Striebel v. Chairman (The), 2002 FCT 924, 2002 FCT 925

Date: 20020830

Docket: T-687-02

Neutral citation: 2002 FCT 925

                                 ADMIRALTY ACTION IN REM AND IN PERSONAM

BETWEEN:

                                              MR. AND MRS. STEPHEN STRIEBEL

                                                                                                                                                       Plaintiffs

                                                                                 and

                                              SOVEREIGN YACHTS (CANADA) INC.

THE OWNERS AND ALL OTHERS INTERESTED

IN THE MOTOR VESSEL CHAIRMAN, also known as

SOVEREIGN HULL NUMBER 7644

                                                                                                                                               Defendants

                                                AMENDED REASONS FOR ORDER

HARGRAVE P.

        These reasons arise out of a motion to set bail for the release of the Chairman, a luxury yacht of about 120 feet in length, which will be ready for sea trials and a delivery voyage to Florida in mid-September. An excursion into the background of the construction of the Chairman and these proceedings is in order.

BACKGROUND

        In June 2000 the Plaintiffs contracted with the Defendant, Sovereign Yachts (Canada) Inc. ("Sovereign") to build the Chairman for them at a price of $6.5 million (US), the vessel to be completed and delivered 30 June 2001. So that the vessel might be delivered off-shore, in order to avoid provincial and federal government sales and goods and services taxes and, one suspects, to secure Sovereign, the vessel was and remains in the ownership of Sovereign. To secure the substantial progress payment interest of Mr and Mrs Striebel in the vessel, $4,650,000.00 (US), and the owners' equipment put into the vessel, the Striebels became mortgagees.

        By May of 2002 and taking into account leeway built into the construction contract for changes and extras, Sovereign was, in the view of the Striebels, many months in breach of its commitment to deliver the vessel. The Striebels lost faith in Sovereign's ability to complete and deliver the vessel. They therefore commenced this action in personam against Sovereign, as owner and builder and in rem against the Chairman. The Striebels also went into possession, as mortgagees in possession, and obtained the Court's permission to move the partially built vessel to another shipyard for completion. The Order of 8 May, 2002, among other things, provided that:

At about this point Sovereign not only counterclaimed, but also, as referred in this quotation from the Order, lodged a caveat against the Chairman to secure its claim. The intent of the parties on 8 May 2002 was that once the interest of Sovereign, as unpaid builder, in the Chairman and as builder claiming damages for alleged breach of contract, was secure, Sovereign would release its caveat and the Striebels would take off-shore delivery and become owners of the Chairman, free and clear of all liens, charges and encumbrances, after commencement after the delivery voyage to Florida.

        Two complications have arisen. First, North West Delta Yacht Services Inc. ("North West"), an unpaid contractor of work on the vessel, has lodged a caveat to secure work done and materials supplied to the Chairman at the request of the owner, Sovereign; and second, the Striebels and Sovereign cannot agree on the amount of security to be provided to secure the claim of the Sovereign. I will deal first with the amount of security to be provided to North West.

ANALYSIS

Security for North West

        North West has an apparent claim for $72,250.00, together with two GST payments of $5,057.00 and $1,750.00, for a total of $79,057.00. This claim takes into account that the Striebels had paid North West for its work done on the Chairman after 16 May 2002, when the Striebels went into possession and began to complete the Chairman using their contractors. It also takes into account a partial pass through of funds provided to Sovereign by the Striebels, funds which were earmarked for North West: the Striebels paid $40,000.00.00 (US), say $60,000.00 (Canadian) of which Sovereign paid only $25,000.00 (Canadian) to North West. North West's reasonably arguable best case is therefore $79,057.00. That amount is confirmed by a letter from the lawyer for Sovereign dated 4 June 2002, in which counsel for Sovereign writes:

To complete the calculation, various amounts were paid to North West and here I am uncertain whether they were paid by Sovereign or by the Striebels, leaving the $79, 057.00 balance.

