Offshore Interiors Inc. v. Sargeant

Offshore Interiors Inc. v. Sargeant
Court (s) Database
Federal Court of Appeal Decisions
Date
2015-02-16
Neutral citation
2015 FCA 46
File numbers
A-439-13
Decision Content
Date: 20150216
Docket: A-439-13
Citation: 2015 FCA 46
CORAM:
NADON J.A.
DAWSON J.A.
TRUDEL J.A.
BETWEEN:
OFFSHORE INTERIORS INC.
Appellant
and
HARRY SARGEANT III and COMERICA BANK
Respondents
Heard at Ottawa, Ontario, on June 9, 2014.
Judgment delivered at Ottawa, Ontario, on February 16, 2015.
REASONS FOR JUDGMENT BY:
NADON J.A.
CONCURRED IN BY:
DAWSON J.A.
TRUDEL J.A.
Date: 20150216
Docket: A-439-13
Citation: 2015 FCA 46
CORAM:
NADON J.A.
DAWSON J.A.
TRUDEL J.A.
BETWEEN:
OFFSHORE INTERIORS INC.
Appellant
and
HARRY SARGEANT III and COMERICA BANK
Respondents
REASONS FOR JUDGMENT
TABLE OF CONTENTS (BY PAGE)
I. FACTUAL AND PROCEDURAL BACKGROUND.. 5
A. Relevant terms of the VCA, Builder’s Mortgage and the Assignment of Insurance. 7
II. DECISIONS UNDER REVIEW... 12
A. March 5, 2013 decision of the Prothonotary. 12
B. December 19, 2013 decision of the Federal Court 14
(1) The Judge’s determination of the appropriate standard of review for a Federal Court judge hearing the appeal of an order made by a Prothonotary. 15
(2) The Judge’s determination of whether the Prothonotary erred when he concluded that the Builder’s Mortgage did not create a lien or charge in the Vessel other than to secure its delivery. 16
(a) Obligation to repay. 17
(b) Advances as a fund. 19
(c) Evidence of account current 20
(d) Lack of particulars of the Builder’s Mortgage. 20
(3) The Judge’s determination of whether the Prothonotary erred when he did not consider Sargeant and Comerica’s alternate claim under the Act, paragraph 22(2)(n) 22
III. ISSUES. 23
IV. ANALYSIS. 24
A. What is the correct standard of review?. 24
B. Was the Judge “plainly wrong” in her interpretation of the VCA, Builder’s Mortgage and their surrounding factual matrix such that Worldspan must repay the advances to Sargeant?. 26
(1) Offshore’s Submissions. 26
(2) Analysis. 31
(a) Principles of contractual interpretation. 31
(b) The nature of builder’s mortgages. 34
(c) The Builder’s Mortgage was intended to secure Sargeant’s advances. 36
(d) Responses to Offshore’s specific arguments against the Judge’s interpretation of the Builder’s Mortgage and the VCA.. 42
C. Was the Judge “plainly wrong” when she concluded that a repayment obligation on the part of Worldspan could be implied into the VCA?. 49
D. Did the Judge err in law in her consideration of the Respondents’ claim under paragraph 22(2)(n) of the Act? 50
V. CONCLUSION.. 51
NADON J.A.
[1] This is an appeal by Offshore Interiors Inc. (“Offshore”) from an order of Madam Justice Strickland of the Federal Court (the “Judge”) dated December 19, 2013, 2013 FC 1266 (the “Federal Court Judgment”) pursuant to which she held that a builder’s mortgage in favour of Harry Sargeant III (“Sargeant”) against the vessel “QEO14226C010” (the “Vessel”) secured advances made by him to Worldspan Marine Inc. (“Worldspan”) for the construction of the Vessel. Hence she found that Worldspan was under an obligation to repay the advances to Sargeant.
[2] In concluding as she did, the Judge allowed the appeal of Sargeant and Comerica Bank (“Comerica”) from the order of Prothonotary Lafrenière (the “Prothonotary”), dated March 5, 2013 (the “Prothonotary’s Judgment”), in which he held that Sargeant’s builder’s mortgage (the “Builder’s Mortgage”) only secured the delivery of the Vessel to Sargeant and hence that Worldspan was under no obligation to repay the advances made to it by Sargeant.
