Offshore Interiors Inc. v. Worldspan Marine Inc.

Offshore Interiors Inc. v. Worldspan Marine Inc.
Court (s) Database
Federal Court Decisions
Date
2013-12-19
Neutral citation
2013 FC 1266
File numbers
T-1226-10
Decision Content
Date: 20131219
Docket:
T-1226-10
Citation: 2013 FC 1266
Ottawa, Ontario, December 19, 2013
PRESENT: The Honourable Madam Justice Strickland
ADMIRALTY ACTION IN REM AGAINST THE VESSEL “QE014226C010”
AND IN PERSONAM
BETWEEN:
OFFSHORE INTERIORS INC.
Plaintiff
and
WORLDSPAN MARINE INC.,
CRESCENT CUSTOM YACHTS INC.,
THE OWNERS AND ALL OTHERS INTERESTED IN THE VESSEL "QE014226C010" AND THE VESSEL "QE014226C010"
Defendants
and
WOLRIGE MAHON LIMITED IN ITS CAPACITY AS APPOINTED VESSEL CONSTRUCTION OFFICER OF THE DEFENDANT VESSEL "QE014226C010" AND HARRY SARGEANT III,
MOHAMMED ANWAR FARID AL-SALEH,
COMERICA BANK
Interveners
REASONS FOR ORDER AND ORDER
[1] This decision concerns the appeals by Harry Sargeant III (Sargeant) and Comerica Bank (Comerica), pursuant to Rule 51 of the Federal Courts Rules, SOR/98-106 (Rules), of the Order of Prothonotary Lafrenière dated March 5, 2013 (Offshore Interiors Inc v Worldspan Marine Inc, 2013 FC 221) declaring that the builder’s mortgage held by Sargeant against the defendant vessel QE014226C010 (Vessel) does not create a lien or charge in the Vessel other than to secure delivery.
Background
[2] The background facts in this matter are not in dispute. Sargeant and Worldspan Marine Inc. (Worldspan) entered into a Vessel Construction Agreement (VCA) dated February 29, 2008 whereby Worldspan agreed to design, construct, outfit, launch, complete, sell and deliver the Vessel, a 142 foot custom built luxury yacht, to Sargeant.
[3] Construction of the Vessel began in March 2008. A Builder’s Mortgage in favour of Sargeant as against the Vessel was filed in the Vancouver Ship Registry on May 14, 2008 (Builder’s Mortgage).
[4] By August 2009 payments made by or on behalf of Sargeant to Worldspan totalled USD$11,064,525.38. On August 14, 2009, Sargeant entered into a Construction Loan Agreement (CLA) with Comerica and others for USD$9,400,000.00 to finance the completion of the construction of the Vessel. Sargeant’s interests in the VCA, the Vessel, and the Builder’s Mortgage were assigned to Comerica by way of an Assignment of Security Agreement and Mortgage of same date.
[5] From August 2009 to March 2010, Comerica paid to Worldspan, on Sargeant’s behalf, the sum of USD$9,387,398.67. By April 2010 the total amount paid to Worldspan by or on behalf of Sargeant in connection with the construction of the Vessel was USD$20,651,924.05.
[6] A dispute arose between Sargeant and Worldspan concerning project costs. Construction of the Vessel ceased in April or May 2010. Offshore commenced the underlying action on July 20, 2010 against Worldspan, Crescent Custom Yachts Inc., the Owners and all others interested in the Vessel, and the Vessel itself for unpaid invoices for services and materials rendered in connection with construction of the Vessel. The Vessel was arrested on July 28, 2010 and remains under arrest.
[7] On May 27, 2011, Worldspan and related entities filed a Petition in the British Columbia Supreme Court seeking relief under the Companies Creditors’ Arrangement Act, RSC 1985, c C-36 (CCAA Proceedings). On July 22, 2011, Justice Pearlman of the British Columbia Supreme Court issued a claims process order in the CCAA Proceedings (CCAA Claims Process Order). This required all creditors to deliver proofs of claim on or before the claims bar date, September 9, 2011, failing which the creditor would be forever barred from making or enforcing any claim. It also provided that any creditor that filed a proof of claim in the CCAA Proceedings asserting an in rem claim against the Vessel could pursue that claim, outside the CCAA Proceeding, in this Court.