        In the 4 June 2002 letter counsel for Sovereign goes on to say that Sovereign claims a set-off of $2,596.80 in respect of damage to the Chairman and that Sovereign is owed money by North West in respect of defective work performed on the yacht Waterford. The letter also refers to "contingent claims which may be advanced by Sovereign against North West.". Sovereign's solicitor then advises North West that Sovereign does not intend to pay North West at that time.

        The Striebels are left with the full in rem claim to secure in the amount of $79,057.00 (Canadian), with the prospect of paying twice for some $35,000.00 of the claim, once by way of money paid to and confiscated by Sovereign and a second time in order to pay some $35,000.00 of North West in rem claim against the Chairman. Be that as it may, North West is entitled to security of $79,057.00, together with interest and costs.

        This action may well take two or three years to resolve, given the possibility that North West may be unnecessarily dragged into a protracted trial between the Striebels and Sovereign. Trial dates, for longer trials, are being allotted many months after the parties are ready for trial. North West's invoices refer to interest at 2% per month. It appears that the work was done over a number of months running from summer 2001 through spring 2002. Taking into account that there may be a further two or more years until North West receives its payment, interest due to North West will be secured for three years at 2% per month simple interest, in round figures $57,000.00.

        As to security for costs, I will be generous. This requires an explanation. When counsel for Sovereign raised the issue of a set-off, principally for work done on some other vessel, I question him as to whether he felt that set-off was proper. Counsel maintained that it was. However, set-off is not always available. Here I would refer to an often quoted dictum of Lord Denning, Master of the Rolls, in The Nanfri, [1978] 2 Lloyd's Rep. 132 (C.A.) at 140:

This statement, requiring a close connection, or indeed claims arising out of the same transaction, as a pre-condition to set-off, was referred to by Mr Justice Saville, in The Adittya Vaibhav, [1991] 1 Lloyd's Rep. 573, at 574, as "[the] most authoritative modern statement of the principle of equitable set-off ...". The principle was adopted by the Federal Court of Appeal in Atlantic Lines & Navigation Company Inc. v. The Ship Didymi and Didymi Corporation, [1988] 1 F.C. 3 at page 20:

      Both The Nanfri and The Didymi were applied by Mr Justice Lutfy, as he then was, in Halla Merchant Marine Co. Ltd. v. Portserv Ltd. (1997), 126 F.T.R. 300. The principle and the cases have been brought up-to-date by Mr Justice Blais in Mediterranean Shipping Co. S.A. Geneva v. Sipco Inc., an unreported 25 September 2001 decision in docket No. T-361-99, 2001 FCT 1046.

      In any event, I questioned counsel for Sovereign as to whether he seriously believed that Sovereign could apply a set-off, related to an entirely different vessel, a set-off which would effect the Striebels, as innocent bystanders. Counsel believed that the set-off would be valid. I disagree. Thus, there is the real possibility that North West might well succeed, as part of its best reasonably arguable case, in solicitor-client costs against the Chairman.

      Given the possibility of North West being dragged through a lengthy trial, the amount to secure solicitor-client costs and disbursements will be $25,000.00.

      Total security will therefore be in round figure, $160,000.00 (Canadian). This security will form a deduction from the security which I am going to allow Sovereign.

Amount of Bail - The Case Law

      The general rule which governs the amount of bail which must be provided, in order to obtain the release of a properly arrested ship, is that it be equal to the secured party's reasonably arguable best case, interest and costs, limited by the value of the arrested vessel: see The Moschanthy, [1971] 1 Lloyd's Rep. 37 (Q.B.) at 44 and Brotchie v. The Karey T (1994), 77 F.T.R. 71 (F.C.T.D.) at 72.

      Usually, but as we shall see, not always, the amount of bail is that claimed in the writ or statement of claim as the case may be: see for example Mayers on Admiralty Law and Practice in Canada, Carswell, 1916 at page 235.