[3] For the reasons that follow I would dismiss the appeal. I come to this conclusion because of my view that the Judge did not err in law nor did she make a palpable and overriding error. More particularly, I am of the opinion that in concluding that the Builder’s Mortgage secured the advances made by Sargeant to Worldspan, the Judge properly interpreted the Builder’s Mortgage in light of the factual context which included a vessel construction agreement (the “VCA”) entered into between Sargeant and the builder, Worldspan.
I. FACTUAL AND PROCEDURAL BACKGROUND [4] The relevant facts of this case are fairly straightforward and undisputed. Therefore a brief summary will be sufficient for the purposes of this appeal.
[5] On February 29, 2008, Sargeant signed the VCA with Worldspan pursuant to which Worldspan agreed to design, construct, outfit, launch, complete, sell and deliver a 142-foot custom-built luxury yacht to Sargeant.
[6] In March, 2008, construction of the Vessel began and on May 14, 2008, the Builder’s Mortgage was filed against the Vessel and in favour of Sargeant in the Vancouver Ship Registry.
[7] 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 with Comerica for a further USD $9,400,000 in order to finance the completion of the Vessel. By way of an Assignment of Security Agreement and Mortgage (also dated August 14, 2009), Sargeant assigned his interest in the VCA, the Vessel and the Builder’s Mortgage to Comerica in exchange for the advanced funds.
[8] From August, 2009 to March, 2010, Comerica paid Worldspan USD $9,387,398.67, on Sargeant’s behalf, on account of invoices issued by Worldspan pursuant to the terms of the VCA.
[9] Around April or May, 2010, a dispute arose between Sargeant and Worldspan regarding project costs and construction. By that time, a total of USD $20,651,924.05 had been paid to Worldspan by Sargeant, or by Comerica on his behalf, in connection with the construction of the Vessel.
[10] On July 20, 2010, Offshore commenced the underlying action against Worldspan, Crescent Custom Yachts Inc., Sargeant and Comerica and all others interested in the Vessel and the Vessel itself for unpaid invoices for services and materials rendered in connection with the Vessel.
[11] On July 28, 2010, Offshore arrested the Vessel. It remained under arrest until June 30, 2014 when it was sold by the Federal Court, free and clear of any and all claims, liens and encumbrances, for the sum of US$5,000,000.
[12] On May 27, 2011, Worldspan, and its related entities, filed a Petition under the Companies Creditors’ Arrangement Act, R.S.C. 1985, c. C-36 (“CCCA”) in the Supreme Court of British Columbia (“BC Supreme Court”). The petition resulted in a claims process order which required all creditors to deliver proof of their claims against Worldspan to the BC Supreme Court on or before September 9, 2011 failing which the creditor would be forever barred from making or enforcing a claim against Worldspan. The order also provided that any creditor asserting an in rem claim against the Vessel could pursue its claim outside the CCCA process in the Federal Court.
[13] On August 29, 2011, the Prothonotary issued a claims process order for all creditors asserting an in rem claim against the Vessel. This claims process order gave notice to all creditors of the requirement to file an affidavit in support of their claim against the Vessel. The order specified that affidavits should describe the nature of their claim and provide any supporting particulars thereby allowing the Federal Court to determine if the claim constituted an in rem claim against the Vessel and, if so, its priority.
[14] On October 14, 2011, Sargeant filed an affidavit in support of his claim against the Vessel. According to this affidavit, his claim derived from payments, in excess of USD $21 million, made by him, or on his behalf, to Worldspan for the construction of the Vessel, and from the security interest in the Vessel granted to him by Worldspan to secure those payments.
A. Relevant terms of the VCA, Builder’s Mortgage and the Assignment of Insurance [15] For ease of reference, selected provisions of the VCA are copied below. For the purpose of clarity, any reference to “Builder” in the VCA refers to Worldspan while references to “Owner” refer to Sargeant. Sections 1 and 2 of the VCA set out Worldspan’s basic obligations.
SECTION 1 – SCOPE
1.1 Builder undertakes to design, construct, outfit, launch, complete and sell and deliver to Owner […] one […] fibreglass composite motor yacht.
[…]
SECTION 2 – COMPLETION AND DELIVERY
[…]
2.3 Upon Delivery, the Vessel […] 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.
[16] Section 4 of the VCA sets out that payments made on account of Worldspan by Sargeant during construction would be in the nature of advances and would not be considered earned until final delivery and acceptance of the Vessel by Sargeant.
