Kirgan Holding SA v. Panamax Leader (The), 2002 FCT 1235

Date: 20021129

Docket: T-1684-99

Neutral Citation:2002 FCT 1235

Ottawa, Ontario, November 29, 2002

Present:    The Honourable Mr. Justice Blais

ACTION IN REM

BETWEEN:

                          KIRGAN HOLDING S.A.

                                                                Plaintiff

                                   and

                 THE OWNERS AND ALL THOSE INTERESTED IN

            THE SHIP "PANAMAX LEADER"(EX "PACIFIC PEARL")

                                                               Defendants

                      REASONS FOR JUDGMENT AND JUDGMENT

• [1]                 The plaintiff Kirgan Holding S.A. [Kirgan] brought an action by way of statement of claim against the defendants The Owners and all Others Interested in the Ship "PANAMAX LEADER", seeking payment for bunker fuel supplied. The basis for invoking in rem jurisdiction pursuant to the Federal Court Act is with respect to maritime goods (bunker fuel) under sections 22(2)(m) and 43(2).

FACTS

• [2]                 In December 1997, the "PACIFIC PEARL" was purchased by Pacific Pearl Co. Ltd. [Pacific Pearl] and registered at the Port of Valletta, under the Maltese flag. The ship was managed by Cyprus Maritime Co. Ltd., a Greek company.
• [3]                 On April 1, 1998, as appears from the Marine Fuels Purchasing Contract [the Contract] between Kirgan as "Seller" and Tor Shipping Limited [Tor] as "Buyer", Kirgan agreed to furnish bunker fuel to various ships for whose owners and "disponent" owners (a disponent owner can be a time charterer or a bareboat charterer) Tor acted as agent. One of the vessels covered by the Contract was the M.V. "PACIFIC PEARL", whose owner and "disponent" owner is shown therein as Tonga Shipping Inc. [Tonga].

• [4]                 On May 12, 1998, pursuant to a charter party, Pacific Pearl bareboat chartered the vessel "PACIFIC PEARL" to Tonga.
• [5]                 On February 25, 1999, Tor, for and on behalf of Tonga, ordered from Kirgan a quantity of bunkers to be delivered at Malta for the vessel "PACIFIC PEARL".

• [6]                 In turn, Kirgan ordered the said bunkers from KG Bominflot [Bominflot], which then ordered it from Texaco.
• [7]                 On March 1, 1999, bunkers were delivered to the ship, at the instance of the charterer of the ship, Tonga.

• [8]                 The "PACIFIC PEARL" is now named the "PANAMAX LEADER" (ex "PACIFIC PEARL"), but is still owned by Pacific Pearl.
• [9]                 As the "PANAMAX LEADER" was discharging cargo in the Port of Québec, Province of Québec, Canada, a warrant was filed on September 21, 1999 at the request of the plaintiff, directing the arrest of the vessel.

• [10]            On July 24, 2000, the plaintiff was ordered to post security for Court costs in the amount of Cdn $12,500.00 by Prothonotary Aronovitch and costs were ordered in the cause.
• [11]            The Court would like to underline the geographic reality of the case at hand:

-          The plaintiff Kirgan is a Panamanian company based in the Ukraine;

-          The defendant Pacific Pearl is a Maltese company;

-          The vessel "PANAMAX LEADER" is registered under the flag of Malta and Cyprus;

-          Tor, the agent, was a Ukrainian company and is now bankrupt;

-          Tonga, the charterer, was a company from St-Vincent and the Grenadines and is now bankrupt;

-          The charter party agreement between Pacific Pearl and Tonga was governed by English law;

-          The choice of law of the Contract between Kirgan and Tor, on behalf of Tonga, is the law applied in the United States of America;

-          Bominflot, the supplier of bunkers (through Texaco), is a German company;

-          The necessaries supplied were delivered at Malta.

