims.
[83]
Worldspan’s position is that it is entitled to
defend the in rem claims in the Federal Court. In addition to its defence
argument based on the interpretation of Section 12.1 of the VCA, which was the
subject of the Worldspan Motion, Worldspan’s counsel explained at the hearing
that its defence is based on its claim of US$4,920,798.11 plus interest that it
says is owing by Sargeant and an argument that Sargeant breached the VCA by
failing to take delivery of the Vessel, which Worldspan says was motivated by
an effort by Sargeant to avoid the effect of a US $36 million fraud judgment
issued against him by a Florida court. Worldspan says that the record in this
proceeding contains the evidence necessary to support its defence arguments.
[84]
It also appears to be common ground among the
parties that, prior to a Federal Court priorities hearing, they would have the
right in this proceeding to cross-examine the deponents of the relevant
affidavits of claim. Sargeant’s counsel expressed doubt that this right applies
to cross-examination of Worldspan’s deponent, as Worldspan is not an in rem
claimant, which Sargeant argues to support his position that the summary
Federal Court claims adjudication process is not robust enough to address the
issues intended to be raised by Worldspan in defence of Sargeant’s in rem
claim. However, Worldspan’s counsel advised that he took no issue with
Worldspan’s deponent being cross-examined.
E.
Analysis
[85]
I acknowledge Sargeant’s argument that, absent a
substantive reason to the contrary, a party is entitled to choose the
jurisdiction in which it wishes to proceed. Such reasons are often adjudicated
based in part on forum non conveniens considerations, in the context of
a motion to a court to stay its own proceeding or, more rarely, to enjoin a
party from proceeding in another court. However, neither of the parties has
moved for a stay or an injunction or argued the principles applicable to either
of those remedies. Rather, the Sargeant’s Motion is framed as a request for an
Order that the in personam claims between Sargeant and Worldspan proceed
in the BCSC, leaving the in rem claims under the Builder’s Mortgage
between those parties, and any claim under section 22(2)(n) of the Federal
Courts Act, to be addressed in this proceeding.
[86]
The relief sought by Sargeant raises a number of
difficulties. First, the requested relief as framed reads as requiring the
parties to pursue litigation in another court. No authority has been cited to
support the request for an Order of this sort. The relief sought is in
substance better characterized as prohibiting the parties from pursuing in the
Federal Court the adjudication of any in personam disputes that are
relevant to the determination of the in rem claims. However, as noted
above, the Sargeant Motion has not been framed or argued as a request for a
stay of the Federal Court proceeding.
[87]
Second, while Sargeant relies on the proposition
that a party is entitled to choose the jurisdiction in which it litigates, its
position, that it commenced action in the BCSC and should be entitled to have
certain disputes determined there, ignores the fact that Sargeant also chose
the Federal Court as the jurisdiction for pursuit of its in rem claim
against the Vessel. To the extent that resolution of any underlying in
personam liability issues are necessary in order to adjudicate Sargeant’s in
rem claim, this follows from Sargeant invoking the Federal Court’s in
rem jurisdiction.
[88]
Third, Sargeant’s position, that the appropriate
procedure is for the Federal Court’s process for adjudication of in rem
claims to be placed in abeyance pending adjudication of certain in personam disputes
in the BCSC, is inconsistent with the objective that the Federal Court judicial
sale process provide a relatively summary mechanism for adjudication of in
rem claims and their competing priorities.
[89]
Worldspan argues that Sargeant is seeking to
contradict the principle in Maritima by having the Federal Court proceed
with the in rem claims without the establishment of the required
underlying in personam liability. I do not think this accurately
captures Sargeant’s position. It is trite law that most categories of in rem
claims, including mortgage claims, must be supported by establishing underlying
liability on the part of the vessel owner. Sargeant does not dispute this
requirement. Indeed, it takes the position that such liability for its advances
to Worldspan has already been found by the Federal Court of Appeal in the
Second Mortgage Appeal Decision, at least to the extent of finding that the
advances are repayable by Worldspan. This characterization of the Second
Mortgage Appeal Decision is disputed by Worldspan, which argues that the Second
Mortgage Appeal Decision represents a decision on contractual interpretation
and not a finding of any liability. This dispute as to the significance of the
Second Mortgage Appeal Decision may have to be addressed in a future motion.
However, for present purposes, the point is that Sargeant is not disputing the
requirement for underlying liability of Worldspan to be established in order to
succeed in its in rem claim. Rather, its position is that any disputes surrounding
that underlying liability, which must be resolved in order to establish its in
rem claim, should be litigated in the BCSC.
[90]
Specifically, Sargeant’s position is that the
arguments that Worldspan intends to raise in defence of its in rem claim
are complex, requiring full rights of discovery and documentary production to
be properly addressed. It also contends that Worldspan’s defence arguments are
sufficiently related to other in personam disputes in the BCSC, that are
irrelevant to the in rem claims, that to have Worldspan’s defence
arguments adjudicated in the Federal Court risks inconsistent determinations
from the two courts.