SECTION 4 – COST AND PAYMENT
4.1 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.
[Emphasis added]
[17] The VCA stated that the estimated price of the Vessel was $15 million and established a method by which changes to this estimated price could be made as between the parties (section 4.2). In order to maintain positive cash flow during construction, Sargeant was to forward monthly payments in arrears in order to cover Worldspan’s costs for the previous month (section 4.3(a)). As part of this system, Worldspan was to submit to Sargeant a monthly “Claim Certificate” detailing that month’s costs (section 4.3(c)).
[18] With respect to risks and insurance, the VCA stated that Worldspan was to retain all risk of loss and damage to the Vessel up until the point of delivery and acceptance by Sargeant. At that point, all risk of loss would immediately transfer to Sargeant (section 5.1).
[19] Furthermore, Worldspan was obligated to obtain and maintain policies of insurance including Hull, Protection and Indemnity and other marine coverage, comprehensive general liability insurance against bodily injury, death and property damage and standard builder’s risk insurance (section 5.2). All policies of insurance were to be taken out in the name of both Worldspan and Sargeant. Additionally, section 5.3 of the VCA stipulated that:
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 law, this Agreement or otherwise.
[Emphasis added]
[20] Sargeant’s rights to assign his rights under the VCA were dealt with in section 8.1:
Owner may freely assign the benefit of this Agreement to any corporation […] Owner may also freely assign the benefit of this Agreement by way of security to any bank or financial institution providing finance in connection with the construction of the Vessel and in that event Builder will cooperate as necessary in the assignment and provide such acknowledgements and assurances consistent with the terms of this Agreement as the bank or financial institution may require.
[21] Section 12.1 of the VCA dealt with title in the Vessel during construction and explicitly granted Sargeant a first priority security interest in the Vessel to secure the sums advanced to Worldspan under the VCA.
Builder will retain title to the Vessel until delivery to Owner. Builder grants to Owner a continuing first priority security interest in the Vessel, including all work, materials, machinery, and equipment relating to the Vessel, to secure any sums advanced or paid to Builder under this Agreement; provided, however, that such security interest shall be subordinate to Owner’s obligations under the Contract Documents including Builder’s right to receive payments pursuant to this Agreement. In support of Owner’s security interest in the Vessel Builder agrees to register a Ship’s Mortgage in favour of Owner or Owner’s construction lender (the form of the mortgage document is to be agreed upon between the parties acting reasonably) if Owner requests that this be done for any purpose.
[Emphasis added]
[22] Termination on the basis of Worldspan’s default was dealt with in section 13 of the VCA:
Builder’s Default
13.1 Owner shall have the right and power, without prejudice to any other right or remedy, to terminate this Agreement, in whole or in part, in the event of any of the following events […]:
[…]
(c) if Builder suspends payment of its debts or ceases to carry on its business or makes any arrangement or composition with its creditors;
[…]
13.2 Upon termination of this Agreement by Owner, Owner will be freely entitled to take over and complete the Vessel elsewhere in which event Builder will be liable:
(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 (including Owner’s supplies) free and clear of all mortgages, maritime liens and debts and claims whatsoever for removal from Builder’s shipyard;
[…]
13.3 As an alternative to its rights under the preceding provisions of this SECTION 13 Owner will be entitled […] 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.
[23] Section 24, in turn, established a formula that would apply in the event of a sale pursuant to section 13.3. In these circumstances, Worldspan would be obliged to pay Sargeant a specified amount if the sale proceeds were less than the cumulative sum of the advances made by Sargeant to Worldspan at the time of sale. Correlatively, if the sale proceeds exceeded the cumulative sum of Sargeant’s advances to Worldspan at the time of sale, Sargeant would have to pay a portion of any profit made on the sale of the Vessel to Worldspan.