      In the present instance Sovereign takes the position that it is for Sovereign to delineate its reasonably arguable best case, relying on the wording of the 8 May 2002 Order, set out above and in particular that the bail is "to secure Sovereign's reasonably best case, costs and interest". This submission concludes that the Plaintiff, not having appealed the 8 May Order, any discussion of the amount of bail, other than that now claimed by Sovereign, is res judicata. I would observe first that the reference to "reasonable best case", which was agreed virtually by consent, expresses a notion or a concept of the measure of security, but not an absolute figure or the importation of any absolute figure. Second, while bail is usually in the amount claimed in the underlying pleading, a court has the discretion and jurisdiction, within limits, to determine the value of the reasonably arguable best case.

      To elaborate, I refer in Atlantic Shipping (London) Ltd. v. The Captain Forever (1995), 97 F.T.R. 32 (F.C.T.D.) to the concept that while a court, in setting bail, ought not to pre-judge the case in order to determine what it is worth as there might be special circumstances by which to moderate bail, generally if a party gave bail as demanded and the bail was eventually proved excessive, there was a remedy for wrongful demand of security, in costs. I here refer to The Moschanthy (supra): see pages 45 and 46.

      Mr Justice Muldoon found special circumstances in Lundberg v. The Manitou III, an unreported 6 December 1988 decision in action T-2180-88, [1988] F.C.J. No. 1124 where he commented on the usual practice of setting bail to include the sum total of the plaintiff's claim, including interest and costs, referred to uncertainties of the claim and set bail at one half of the claim itself, as sufficient to cover a claim, interest and costs:

      In The Gulf Venture, [1984] 2 Lloyd's Rep. 445 (Q.B.) Mr Justice Sheen applied a similar rough and ready approach to setting security: he felt the evidence was incomplete, but was satisfied that the claim would not succeed in full and therefore, while the claim endorsed on the writ exceeded £ 400,000, he set security at £ 250,000:

      In The Tribels, [1985] 1 Lloyd's Rep. 128 Mr Justice Sheen, while allowing that the salvors were entitled to demand security up to what might be anticipated, on the basis of a reasonably arguable best case, interest and costs, looked upon the demand for security of £ 3.323 million as exorbitant, noting that counsel for the plaintiff conceded the point. He went on to set security at £ 1 million, adding that it might be that even £ 1 million was excessive.

      A last case to which I shall refer, in this line of cases which the court has exercised a discretion in determining bail, in particular circumstances, is Amican Navigation Inc. v. Densan Shipping Co. (1997), 137 F.T.R. 132 (F.C.T.D.), a decision of Mr Justice Lutfy, as he then was. He observed, at page 135, that "arrest is a powerful weapon." and went on to say that the plaintiff had a right to be secured for the full amount of the claim, interest and costs, but that exceptional power which a law attach to arrest and the right to full security must be balanced so as not to be oppressive:

Here I would note that at stake was the variation of bail, however the same principle applies in the case of a determination of bail. He then went on to apply the principle set out in The Moschanthy (supra).    

      Mr Justice Lutfy rejected a speculative calculation as to the reasonably arguable best case, appearing in a survey report, noting that there could have been cross-examination. However, he did reduce the plaintiff's claim for a projected loss of profit of 60% of the gross revenue, for he found it difficult to imagine, using the plaintiff's own information and calculations, that a reasonably arguable best case for profit might be 60% of gross freight. Indeed, he found the circumstances arising from that sort of profit special and extraordinary, warranting intervention. He was satisfied that a profit of about 30%, on revenue, represented a sufficient level of bail to protect the rights of a plaintiff: see pages 138 and 139. In the result he reduced the bail from $650,000.00 to $436,784.00. I now turn to an application of all of this to the present instance and specifically to the security sought by Sovereign.

Security for Sovereign      

      The figures which I use in arriving at appropriate security are in Canadian dollars, unless otherwise designated. Sovereign's counterclaim sets out the agreed price for the Chairman of $6.5 million (US). In the prayer for relief Sovereign seeks $91,472.92 (US) for labour performed and material provided in connection with change orders, together with a claim for damages, unspecified in the prayer for relief, for breach of contract, conversion and trespass. However, in the counterclaim itself, Sovereign seeks $1,850,000.00 (US), less an agreed credit of $340,000.00 (US), being an allowance for equipment provided by Mr and Mrs Striebel. Thus the total claim is as plead in the counterclaim, $1,601,472.92 (US), together with interest and costs. As refined in subsequent affidavit material , Sovereign's claim is put at $1,810,815.00, apparently a Canadian dollar figure. Sovereign seeks security of $2 million. Were I convinced that no special circumstances existing, security at $2 million, taking into account perhaps three years' interest at 6% and costs of perhaps $100,000.00, the security would be appropriate less, of course, that portion of the security which goes to secure North West, at $160,000.00 (Canadian). However, there are clearly special circumstances in this instance.