PLAINTIFF'S POSITION

(1)       Invoice cost of bunkers                                                     U.S. $54,397.19

(2)        Interest (pursuant to Clause 10(c) of the                         U.S. $ 4,678.16

            Contract)      

(3)        A penalty for default in payment of over                         U.S. $14,034.48

            ninety (90) days (pursuant to Clause 10(c)

            of the Contract)

(4)        Collection expenses (pursuant to Clause                          U.S. $ 9,500.00

11(c) of the Contract)

DEFENDANTS' POSITION

ISSUES

2.        If the plaintiff is entitled to a maritime lien against the ship, what is the value of the damages incurred by it for supplying the bunkers and are interest and recovery costs applicable?

FINDINGS

ANALYSIS

1.        Was the plaintiff Kirgan right in presuming that the bunkers were delivered on the credit of the ship?

Choice of Law Clause

[para. 28] The parties agree, and are correct to say, that "Federal Calumet", supra, mandates the proper process for determining the proper law of a contract. First, the Court must determine whether there is an express choice of law by the parties. If there is none, then the Court must determine whether the proper law can be inferred from the terms of the contract and the surrounding circumstances, an exercise that requires the Court to determine the system of law that has the closest and most real connection to the contract ... [Ontario Bus Industries Inc. v. Ship "Federal Calumet", [1992] 150 N.R. 149 (FCA)].

[emphasis added]

• [21]            Indeed "the rationale for enforcement, particularly in international transactions, is to protect the expectations of the parties and thus provide for greater certainty in contracting" [Restatement (Second) of Conflict of Laws, s.187(2) (1971)].

[para. 8] The parties accept that it is well settled that a maritime lien arising under United States statutory law in a claim for necessaries supplied, [The ship "Strand Hill", [1926] S.C.R. 680">[1926] S.C.R. 680] ... , in the United States will be recognized and enforced in this court under Canadian maritime law. That lien is enforceable in an action in rem, even if the claim is one arising without direct authority or personal liability of the owner of the vessel. [See note 3 below] Moreover, a maritime lien arising under the United States statute has been enforced in this Court even where necessaries were delivered outside the United States. [See note 4 below]

...

Note 3: Marlex Petroleum, Inc. v. The "Har Rai", [1984 2 F.C. 345 (C.A.) aff'd [1987] 1 S.C.R. 57.

Note 4: Fraser Shipyard and Industrial Centre Ltd. v. Expedient Maritime company Ltd., (1999), 170 F.T.R. 1 (T.D.) upheld on this point in [1999] F.C.J. No. 1212 (T.D.).

[emphasis added]

In The "Seapearl" v. Seven Seas Corp., [1983] 2 F.C. 161 the Federal Court of Appeal set out the rules to be applied in such cases. Noting first that contractual undertakings whereby parties agree to submit their disputes to a foreign court do not deprive the Federal Court of its jurisdiction, the Court pointed out that it had discretionary power to stay proceedings initiated contrary to such clause in the contract. Pratte J.A., speaking for the majority, added : ""Paragraph 50(1)(b) of the Federal Court of Canada Act confers on the Court the discretionary power to stay proceedings where "it is in the interest of justice that the proceedings be stayed". As a rule, it is certainly in the interest of justice that contractual undertakings be honoured"". The Court went on to say that this discretionary power should not be exercised based merely on the balance of convenience: there have to be strong reasons for departing from the rule that contractual undertakings must be honoured. By strong reasons the Federal Court of Appeal meant "reasons that are sufficient to support the conclusion that it would not be reasonable or just, in the circumstances, to keep the plaintiff to his promise and enforce the contract he made with the defendant".

[emphasis added]

Consequently, to the extent that the parties are entitled to make their own determination with respect to choice of law, IMF-SF may assert liens against the vessel, regardless of the laws of Singapore or Indonesia. Under the circumstances of the present case, it seems beyond dispute that the parties' choice of law provision should be enforced. In The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 1972 AMC 1407 (1972), and later in Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 1991 AMC 1697 (1991), the Supreme Court required the enforcement of forum selection clauses in admiralty contracts. n9 The Court [*1238] held in The Bremen that, "absent some compelling and countervailing reason," a negotiated forum-selection clause "should be honoured by the parties and enforced by the courts." 407 U.S. at 12, 1972 AMC at 1415. In Carnival Cruise Lines, the Court extended its decision in The Bremen to hold enforceable a forum-selection clause contained in a standard form contract of passage.