[24] If Sargeant failed to make payments in accordance with the VCA, section 13.5 gave Worldspan the right to terminate the VCA. In this situation, property in the Vessel would revert to Worldspan and Sargeant was to, “promptly do and execute all acts, matters, things and documents necessary or reasonably required by Builder to perfect Builder’s property therein”. Following this, Worldspan could sell the Vessel and would be liable to repay Sargeant his advances from the sale proceeds, less Worldspan’s out-of-pocket costs for storage and resale. If Worldspan then sold the Vessel for an amount less than the “Capped Purchase Price” (defined to be the lesser of the sum of advances paid by Sargeant at the time of sale or 10% greater than the original $15 million estimated price of the Vessel), it was to refund Sargeant all instalment payments less its direct out-of-pocket costs and expenses and less the difference between the Capped Purchase Price and the actual resale price of the Vessel.
[25] The Builder’s Mortgage granted to Sargeant by Worldspan was in statutory form (Form 16), as required by the Canada Shipping Act, 2001, S.C. 2001, c.26 (the “Shipping Act”) and named Sargeant the mortgagee and Worldspan the mortgagor. Form 16 contains a text box with the following instructional text written above:
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 principal and interest due at any given time is to be ascertained and the manner and time of payment).
[26] Below these instructions the following text had been inserted on the Builder’s Mortgage granted to Sargeant:
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.
[27] Below these excerpts, another part of the Builder’s Mortgage contained the following standard text to which the number “64” had been added, as shown below:
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 purpose of better securing payment to the mortgagee(s), the mortgagor(s) hereby mortgage to the mortgagee(s) ___64______ shares (number of shares must be indicated) of which the mortgagor(s) have the power to mortgage the shares and that they are free of encumbrances except as appears in the record of the said vessel. (delete if not applicable)
[28] Lastly, as noted above, on August 14, 2009, Sargeant assigned his rights under the VCA to Comerica in return for additional financing to complete the construction of the Vessel. The following paragraph comes from a document entitled “Assignment of Insurances” that was concluded between Sargeant, Worldspan and Comerica as part of this assignment and is relevant to this appeal:
By executing this assignment, it is acknowledged by the parties that the rights assigned to Assignee [Comerica] herein shall be no greater than Purchaser’s [Sargeant’s] rights under the Construction Agreement. The parties expressly acknowledge Builder’s [Worldspan’s] first lien rights and rights to payment of any insurance proceeds. Builder [Worldspan] has no duties to Purchaser [Sargeant] that are not expressly set forth in the Vessel Construction Agreement and no additional obligations are created by this assignment, as their interests may appear.
II. DECISIONS UNDER REVIEW A. March 5, 2013 decision of the Prothonotary [29] Offshore sought a declaration from the Prothonotary to the effect that the Builder’s Mortgage granted to Sargeant, pursuant to the VCA, did not create a lien or charge in the Vessel other than to secure its delivery. On March 5, 2013, the Prothonotary granted Offshore’s motion, with costs.
[30] Preliminarily, the Prothonotary relied upon a portion of Offshore’s written submissions and determined that the argument made by Sargeant and Comerica that the Sargeant had an equitable mortgage or a claim based on paragraph 22(2)(n) of the Federal Courts Act, R.S.C. 1985, c. F-7 (the “Act”) was “of no moment” (Prothonotary’s Judgment, para. 27).
[31] Instead, the Prothonotary indicated that the key question was the correct interpretation of the language used in the contracts in question and, specifically, whether there was an obligation, express or implied, under the Builder’s Mortgage or the VCA for Worldspan to repay the funds advanced by Sargeant and Comerica.
[32] The Prothonotary first concluded that while the Builder’s Mortgage complied with the form prescribed by the Shipping Act, (Form 16), it did not contain the specifics of the transaction required by that form. Namely, neither the VCA nor the Builder’s Mortgage included the amount owing and the “time of payment”.
[33] Second, the Prothonotary concluded that the VCA did not contain an express or implied repayment term. In support of this conclusion, he found, notwithstanding the language of the Builder’s Mortgage, that there was no evidence that an account current had been created and furthermore that the terms of the VCA, “clearly allowed Worldspan to retain all advances made by Sargeant for the purpose of making payments for the labour and materials to construct the Vessel” (Prothonotary’s Judgment, para. 39).