[91]
While a multiplicity of proceedings can always raise
a risk of the sort to which Sargeant refers, the Court has not been provided
with enough information to assess how real that risk is in the case at hand.
More significantly, Sargeant has referred to no precedent for this Court
declining to permit the owner of a vessel, which was arrested and sold in this
Court, to defend in rem claims in this Court through its claims adjudication
process, notwithstanding that this process is less procedurally complex than
that which applies to an action. The Supreme Court of Canada has recognized in Holt
Cargo Systems Inc v ABC Containerline N.V. (Trustee of), 2001 SCC 90, that
the Federal Court retains its in rem jurisdiction, in relation to
secured maritime claims, even in the context of an insolvency, and there is
nothing in that decision that suggests that all determinations necessary to exercise
such in rem jurisdiction should not be made in this Court.
[92]
While the Court might in an appropriate case decline
to exercise such jurisdiction, I would consider it necessary for the Court to
be convinced that it is appropriate both (a) to deprive a vessel’s owner of the
right to defend in this Court against in rem claims that have been
asserted in this Court and (b) to deprive other creditors of access to the
benefits of the adjudication process that Federal Court practice provides. In
that latter respect, I note Sargeant’s acknowledgment that there are in rem
claimants who may seek an equitable reordering of priorities in an effort to
achieve some recovery notwithstanding the priority that would traditionally be
afforded to the Mortgage. To accede to Sargeant’s proposed process would not
only place Sargeant’s in rem claim in abeyance pending the conclusion of
litigation in the BCSC, but would place the claims of the other in rem
creditors in abeyance as well. Sargeant has not convinced me that the Worldspan
defence arguments are so unusual or complex as to require more robust
litigation processes that would warrant a departure from the Court’s usual
process for adjudication of in rem claims.
[93]
I emphasize that this conclusion is not intended
to suggest that in personam proceedings should be commenced in this
Court and therefore should not give rise to the “procedural
fog” that Sargeant expressed concern would impact other claimants. Rather,
my conclusion is that this Court’s in rem jurisdiction includes whatever
liability and quantification determinations, including defence arguments raised
by the vessel owner, are necessary to adjudicate the in rem claims.
[94]
I should also note that, in reaching this
conclusion, I am conscious of the importance of comity between superior courts
and the care that Justice Pearlman of the BCSC has taken to afford such comity
to the Federal Court in issuing the BC Claims Process Order. I would not wish
my reasons for this decision to be read as failing to be equally attentive to
this principle. My reading of the BC Claims Process Order is that it recognized
that for purposes of pursuing in rem claims, which the Order permitted
to be pursued outside the process established by the Order, claimants would be
required to establish in personam liabilities on the part of Worldspan.
The relevant portion of paragraph 14 of the Order provides as follows:
14. Any Creditor that files a Proof of
Claim asserting a Maritime Claim shall:
(a) be entitled to pursue its claim against the Vessel outside of
the process established by this Order;
(b) for the purposes of pursuing its claim against the Vessel, have
its right to proceed in personam against the Petitioners preserved; and
(c) for the purposes of pursuing its claim against the Vessel, not
be bound by any determination of the Petitioners or the Monitor
….
where “Maritime Claim” means an in rem
claim against the Vessel under Canadian maritime law. Paragraph 15 of the BC
Claims Process Order then requests the aid and recognition of the Federal Court
in carrying out the terms of this Order.
[95]
While paragraph 14 of the BC Claims Process
Order does not expressly identify the forum for adjudication of either in
rem claims or the in personam liability necessary to establish them,
in my view it does represent a recognition that one depends on the other. My
decision on this motion is premised simply on the Court continuing to exercise the
entirety of its in rem jurisdiction. I intend this decision to be
consistent with Justice Pearlman’s Order and accordingly respectful of the
jurisdiction of the BCSC.
[96]
For these reasons, the Sargeant Motion will be
dismissed.
VI.
COSTS
[97]
Worldspan and Sargeant each took the position at
the hearing that $1500 is an appropriate costs award to be applied to each
motion. I adopt this position.
ORDER
THIS COURT ORDERS THAT:
- The preliminary evidentiary motion of Worldspan
Marine Inc. is dismissed, with costs payable to Harry Sargeant III in the
fixed amount, inclusive of disbursements, of $1500.
- The motion of Worldspan Marine Inc. is dismissed,
with costs payable to Harry Sargeant III in the fixed amount, inclusive of
disbursements, of $1500.
- The motion of Harry Sargeant III is dismissed, with
costs payable to Worldspan Marine Inc. in the fixed amount, inclusive of
disbursements, of $1500.
“Richard F. Southcott”
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