[8] By order dated August 29, 2011, the Prothonotary, as case management judge, established a claims process for all creditors with in rem claims against the Vessel (Federal Court Claims Process Order). That order provided that notice be given to all creditors of the requirement to file an affidavit containing particulars in support of the claim against the Vessel, specifying the nature of the claim to enable the Court to determine if such a claim constituted an in rem claim and, if so, its priority. It also required all such affidavits to be filed 21 days after the in rem creditor received the required notice and provided that all questions relating to the right of any in rem claimant be determined by the Federal Court upon application.
[9] On February 9, 2012, Offshore filed a motion seeking an order of this Court declaring that the Builder’s Mortgage does not create a lien or charge in the Vessel other than to secure its delivery. The order was granted by the Prothonotary, sitting as Case Management Judge, on March 5, 2013, with costs as set out. That order is the subject of this appeal.
Decision Under Appeal
[10] The Prothonotary set out the context of the motion before him being that, as a condition of participating in a priorities distribution following judicial sale of the Vessel, each claimant must have an existing, valid and enforceable in rem claim against the Vessel. Claimants could present their own claims and could also attack others, including their ranking in terms of priority. The relief sought by Offshore in its motion was not intended to preclude Sargeant or Comerica from participating in the priorities hearing, but rather to limit their claim by excluding from it the repayment of the funds advanced by or on behalf of Sergeant for the construction of the Vessel.
[11] The Prothonotary set out the positions of the parties. Offshore submitted that the Builder’s Mortgage did not create a lien or charge in the Vessel, but only secured delivery. Mohammed Anwar Farid Al-Saleh (Al-Saleh) adopted this position.
[12] Sargeant and Comerica opposed Offshore’s motion, arguing that the Builder’s Mortgage, expressly or impliedly, allows them to secure repayment of the amounts advanced to Worldspan by or on behalf of Sargeant. The VCA expressly provides that advances made by Sargeant to Worldspan are not earned until a future date, being the delivery of the Vessel. As it was never delivered, the advances are recoverable as money lent. Alternatively, Sargeant has an equitable mortgage or a claim against the Vessel pursuant to subsection 22(2)(n) of the Federal Courts Act, RSC 1985, c F-7 for the amounts advanced for the construction of the Vessel.
[13] The Prothonotary adopted Offshore’s supplementary written submissions on the subsection 22(2)(n) claim and concluded that the claim was “of no moment”.
[14] The Prothonotary noted that the question of whether Worldspan had an obligation under the Builder’s Mortgage or the VCA to repay the funds advanced by Sargeant turned on the interpretation of those documents. In that regard, he referenced the principles of contract interpretation found in Salah v Timothy’s Coffees of the World Inc, 2010 ONCA 673 [Salah]. Considering the factors and circumstances, he was not persuaded that the evidence supported any indebtedness.
[15] He noted that the Builder’s Mortgage is in the form prescribed by the Canada Shipping Act, 2001, SC 2001, c 26 (Canada Shipping Act, 2001) (Form 16) which permits only a principal sum and fixed rate of interest, or, an “account current.” The Builder’s Mortgage stated only that there was an account pursuant to, and the obligations secured by, the VCA. However, while the form required specifics of the transaction so as to determine the amount owing and the “time of payment”, neither the Builder’s Mortgage nor the VCA contained such specifics.
[16] Further, while the VCA set out the rights and obligations of the parties in the event of breach, termination or upon completion, it contained no explicit provision for repayment for the funds provided for construction of the Vessel.
[17] The Prothonotary also found that whether a mortgage implies a loan is dependant on the circumstances of the specific situation. Here, regardless of the wording of the Builder’s Mortgage, there was no evidence of an account current being created pursuant to the VCA. The VCA clearly permitted Worldspan to retain all advances for the purpose of paying for labour and material used to construct the Vessel and “would not exist as a fund” (FC Yachts Ltd, PR Yacht Builders Ltd and New World Expedition Yachts (31 August, 2010) arbitration decision of Mr. John J McIntyre [FC Yachts]).