It is clear from these decisions that the agreements of private parties, whether freely negotiated or not, are ordinarily to be given full effect by federal courts. Accordingly, choice of law and choice of forum provisions in admiralty contracts have generally been held to be enforceable. ... The claimant has not alleged in this case that enforcement of the choice of law provision would be fundamentally unfair, or otherwise opprobrious. Consequently, in light of the terms of the bunkering agreement between IMF-SF and Meridian, IMF-SF's provision of bunkers to the Anangel Happiness gave rise under American law to maritime liens in favour of IMF-SF.

[emphasis added]

• [26]            Although disapproving of the aggressive tone that tainted both experts' supplemental affidavits, I nevertheless recognize that they presented valid evidence well supported by case law. The experts helped this Court in coming to a decision as to the issues of the effect of choice of law provisions in bunkering contracts and to maritime liens under U.S. law.
• [27]            As to the validity of the choice of law provision, I think that Mr. De Klerk's interpretation of the U.S. law should prevail. In his affidavit, Mr. De Klerk states that:

U.S. case law is firmly established that "choice of law provisions in freely negotiated private agreements, absent fraud, undue influence, or overwhelming bargaining power, are presumptively valid." ... Based on my review of the evidence, I have not seen any indications of "fraud, undue influence, or overwhelming bargaining power," and thus, under U.S. law, the bunkering choice of law provision in this matter can be considered to be presumptively valid.

[A]bsent some compelling and countervailing reason, "a negotiated forum selection clause "should be [honoured] by the parties and enforced by the courts." (emphasis added).

Presumption of Authority

Section 31341

(a) The following persons are presumed to have authority to procure necessaries for a vessel:

(1) the owner;

(2) the master;

(3) a person entrusted with the management of the vessel at the port of supply; or

(4) an officer or agent appointed by --

(A) the owner;

(B) a charterer;

(C) an owner pro hac vice; or

(D) an agreed buyer in possession of the vessel.

Section 31342

(a) Except as provided in subsection (b) of this section, a person providing necessaries to a vessel on the order of the owner or a person authorized by the owner -

(1) has a maritime lien on the vessel;

(2) may bring a civil action in rem to enforce the lien; and

(3) is not required to allege or prove in the action that credit was given to the vessel.

(b) This section does not apply to a public vessel.

[emphasis added]

• [31]            Accordingly, by these provisions, the lien is intended to attach whether the necessaries are supplied on the order of the shipowner or of a person authorized by the shipowner.
• [32]            Williams in Chartering Documents, 4^th ed. (London: Sinclair Roche & Temperley, 1999) states at page 80:

Liability for supplies and services

The foregoing section is concerned with whether, under the charter, it is the owner or the time charterer who shall pay. It is sometimes a different question who is liable towards a supplier. As against the owner it is for the time charterer to bear the cost of bunkers, but if he does not pay, the supplier can often look to the ship. If the owner must pay, it is true that he has recourse to the time charterer, but it may not be any easier for the owner to extract money from the time charterer than it was for the bunker supplier, ...

The claim for payment for supplies for the time charterer's account (as against the owner) may be framed in contract against the shipowner if the master or agent is deemed to have acted on behalf of the shipowner when the order was given. Alternatively, in certain countries some such claims are by law enforceable as a maritime lien claim against the ship. A maritime lien gives security, with priority ranking ahead even of mortgages. ...

...

... The United States has some special rules on this topic, for example in relation to the so-called non-lien clause. ...

"The Charterers will not directly or indirectly suffer, nor permit to be continued, any lien or encumbrance which might have priority over the title and interest of the Owners of the Vessel. The Charterers undertake that during the period of this Charter Party, they will not procure any supplies or necessaries or services, including any port expenses and bunkers, on the credit of the Owners or in the Owners' time."