      As I have already made clear, I may not try the case at this point. However, I may, as pointed out by Associate Chief Justice Lutfy, in Amican Navigation (supra), strike a balance between what might, on the one hand, be an arrest exercised oppressively and, on the other hand, a right to sufficient security. Indeed, as established by Mr Justice Sheen in The Gulf Venture (supra), on being satisfied that the claim would not succeed in full, he was then able to reduce bail to a lesser but adequate amount.

      I do not intend to become caught up in small issues: for example, whether the costs of moisture eliminators, said not to be included in the specifications, at some $6,000.00 and supplied by the Plaintiffs, should be a deduction from the Striebels' accounting; whether the batteries supplied by the Striebels cost some $3,000.00 more than Sovereign's cost; whether the cost of stainless steel deck drains at $180.40, again supplied by the Striebels, was excessive; and whether Sovereign could have purchased appliances for $14,000.00 less than purchased by the Striebels or their present shipyard. These are items for the trial judge to determine. Similarly, it is for the trial judge to determine whether Sovereign has been carried away by maintaining that there should be no additional completion expense for the cost of an alarm monitoring system, a system clearly called for in the specifications but said, by the surveyor acting for the Striebels and I accept the surveyor's word, not installed on the vessel when it was turned over to the Striebels. I do not intend to become involved with Sovereign's estimate profit on additional change orders, which were not effected by Sovereign, approximately $110,000.00 worth, for that is a gross figure upon which profit would have been, pursuant to the construction agreement, costs plus 15% and a modest mark up for labour. Some of these items may succeed and others may not, however, the total amount at stake is not large in the overall context and, as I say, would require a determination of the case.

      The real issue, at this point, is what is a reasonably arguable best case as to the amount of labour hours required to complete the vessel. Bearing on this issue are the assumptions that I am asked to make, principally that Sovereign has no variable costs, which stopped running when the vessel was removed from the yard and that Sovereign has, to date, taken no profit out of the transaction, but rather, intends to take all of its profit, $1,810,815.00, out of the remaining gross balance which would have been owing, had Sovereign completed the vessel, being $2,661,315.00. The profit of $1,810,815.00, is 67% of the balance of the gross revenue which would have come in had Sovereign completed the vessel.

      I will begin with the clearly special circumstance of the calculation of the costs of completion of the vessel as calculated, on the one hand, by Sovereign and, on the other hand, as both expended and as calculated by the Striebels.

      At the time the Chairman was taken over by the Striebels, both they and Sovereign engaged surveyors to undertake a joint survey. I have not seen the report of Sovereign's surveyor, however the affidavit evidence of the Striebels' surveyor is that the two surveyors agreed to over 400 items involving "areas still requiring adjustment, mounting, plumbing, installation, fittings, supplied and/or completed", as well as 14 areas of minor damage. The work to be accomplished, by simple inspection of the deficiency list, is very substantial, both in the number of items and in the magnitude of many of the items themselves. By inspection, to assume that all of the deficiencies might be made right with just 1057.5 hours of work, as suggested by Sovereign, is an absurdity.