[18] The Prothonotary found that the parties must have contemplated that, following a breach, Worldspan would have no ability to repay the substantial amounts advanced to construct the Vessel leaving Sargeant and Comerica with the obvious remedy of taking the Vessel from the yard and completing it elsewhere or selling it. The VCA contained no provision for repayment and a contractual term will not be implied merely because, in hindsight, it would have been reasonable to do so. The Prothonotary adopted para 57 of Offshore’s supplementary written representations to the effect that the VCA is not a loan agreement and that if the advanced finds were intended as a loan and were to be repaid then the VCA would have said so.
[19] The Prothonotary concluded that, for these reasons, there were no financial obligations of Worldspan to Sargeant under the VCA. If Worldspan was in breach, Sargeant’s remedies were limited to possession and ownership of the Vessel and an in personam action against Worldspan.
Issues
[20] The issues on this appeal are:
(1) What is the standard of review?
(2) Did the Prothonotary err in finding that the Builder’s Mortgage does not create a lien or a charge in the Vessel other than to secure its delivery?
(3) Did the Prothonotary err by not considering Sargeant’s alternate claim under subsection 22(2)(n) Federal Courts Act?
(1) What is the Standard of Review?
[21] The modified test in Merck & Co v Apotex Inc, 2003 FCA 488, [2004] 2 FCR 459 at para 19 describes the standard of review for discretionary orders made by a prothonotary. Here the Prothonotary was called upon to interpret and apply the Builder’s Mortgage and the VCA in determining whether the Builder’s Mortgage created a lien or charge in the Vessel other than to secure its delivery. This did not involve an exercise of discretion, but rather, concerned the task of gleaning the parties’ intentions by interpreting the relevant facts and contract provisions. Therefore, the normal appellate standards of review apply (Housen v Nikolaisen, 2002 SCC 33, [2002] 2 SCR 235 at para 8 [Housen]; Giroux v Canada, 2001 FCT 531 at para 32; Douze v Canada (Citizenship and Immigration), 2010 FC 1086 at para 24).
[22] Sargeant, Comerica and Offshore all rely on General Motors of Canada Ltd v R, 2008 FCA 142 [General Motors] for their standard of review analysis, although they come to different conclusions as to its application. Sargeant and Comerica assert that it supports the correctness standard while Offshore submits that it supports the palpable or overriding error standard. The relevant portions of that decision are as follows:
[29] In MacDougall v. MacDougall (2005), 262 (4th) 120, the appeal before the Ontario Court of Appeal pertained to the proper interpretation of a spousal support section of a marriage contract, i.e. the interpretation of a variation provision in a domestic contract. Thus, the Court of Appeal had to determine on what standard it would review the Trial Judge’s interpretation. The appellant contended that the question before the Court raised a question of law and was thus reviewable on a standard of correctness because it related to the legal effect to be given to the words of the contract. The respondent argued that the question before the Court was a mixed question of fact and law which should be reviewed on a standard of palpable and overriding error.
[30] After reviewing a number of Ontario Court decisions in the light of Housen v. Nikolaisen, 2002 SCC 33 (CanLII), [2002] 2 S.C.R. 235, Lang J.A. wrote at paragraphs 30 to 33 of her Reasons for the Court:
30 To begin with, the trial judge must apply the proper principles of contract interpretation, including consideration of the clause in the context of the entirety of the contract. A failure to follow the proper principles, including a failure to apply a fundamental principle of interpretation, would be an error of law attracting review on the standard of correctness.
31 To the extent that this task of interpretation includes consideration of extrinsic evidence, or a determination of the factual matrix, the trial judge is involved in making a finding of fact, or drawing inferences from a finding of fact. Further, the trial judge's "interpretation of the evidence as a whole" is one involving factual or inferential determinations. See Amertek Inc. v. Canadian Commercial Corp. 2005 CanLII 23220 (ON CA), (2005), 200 O.A.C. 38 at para. 68. Such questions of fact are entitled to deference and are not to be overturned except in the case of palpable or overriding error, or its "functional equivalents": "clearly wrong", "unreasonable", and "not reasonably supported by the evidence". See H.L. v. Canada, 2005 SCC 25 (CanLII), [2005] 1 S.C.R. 401 at para. 110.