The background to this clause is a United States rule that the supplier gets a lien, irrespective of who places the order for supplies, unless he knows that the master had no authority to bind the owners to a debt of that kind.

Some years ago knowledge that the ship was under charter was sufficient to show that the master was unauthorised. After a 1971 amendment to the United States Ship Mortgage Act of 1929 it is not sufficient to prevent a lien arising that the supplier knows that the ship is fixed on a time charter. Only if he has actual knowledge of his buyer's lack of authority to bind the ship will a lien be avoided. ... For the owner, the safest course is to prohibit the master from ordering any time charterer's supplies. If he cannot avoid this entirely the master should see that such receipts and bills are marked "for account of time charterers, ...". He should refuse to take delivery on board without that. The tests are in practice applied rather strictly against the owner and the master generally has difficulty in doing all that is necessary.

[emphasis added]

• [33]            Although these passages talk about "time charterers", the author confirms at page 98 that: "There are many areas of bareboat chartering which conform to exactly the same rules as apply to time chartering. ...". Indeed, the liability for supplies and services of bareboat chartering is one area that conforms to the same rules as time chartering.
• [34]            Accordingly, a supplier has neither a duty nor an obligation to investigate whether the party has actual authority. It is the responsibility of the vessel owners to convey sufficient notice.

Under these sections, ..., a charterer is presumed to have authority from the owner to subject the ship to a maritime lien for necessaries in the absence of actual knowledge by the supplier of a prohibition-of-lien clause in the charter party.

[para. 3] Generally speaking, a lien for necessaries will arise where a supplier has, on the order of the owner or person authorized by the owner, provided an item to a vessel which is reasonably necessary for the vessel to perform its business. Such items explicitly include repairs, supplies, towage, and use of a dry dock or marine railway: 46 U.S.C.A. 31301(4). The list has been extended by case law to include those items reasonably needed in the ship's business.

... This is not a case where Star was itself in possession of the vessels such that Petromar was entitled to rely on the presumed authority to bind the appellant: Goodwin Johnson, supra. ... [[1954] S.C.R. 513">Goodwin Johnson, Ltd. v. The Ship (Scow) AT & B No. 28, [1954] S.C.R. 513.]

• [38]            In the case at bar, the bareboat charterers had complete possession and control of the ship at all material times, thus making the plaintiff entitled to rely on the presumed authority of Tor to bind the shipowner.
• [39]            In Thorne Riddell Inc. v. Nicolle N Entreprises Inc., [1985] 2 F.C. 31 at 36-37, Addy J. stated, in obiter, that:

A demise charter creates an ownership interest in a ship. The charterer by way of demise has been held to become, for the time of the charter, the owner of the vessel. (Scrutton on Charter Parties and Bills of Lading, 18^th Ed., page 45) ...

As has often been stated, the principles of maritime law came into being in order to govern, regulate and encourage international trade and the movements of ships and commerce through the world. Where an owner turns over a ship to another person under a demise bare boat charter, knowing full well that it will be sailing to foreign ports and that it will be obliged to take on fuel and other supplies from time to time, it would seem, at first sight, in any event, to be impractical and unnecessarily restrictive of commerce and of the movement of ships to expect that the suppliers in all these cases would be required to receive prepayment in specie or to check with the actual registered owners at or through the port of registry in whatever corner of the world it might be, to enquire whether proper authority had been granted before supplying that ship with the essential requirements to enable it to continue on its voyage. Whether it be by virtue of presumed or implied authority or otherwise, unless the supplier is put on notice or has reason to suspect that the actual owner has forbidden the credit of the ship to be pledged, then it would seem that an action for such necessaries might well be maintainable in rem against the ship when its owner pro tempore, that is, the charterer by way of demise, would be responsible at law for those supplies.

• [40]            Furthermore, in Med Coast Shipping Ltd. v. Cuba, [1993] Q.J. No.750, Tingley J.S.C. held that:

[para. 19] As the charterer of the vessel under a bareboat charter party contract, which includes a hire/purchase clause, Mambisa enjoys all the incidents of ownership (possession, use and risk) and has all the obligations of an owner. Lloyd's Register listing is consistent with this finding. Lloyd's Register does not appear to be too concerned about what the registers of a country might have to say regarding "registered" ownership. It relies on its own research for the information it publishes.

