The Federal Court of Appeal rendered a decision on December 12, 2008 which will be of particular interest for ship suppliers, ship chandlers and repairers as well as banks issuing ship mortgages. The three appellants, suppliers of bunkers, were successfully represented by Peter G. Pamel and Jean-Marie Fontaine of our Montreal office.

In a two to one decision, the Federal Court of Appeal enforced a maritime lien in favour of three suppliers of bunker fuel to the vessel LANNER. None of the suppliers were incorporated or based in the US. The bunker fuel was supplied in Canada, Spain, Trinidad and Singapore. The vessel was registered in Liberia and the registered owners were also based in that country. The vessel’s base of operation and the vessel manager’s country of residence was Greece. However, each of the supply contracts contained a choice of law clause incorporating the law of the United States. The ship was arrested in Canada by the respondent banks, which held valid registered ship mortgages against the vessel, and it was sold in a judicial sale. The litigation arose out of the competing claims of the suppliers and the banks for the proceeds of that sale.

The Federal Court of Appeal reiterated that Canadian courts will recognize valid foreign maritime liens even if Canadian maritime law would not have granted that party a lien in the same circumstances. It also reiterated that a foreign maritime lien will receive the same ranking as a Canadian maritime lien (ahead of a registered ship mortgage). What was novel in this case is that the Court held that unless there is a compelling reason not to do so, a valid choice of law clause in a supply contract which incorporates the law of the United States (suppliers in the US enjoy a maritime lien) is sufficient to give the supplier the benefit of a maritime lien under US law which will be recognized in Canada. In other words, even if the supplier is non-American, the ship is not flagged in the US and the supplies were not furnished in the US, save for exceptional circumstances, the choice of law clause incorporating US law will be sufficient to give the supplier the benefit of a maritime lien which will outrank a ship mortgage under Canadian priorities ranking. The Federal Court of Appeal did leave open the possibility that there may be circumstances where, despite the choice of law clause, the supply of the bunkers has such a strong connection to another specific jurisdiction that the general rule will be displaced. In dissent, Justice Pelletier felt that the law in the US was not settled. He concluded that some circuits in the US will give a foreign supplier the benefit of a maritime lien on the basis of a choice of law clause while others would not.

This case is of particular importance to the ship chandlery industry, as most Commonwealth countries do not grant a maritime lien to a supplier of necessaries. By incorporating a carefully worded choice of law clause in its supply contract, the supplier can overcome that disadvantage and enjoy the security that American ship suppliers have enjoyed for decades.

As this was not a unanimous decision and as this is a novel point of law, the respondent bank may seek leave to appeal this decision to the Supreme Court. We shall keep our readers updated on any developments in this case.