32 In interpreting the contract, the trial judge also applies the legal principles to the language of the contract in the context of the relevant facts and inferences. This requires the application of law to fact. This has been said to be a question of mixed fact and law. See Algoma Steel Inc. v. Union Gas Ltd. 2003 CanLII 30833 (ON CA), (2003), 63 O.R. (3d) 78 at paras. 19-21 (C.A.); Amertek, supra, at para. 68.
33 Accordingly, in reviewing the trial judge's interpretation of a contract, the appellate court must first classify the question as one of fact, law, or mixed fact and law. If the question is an inextricable intertwining of both fact and law, the question can be said to be one of mixed fact and law. […]
[Emphasis added]
[23] Sargeant submits that the Prothonotary failed to apply the appropriate principles of contractual interpretation on the motion before him. This was error of law which led him to incorrectly conclude that the Builder’s Mortgage does not secure repayment of the amounts advanced by Sargeant pursuant to the VCA. Further, that the Prothonotary erred in law by failing to consider or apply the applicable legal principles to his alternate claim against the Vessel pursuant to subsection 22(2)(n) of the Federal Courts Act. Both errors of law are reviewable on the standard of correctness.
[24] Sargeant submits that the Prothonotary did not apply the principles of contractual interpretation that required the VCA and Builder’s Mortgage to be interpreted in accordance with sound commercial principles and business sense; to avoid a commercial absurdity; and, to extract meaning from the parties expression of their contractual intention in accordance with the language used. Instead of interpreting the language and grappling with the principles, the Prothonotary applied an overly formalistic and literal approach basing his decisions on the perceived absence of explicit provisions and evidence.
[25] Comerica submits that interpreting an agreement involves referring to the context, or factual matrix, in which it was made. The factual matrix in this case was that Sargeant was to provide the working capital needed by Worldspan to construct the Vessel, Worldspan would remain the owner until delivery, and, Sargeant’s advances were to be secured by the Builder’s Mortgage. It was within that context that the Prothonotary was required to interpret the VCA. Further, that the Prothonotary erred in law in failing to apply the proper principles of contract interpretation and erred in fact as regards to the existence of an account current.
[26] Offshore submits that the standard of review is that of palpable or overriding error as interpreting the VCA within the factual matrix is a mixed question of fact and law (General Motors, above, at paras 29-33). Here, there was no palpable or overriding error and, in any event, the Prothonotary’s decision would also survive review on a correctness standard.
[27] The applicable standard of review for a question involving contractual interpretation was well described in Geoff R. Hall, Canadian Contractual Interpretation Law, 2nd ed (Markhan: LexisNexis Canada Inc, 2012), at 125:
…The new approach holds that different standards of review apply depending upon the precise nature of the question. This is because contractual interpretation involves questions of law (what are the applicable principles of interpretation?), questions of fact (what is the factual matrix?), and questions of mixed fact and law (what is the meaning of a particular contract in light of the legal principles and the factual matrix?). The standard of review for each of these questions is defined by the Supreme Court of Canada’s leading case on standards of appellate review, Housen v. Nikolisen: correctness in the case of a question of law, palpable and over riding error in the case of a question of fact and (in general) palpable and overriding error for questions of mixed fact and law.
[28] Here, at the outset of his decision, the Prothonotary correctly identifies the applicable principles of contract interpretation. Thus, there is no error of law in this regard. However, he does not state how those principles are applied to the matter before him or how his conclusion is related to those principles. In my view, with the exception of the alleged failure to address the alternate subsection 22(2)(n) submission which was an error in law reviewable on the correctness standard, the remaining issues are all linked to factual inquiries. Thus, they are mixed questions of fact and law, making the appropriate standard of review that of a palpable and overriding error.
[29] In that regard, I would note that although Sargeant and Comerica both submit that the correctness standard applies, they also make submissions disputing the Prothonotary’s assessment of the underlying factual matrix relevant to interpreting the VCA.
Relevant Provisions of the VCA and Builder’s Mortgage
[30] Prior to considering the second issue, it is useful to set out the relevant provisions of the VCA and Builder’s Mortgage.