...

[para. 21] The following remarks of Mr. Justice Marceau of the Federal Court of Appeal in the case of Mount Royal/Walsh Inc. c. The Ship Jensen Star et al [See Note 4 below] have special application to this case, where the bareboat charter contract contains a hire/purchase clause:

Note 4: (1990) 1 F.C. 199 at pages 209 and 210.

"The problem, however, is that I simply do not see how a court could suppose that Parliament may have meant to include a demise charterer in the expression "beneficial owner" as it appears in subsection 43(3) (of the Federal Court Act). Whatever be the meaning of the qualifying term "beneficial", the word owner can only normally be used in reference to title in the res itself,[,] a title characterized essentially by the right to dispose of the res. The French corresponding word "propriétaire" is equally clear in that regard. These words are clearly inapt to describe the possession of a demise charterer. In my view, the expression "beneficial owner" was chosen to serve as an instruction, in a system of registration of ownership rights, to look beyond the register in searching for the relevant person. But such search cannot go so far as to encompass a demise charterer who has no equitable or proprietary interest which could burden the title of the registered owner. As I see it, the expression "beneficial owner" serves to include someone who stands behind the registered owner in situations where the latter functions merely as an intermediary, like a trustee, a legal representative or an agent. The French corresponding expression "véritable propriétaire" (as found in the 1985 revision, R.S.C., 1985, C. F-7) leaves no doubt to that effect."

[para. 22] In the cases before this Court, Mambisa has, by virtue of the hire/purchase clause, that "equitable or proprietary interest which could burden the title of the registered owner".

• [41]            Part IV of the charter party between Tonga and Pacific Pearl constitutes such a "hire/purchase agreement" clause, thereby affording Tonga to burden the title of the registered owner Pacific Pearl.
• [42]            Although the defendants did prove that the master posted prohibition of lien clauses in prominent places throughout the ship, such notices were in effect insufficient. The plaintiff did not personally deliver the necessaries. It was through Bominflot and Texaco that it completed the transaction. Given these circumstances, there was very little the defendants could do. Had they included, on the bunker delivery receipt, a statement as to the lack of authority of the bareboat charterer to incur or subject the ship to any maritime liens, then plaintiff could not have claimed that it was unaware of the charter party agreement.

• [43]            Given these facts, no effective notice was brought to the plaintiff's attention such that the presumed authority of the bareboat charterers could be rebutted. Therefore, the plaintiff was right in presuming that the bunkers were delivered on the credit of the ship.
• [44]            In my view, the opinion expressed by Mr. De Klerk should once again prevail: the bareboat charterer of the "PANAMAX LEADER", namely Tonga, was a person authorized under section 31341(a) of the Maritime Liens Act to procure necessaries for the vessel. As stated in his affidavit:

... upon the authorization of the vessel's manager (Tor Shipping, Ltd.), acting on behalf of the bareboat charterer (Tonga Shipping, Ltd.), Kirgan did, in fact arrange for supply of fuel or bunkers to the PANAMAX LEADER in March 1999. Under U.S law, a supplier of necessaries to a vessel is entitled to rely upon the statutory presumption of authority granted under the Maritime Lien Act unless a vessel owner gives actual notice that authority is, in fact, lacking.

[emphasis added]

• [45]            I also agree with the expert that a U.S. Court would enforce the choice of law provision and further find, as a matter of law, that under the Maritime Liens Act, Kirgan is the possessor of a valid maritime lien for necessaries supplied.
• [46]            Accordingly, Kirgan was entitled to rely on the statutory presumption of authority and has, therefore, established a valid claim of lien under the Maritime Liens Act.

2.        If the plaintiff is entitled to a maritime lien against the ship, what is the value of the damages incurred by it for supplying the bunkers and are interest and recovery costs applicable?