      Sovereign says that it would take 1057.5 hours which, given Sovereign's 23-person workforce employed on the vessel, would require about a week of work. This work, together with material and equipment, is said by Sovereign to amount to about $540,000.00 or, more exactly, $851,000.08 in Canadian funds. However, we also have the same witness, in an earlier affidavit sworn for a different purpose, establishing both a completion figure of under $400,000.00 (US) and six weeks time to complete. This is in stark contrast with the estimate, prepared for the Striebels, of some 10,000 hours of work to complete the Chairman. By way of justification counsel for Sovereign refers to Tercon Contractors Ltd. v British Columbia, an unreported 12 July 1994 decision of the British Columbia Supreme Court, Vancouver Registry, C915910. In Tercon one of the issues was the difference in equipment and expertise as between two contractors. In the present instance I accept that there would be no appreciable difference in equipment or expertise as between Sovereign and the present ship builder and repairer being utilized by the Striebels. Sovereign goes on to say that it has no variable costs, that is costs saved by not having to complete the Chairman, a statement which, on its face, seems highly improbable. However, on this basis, Sovereign estimates its profits on the remaining $2,661,315.00, which would be due on completion, at $1,810,815.00, or 68% of that gross revenue balance. Here Sovereign seems to be saying that it took no profit, at any earlier stage and that it intended to take all of its profit in the last work week, or the last six weeks, depending upon which of the Sovereign's affidavits one were to accept. For the same reason, that I am not here to decide the case, I will not comment on the Plaintiffs' view of the costs which would have been incurred if Sovereign had completed the vessel, costs substantially higher than those suggested by Sovereign.

      The evidence of the Striebels is that since they took over the Chairman and to the date of this motion, they have expended 6891 hours of labour to go towards completion of the vessel. The evidence of the surveyor acting for the Striebels is that more than 2000 hours remain in order to bring the vessel up to the construction contract specifications. There is an estimated total of 10,000 hours of work to be done from when they took over the Chairman. The shipyard organization which the Striebels have commissioned to complete the Chairman is a highly regarded and long-established entity specialising in luxury yacht repair and construction.

      Clearly the evidence in the present proceeding is not only contradictory, but also incomplete.

CONCLUSION

      The question that a trial judge would eventually have to grapple with is the vast difference between Sovereign's estimate of labour cost to complete, $27,000.00 and the labour costs of the Striebels, largely actual expended labour costs and some labour costs to come, of $800,000.00. Should Sovereign's calculation be correct and taking into account that their calculation includes the claim of North West, the $2 million in security might be tenable. On the Striebels' calculation of labour, materials and equipment necessary to complete the vessel to the construction contract specifications, they will have a substantial claim over against Sovereign, for they will expend far more than the $6.5 million (US) and some extras, to have the luxury yacht for which they bargained.

      The two sides are so far apart all one can say is that, even without analysing the evidence, the case is at present clearly incomplete. However, I am satisfied that Sovereign's claim will not succeed as presented. To require security for the claim, as presented, would be to make the security and indeed the effect of Sovereign's caveat oppressive. I am satisfied that Sovereign will have sufficient security if the gross security is set at $1 million with $160,000.00 of that amount being deducted and allocated in order to provide security for North West, the net balance going to secure Sovereign.

(Sgd.) "John A. Hargrave"

                                                                                               Prothonotary

Vancouver, British Columbia

30 August 2002

                                                   FEDERAL COURT OF CANADA

                                                                    TRIAL DIVISION

                             NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                                            T-687-02

STYLE OF CAUSE:                        Mr. and Mrs. Stephen Striebel v.

Sovereign Yachts (Canada) Inc.

PLACE OF HEARING:                   Vancouver, British Columbia

DATE OF HEARING:                      19 August 2002

REASONS FOR ORDER:             HARGRAVE P.

DATED:                                               30 August 2002

APPEARANCES:

Mr David McEwen                                                                      FOR PLAINTIFFS

Mr Murray Clemens & Mr J MacInnis                                     FOR DEFENDANT Sovereign                     Yachts (Canada) Inc.

Mr Wayne Ryan                                                                          FOR DEFENDANT North West Delta Yacht Services

SOLICITORS OF RECORD:

McEwen, Schmitt & Co.                                                            FOR PLAINTIFFS

Vancouver, British Columbia

Nathanson Schachter & Thompson                                       FOR DEFENDANT Sovereign

Vancouver, British Columbia                                                   Yachts (Canada) Inc.

Ottho Law Group                                                                         FOR DEFENDANT North West

Vancouver, British Columbia                                                   Delta Yacht Services