[31] Worldspan, as the builder, undertook to design, construct, outfit, launch, complete and sell and deliver the Vessel to Sargeant subject to the provisions of the VCA (section 1.1). Worldspan also agreed to deliver the Vessel to Sargeant upon completion (section 2.1).
[32] Section 2.3 provides that:
Upon Delivery, the Vessel, including any equipment, materials, supplies, parts or other components…shall be free and clear of all liens, mortgages, and encumbrances (except liens and encumbrances approved by Owner in favour of Owner’s construction finance lender, if any)…which arise or attach prior to the delivery of the Vessel to Owner, against the Vessel or against the materials, labour, supplies or equipment furnished by Builder in performance of this Agreement.
[33] Worldspan also agreed to provide a bill of sale warranting that the Vessel is free and clear of any and all claims, debts, liabilities, liens, charges, mortgages and encumbrances of any nature whatsoever (subsection 2.5(b)) and an affidavit confirming that materials, equipment, parts, components and supplies furnished by Worldspan and all persons who provided labour or material to the Vessel have been paid in full (subsection 2.5(d)).
[34] Section 4.1 addresses payments on account made by Sargeant to Worldspan during construction which are in the nature of advances:
The cost of the Vessel and the final purchase price payable by Owner (the “Final Purchase Price”) will be finally determined on a time-and-materials basis subject to reasonable verification/audit ... During the course of construction of the Vessel Owner will make payments on account of the Final Purchase Price as hereinafter provided but these payments will be in the nature of advances to Builder and the Final Purchase Price will not be earned by Builder until delivery and acceptance of the Vessel in accordance with this Agreement.
[35] The estimated price of the Vessel was US $15.0 million subject to any agreed changes (section 4.2). During construction of the Vessel, Sargeant was required to make monthly payments in arrears to cover Worldspan’s expenditures for the previous month (subsection 4.3(a)). In the event that the final purchase price would be more than 10% greater that the estimated price plus agreed changes, then Sargeant had the option of terminating the VCA with the consequences set out in section 13. Each month Worldspan was to submit to Sargeant, for verification and approval, a Claim Certificate setting out that month’s expenditures (subsection 4.3(c)). These arrangements were acknowledged as intended to maintain positive cash flow (subsection 4.3(e)).
[36] Risk remained with Worldspan during construction (section 5). Total loss was addressed in section 5.3:
In the event Builder is unable or otherwise fails to deliver the Vessel to Owner as required hereunder due to total loss of the Vessel during construction, Owner shall be entitled to recover all amounts paid to Builder hereunder, whether by insurance or otherwise (the “Refund”). The Refund shall be without prejudice to any other rights of owner under the law, this Agreement or otherwise.
[37] Pursuant to section 8.1, Sargeant was permitted to assign the benefit of the VCA by way of security to any bank or financial institution providing financing in connection with the construction of the Vessel.
[38] By section 12.1, Worldspan retained title to the Vessel until delivery and granted Sargeant a continuing first priority security interest to secure the sums advanced to Worldspan:
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.
[39] Section 13.1 gives Sargeant the “right and power, without prejudice to any other remedy,” to terminate the VCA in certain events of default, including if Worldspan suspended payment of its debts or ceased to carry on business or made any arrangement or compromise with its creditors. By section 13.2, should Sargeant terminate the VCA then he was entitled to take over and complete the Vessel elsewhere in which event Worldspan’s liabilities are set out, including:
(a) to deliver up the Vessel and/or such parts as have been constructed and all materials, engines, machinery, outfit and equipment from time to time appropriated to the Vessel and/or pertaining to this Agreement…free and clear of all mortgages, maritime liens and debts and claims whatsoever for removal from Builder’s shipyard;
(b) to do and execute all acts, matters, things and documents necessary or reasonably required by owner to transfer and convey all right, title and interest to and in the Vessel to owner and protect the same against claims by other persons (including suppliers, subcontractors and creditors of the Builder…)
13.3 As an alternative to its rights under the preceding provisions of this SECTION13 Owner will be entitled by notice in writing given at anytime within thirty (30) days after termination of this Agreement to require Builder to cooperate in the prompt sale of the vessel on such terms and in such manner as owner may decide and Builder may approve….and following such sale the provisions of SECTION 24 will apply.