• [47]            According to the bunker supply receipt from Texaco and to Kirgan's invoice to Tor, the total value of the fuel supplied is U.S. $54,397.19. However, the costs they incurred (i.e. the sum they paid to Bominflot) is U.S. $52,268.58.
• [48]            The plaintiff is claiming it's selling price to the defendants, U.S. $54,397.19 together with interest, calculated at a rate of 1.5% per month from the payment's due date March 31, 1999 to judgment date, and with a penalty payment of 0.15% per each day of default in payment of over 90 days.

• [49]            Both parties are of good faith. On one hand, the plaintiff delivered bunkers to a bareboat charterer, passing as owner, and was not paid for them. On the other hand, the defendants, while unaware of the transaction, must now assume the bankrupt bareboat charterer's obligation to the plaintiff.
• [50]            Nevertheless, it is clear from the defendants' witness, Mr. Antonopoulos, that when signing a contract with a charterer, a ship owner is well aware that it loses control over the vessel. Indeed, once a charter agreement is in force, the charterer is free to sail the ship on any sea and in every port that it wishes and the owner is left with the consequences, such as the one before us.

... The ship gained a windfall in receiving fuel without payment, and to require the owner to bear the cost of that benefit is neither inequitable nor in contradiction of established principles under American maritime law. ...

• [52]            In my view, the plaintiff is entitled to his claim established at U.S. $54,397.19, which is the value of the fuel supplied.
• [53]            The plaintiff is claiming interest at the rate of 1.5% per month, and a penalty at the rate of 0.15% per each day of delay pursuant to Clause 10(c) of the Contract.

[para. 58] ... I am also of the view that an interest rate of two percent per month, bearing in mind the banking prime rates shown in Exhibit P-33, is excessive. I am satisfied that the plaintiff will be adequately compensated by being awarded interest on its claim from January 1, 1984, to the date of payment at one (1) percentage point above the prime bank rates from time to time prevailing as shown in Exhibit P-33. ...

• [55]            I agree with Martin J.'s finding, and I consider that the plaintiff should not be entitled to the interest rate mentioned in Clause 10(c) of the Contract. Using my discretion, I will add to this sum interest calculated at the prime rate plus 2% per annum from March 31, 1999.
• [56]            The recovery costs claimed pursuant to Clause 11(c) will not be granted.

                                              JUDGMENT

[1]                 The defendants are condemned to pay the plaintiff the sum of Cdn $123,914.74 together with interest at the prime rate charged by Canadian chartered banks on March 31, 1999, plus 2% per annum.

[2]                 This Court declares that the plaintiff is entitled to a maritime lien to secure the amounts owing to it by the defendants' ship and further that such maritime lien takes priority over any outstanding mortgages against the defendant ship.

COSTS

[3]                 The parties have asked to make representations.

[4]                 The plaintiff shall file and serve written representations on costs no later than 10 days after the date of this judgment.

[5]                 The defendants shall file and serve their written representations no later than 20 days after the date of this judgment and the plaintiff shall file a reply, if necessary, no later than 25 days after the date of this judgment.

[6]                 I will remain seized of the file for the purpose of the decision on costs.

                  "Pierre Blais"                  

                      J.F.C.C.

                          FEDERAL COURT OF CANADA

                                       TRIAL DIVISION

    NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                   T-1684-99

STYLE OF CAUSE: Kirgan Holdings S.A.

And:

The Owners and all those interested in the Ship "Panamax Leader" (ex "Pacific Pearl")

PLACE OF HEARING:                                   Montreal

DATE OF HEARING:                                     October 15 and 16^th, 2002

REASONS FOR [ORDER or JUDGMENT] : Blais J.

DATED:                      November 29, 2002

APPEARANCES:

                                     Mr. Victor De Marco

FOR PLAINTIFF

Mr. Sean J. Harrington

FOR DEFENDANT

SOLICITORS OF RECORD:

                                     BRISSET, BISHOP FOR PLAINTIFF

Montreal, Quebec

BORDEN, LADNER, GERVAIS FOR DEFENDANT

Montreal, Quebec