[40] Section 24 of the VCA sets out a formula that applies in the event of a sale of the Vessel by Sargeant pursuant to which Worldspan is obligated to pay Sargeant a calculated sum in the event that the sale proceeds are less than the advances made by Sargeant to Worldspan; similarly, if the sale proceeds exceed the advances made by Sargeant to Worldspan, Sargeant is to pay a portion of the profit to Worldspan.
[41] Section 13.5 of the VCA deals with default by Sargeant providing that Worldspan has a right to terminate in the event that Sargeant fails to make payments pursuant to the VCA, in which case Worldspan may offer the Vessel for sale. Worldspan’s “property in the Vessel will revert or pass to Builder and Owner will promptly do and exercise all acts, matters, things and documents necessary or reasonably required by Builder to perfect Builder’s property therein.” Further, if Worldspan resells the Vessel for an amount less than the Capped Purchase Price, it shall refund to Sargeant all instalment payments less Worldspan’s direct out-of-pocket costs and expenses for storage and resale. If Worldspan resells the Vessel for an amount equal to or in excess of the Capped Purchase Price, then it shall refund to Sargeant any instalment payments less Worldspan’s costs and expenses for storage and resale.
Builder’s Mortgage
[42] The Builder’s Mortgage is in statutory form (Form 16) in favour of Sargeant, as mortgagee, by Worldspan, as mortgagor. The form includes the wording “Whereas (State that there is an account current between mortgagor and mortgagee (describing both), and describe the nature of the transaction so as to show how the amount of principle and interest due at any given time is to be ascertained and the manner and time of payment)”. In response was entered:
There is an account current pursuant to that certain Vessel Construction Agreement dated February 29, 2008 among mortgagor and mortgagee which Agreement specifies the obligations hereby secured.
[43] The form then states:
I/We, the mortgagor(s) in consideration of the above now covenant with the mortgagee(s) to pay to the mortgagee(s) the sums for the time being due on this security, whether by way of principal or interest, at the times and in the manner set out. For the purposes of better securing payment to the mortgagee(s), the mortgagor(s) hereby mortgage to the mortgagee(s) 64 shares…of which the mortgagor(s) are the owner(s) in the vessel described above…
(2) Did the Prothonotary err in finding that the Builder’s Mortgage does not create a lien or a charge in the Vessel other than to secure its delivery?
[44] The Prothonotary correctly recognized at the outset of his analysis that the aim of contract interpretation is to determine the intent of the parties based on the language of the contract documents and having regard to the context in which the contract was executed. He also acknowledged the principles of contract interpretation as set out in Salah, above at para 16. Thus, the issue is whether the Prothonotary properly applied those principles in his analysis.
[45] For the reasons outlined below, I am not satisfied that the Prothonotary’s analysis, while considering individual aspects of the VCA, employed an overall view of the factual matrix and consideration of the VCA and the Builder’s Mortgage as a whole so as to garner the true intent of the parties. This impacted his analysis of the nature of the advances and the scope of Sargeant’s security interest.
Scope of Security
[46] The starting point of the analysis is, as the Prothonotary determined, clause 12.1 of the VCA:
12.1 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…
[Emphasis added]
[47] The parties agreed that the Builder would retain title to the Vessel during construction, this necessarily puts the Owner at risk as regards to the advances. Therefore, the broad question on this appeal is how did the parties intend for that risk to be managed? Put otherwise, what was the intended scope of the security interest?
[48] The management of this type of risk during the construction of a vessel is not unique or outside usual commercial practice. This is often dealt with in one of two ways, as described in Simon Curtis, The Law of Shipbuilding Contracts, 4th ed (London: Informa Law, 2012) at 135:
The time at which title to the vessel passes to the buyer is for two reasons an issue of central importance to the entire shipbuilding project. First, whoever owns the vessel during her construction period enjoys a measure of security against the risk of the other party’s financial default; in such event his rights of ownership should (at least in theory) prevail against the other’s creditors and permit him to sell the vessel in order to recoup his investment. Secondly, depending on local law and practice, ownership of the vessel may afford to the builder the right to mortgage or charge her for the purpose of securing the finance needed for her construction.
The overwhelming majority of international shipbuilding contracts confer title to the vessel upon the builder throughout the construction period on the basis that the buyer’s pre-delivery credit risk will be secured by a refund guarantee; this will typically be provided to the buyer as a condition of payment of the first instalment of the contract price. Title to the vessel will be transferred to the buyer concurrently with execution of the Protocol of Delivery and Acceptance…
If, however, the builder is not in a position to provide a satisfactory refund guarantee, it may be agreed that the vessel itself should stand as security for the buyer’s pre-delivery instalments. In such circumstances the contract will provide that title to the vessel, together with all equipment and materials intended for her, should pass to the buyer during the course of construction. The title vested in the buyer will, however, usually be conditional, rather than absolute, in nature and will in particular not preclude him from exercising his rights to reject the vessel and rescind the contract. In such circumstances title will normally revert to the builder following the buyer’s notice of termination and upon the builder’s refundment to him of the pre-delivery instalments of the contract price paid at that time, together with interest thereon.
[49] These situations are not representative of the title and risk provisions contained in the VCA, and it must also be recalled that, in the United Kingdom, there is no right to place a builder’s mortgage during construction. In that regard, Curtis, above states the following at 42:
Secondly, in certain European shipbuilding jurisdictions, it is possible for the builder to create and register a mortgage over the partly-built vessel to secure construction financing; such mortgage will obviously be redeemed prior to delivery in order to permit the buyer to take the vessel free of all encumbrances. During the construction period, however, the existence of the mortgage will usually ensure that it is the mortgagee, rather than the liquidator of the builder, who will be entitled to dispose of the vessel in the event of the builder’s insolvency. Where the vessel’s construction is financed on a mortgage basis, the buyer may therefore wish at the outset to reach a separate agreement with the mortgagee permitting him an option to purchase the vessel should the builder default and the mortgagee enter legal possession.
[50] Here, of course the factual situation differs as the mortgagor was Worldspan and the mortgagee was the purchaser, Sargeant, whose advances were utilized to construct the Vessel. However, these provisions demonstrate that title, the risk of financial default and of third party claims, and, the securing against same, are inter-related.
[51] Pursuant to section 13.1 of the VCA, in the event of default by Worldspan, Sargeant, had the right to terminate the VCA, without prejudice to any other right or remedy. In that event, Sargeant was entitled to take over and complete the Vessel free and clear of all claims (section 13.2), alternatively, to cause the sale of the Vessel (section 13.3) and to recover the funds he expended by way of the advances pursuant to the formula set out in section 24. Of note is that those remedies are as between Worldspan and Sargeant, and, that Sargeant’s remedies in the event of default were not limited to termination of the VCA and the exercise of his section 13 rights as contended by Offshore in its submissions.
[52] Thus, while the VCA included provisions to contend with default by either party or total loss during construction, the Builder’s Mortgage had a different purpose. That purpose was explicitly stated by the parties as serving to provide a continuing first priority security interest in the Vessel to secure the unearned advances (sections 12.1 and 4.1). As such, it can reasonably be implied that it was intended to be effective against third parties and was not limited in effect as between Worldspan and Sargeant. In short, it served to manage the risk to Sargeant which arose by making the advances while not holding title to the Vessel. Based on the foregoing, in my view, the scope of the Builder’s Mortgage security was not limited to securing the delivery of the Vessel, rather, it was intended that the Vessel itself was to stand as security for Sargeant’s pre-delivery instalments.
Obligation to Repay
[53] I agree with Comerica that the factual matrix in this matter, supported by sections 12.1 and 4.3 of the VCA, is that Sergeant was to provide the working capital needed by Worldspan to construct the Vessel, Worldspan was to remain the owner until delivery, and, the advances made by Sargeant were to be secured by the Builder’s Mortgage. As to the question of whether the advances secured by the Builder’s Mortgage constituted a loan with an obligation to repay the funds advanced for the construction of the Vessel, the VCA does not explicitly state that the advances are provided by way of a “loan”. Nor is there an underlying loan document such as a promissory note or deed of covenants made collateral to the Builder’s Mortgage, a schedule of principal and interest payments or a specified interest rate. Accordingly, the VCA and Builder’s Mortgage did not comprise a “loan” in the conventional sense. However, section 4.1 states that the payments would be made “on account” of the purchase price but would be in the nature of advances and that the purchase price would not be earned by Worldspan until delivery and acceptance of the Vessel in accordance with the VCA. This at least implies the existence of an extended credit, and resultant potential debt, until the advances were earned.
[54] In that regard Comerica submits that a number of the VCA provisions, specifically sections 4.1, 5.3, 13.3, 13.5 and 24.8, require repayment of the advances and that the Prothonotary therefore erred in finding that an obligation to repay could not be implied.
[55] As to section 4.1, Comerica submits that the advances made by Sargeant pursuant to section 4.1 could be satisfied by Worldspan by delivery of the Vessel. Offshore submits that while this provision does not mention repayment, it agrees that delivery would be sufficient to deem the advances earned.
[56] While section 4.1 does not explicitly mention repayment, it does state that: i) Sargeant is making payments “on account”; ii) the payments are in the nature of advances; and iii) the advances are not earned until delivery. On a plain reading, this suggests that Worldspan is not entitled to retain and not disgorge the advances if the Vessel was not delivered.
[57] Section 5.3 provides that in the event that Worldspan fails to deliver the Vessel due to total loss during construction, Sargeant “shall be entitled to recover all amounts paid to Builder hereunder, whether by insurance or otherwise (the “Refund”)”. This provision clearly contemplates a refund in the event of non-delivery. However, Offshore submits this provision would only result in payment of funds recovered from an insurer and that it does not refer to the advances.
[58] In my view, as the amounts Sargeant paid to Worldspan were paid by the advances, it can reasonably be inferred that it is the advances that are to be refunded by way of any insurance proceeds paid to Worldspan. Further, as to the submission that the provision does not require Worldspan itself to provide the payments, the provision states that Sargeant “shall be entitled to recover all amounts paid to Builder hereunder, whether by insurance or otherwise…” Thus, while it clearly envisions the Refund being paid by Worldspan to Sargeant from insurance proceeds following a total loss, it is not limited to such payments. As the advances are paid pursuant to the VCA, they could also be recovered under this provision. This would permit, for example, recovery directly from Worldspan in the event of a denial of coverage by Worldspan’s insurer.
[59] Sections 13.3 and 24.8 provide that as an alternative to its other rights under section 13 in the event of default by Worldspan, Sargeant may require the sale of the Vessel upon termination of the VCA (section 13.3) in accordance with the provisions of section 24 which, in essence, stipulates that if the Vessel is sold at a loss that Worldspan is to pay a portion of the loss to Sargeant and, conversely, if it is sold at a profit, Sargeant is to pay a portion of the profit to Worldspan. While, neither section expressly refers to a refund or repayment, Comerica points out that one element of the formula contained in section 24.2 refers to “the Final Purchase Price taking into account all sums contributed by the Owner and the Builder.” As Sargeant contributed to the Final Purchase Price by way of the advances, these sections therefore require Worldspan to repay the advances on default. Offshore argues that the advances are only used in this scenario to calculate how proceeds of a sale would be distributed and that sale proceeds and the advances are two separate things.
[60] It seems to me that the primary purpose of stipulating in the VCA that the Vessel may be sold in the event of default by Worldspan is so that Sargeant can recover that which he had contributed to the cost of construction. The formula serves to determine the liabilities as between the parties in that event, depending on the sale price. One element of the formula refers to the “Final Purchase Price” which is defined in section 4.1 and provides that during construction, the Owner will make payments on account of the Final Purchase and those payments will be in the nature of advances to the Builder and the Final Purchase Price will not be earned by the Builder until delivery and acceptance of the Vessel. Accordingly, in my view, it cannot reasonably be argued that the proceeds from the sale of the Vessel payable to Sargeant are anything other than repayment of the advances under this provision.
[61] Section 13.5 concerns default by Sargeant and, in that event, Worldspan’s right to terminate the VCA and sell the Vessel. In that case the “property in the Vessel…will revert or pass to Builder and Owner