[34] Relying upon an arbitral decision (FC Yachts Ltd. v. P.R. Yacht Builders Ltd. v. New World Expedition Yachts LLC, Ad Hoc Decision on Priorities, (31 August 2010) (McIntyre, Abr.)) where it was held that obligations to finance construction of a vessel, such as Sargeant and Comerica’s advances in this case, did not constitute a loan, the Prothonotary concluded that, “the parties plainly contemplated that all monies provided for construction of the Vessel would be utilized in its construction and would not exist as a fund” (Prothonotary’s Judgment, para. 45). Furthermore, the Prothonotary concluded that, in the event of a breach, the parties had contemplated that Worldspan would be unable to repay the substantial advances made to construct the Vessel. Sargeant’s remedies in this circumstance were to have the Vessel completed elsewhere or sold.
[35] As a result, the Prothonotary concluded that no express or implied repayment term could be found in the VCA. Worldspan therefore owed no financial obligations to Sargeant under the VCA. Sargeant’s remedies for breach of the VCA were in turn limited to possession and ownership of the Vessel and an in personam action against Worldspan. In the result, the Prothonotary found that because the advances were not in the nature of a loan, Worldspan had no obligation to repay them and, in turn, Sargeant did not have an in rem claim against the Vessel for their repayment.
B. December 19, 2013 decision of the Federal Court [36] On appeal, the Judge reversed the Prothonotary’s decision and concluded that the VCA and the Builder’s Mortgage created an obligation upon Worldspan, either express or implied, to repay the advances made by Sargeant and Comerica.
[37] She was of the view that three issues had to be dealt with:
(1) What was the appropriate standard of review for a Federal Court judge hearing the appeal of an order made by a Prothonotary?
(2) Did the Prothonotary err when he concluded that the Builder’s Mortgage did not create a lien or charge in the Vessel other than to secure its delivery?
(3) Did the Prothonotary err when he did not consider Sargeant and Comerica’s alternate claim under the Act, paragraph 22(2)(n)?
[38] Having laid out the issues as the Judge saw them, I will summarize her findings on each of these points.
(1) The Judge’s determination of the appropriate standard of review for a Federal Court judge hearing the appeal of an order made by a Prothonotary [39] With respect to the first issue, the Judge determined that the Prothonotary’s Judgment did not involve the exercise of discretion but rather, “concerned the task of gleaning the parties’ intentions by interpreting the relevant facts and contract provisions” (Federal Court Judgment, para. 21). She therefore concluded that this was a question of mixed fact and law, reviewable against the “palpable and overriding error” standard of review established in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 (“Housen”).
[40] However, with respect to Sargeant and Comerica’s assertion that the claim fell under paragraph 22(2)(n) of the Act, the Judge concluded that the issue determined by the Prothonotary constituted a question of law reviewable on a correctness standard.
(2) The Judge’s determination of whether the Prothonotary erred when he concluded that the Builder’s Mortgage did not create a lien or charge in the Vessel other than to secure its delivery [41] Turning to the second issue, the Judge determined that the Prothonotary had correctly recognized that the aim of contract interpretation was to determine the intent of the parties, having regard to the language used in the contract documents and the context in which the contract was executed. In this regard, she determined that the Prothonotary had erred in that he had failed to take the entirety of the factual matrix, including the VCA and the Builder’s Mortgage, into account in determining the true intent of the parties.
[42] The Judge determined that section 12.1 was the starting point for an analysis of the VCA. According to this clause, title to the Vessel would remain with Worldspan during construction while the Builder’s Mortgage would be granted to Sargeant as security for the sums he advanced to Worldspan.
[43] The key question to be determined was the scope of the security interest held by Sargeant under the Builder’s Mortgage. Considering sections 12.1 and 4.1 of the VCA, the Judge concluded that the purpose of the Builder’s Mortgage was to provide Sargeant with a continuing first priority security interest in the Vessel to secure the unearned advances. The Judge opined as follows (Federal Court Judgment, para. 52):
It [the security interest] 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 […]. 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.
(a) Obligation to repay [44] With respect to an obligation to repay the advances, the Judge found that the factual arrangement among the parties was such that Sargeant was to provide the working capital needed by Worldspan to construct the Vessel, Worldspan was to remain the owner until delivery and Sargeant’s advances were to be secured by the Builder’s Mortgage.
[45] The Judge acknowledged that the VCA and the Builder’s Mortgage did not constitute a “loan” in the traditional sense. Furthermore, she noted that there was an absence of explicit language to this effect in the VCA or other regular indicia of a loan arrangement such as a promissory note or schedule of principal and interest payments.
[46] Nevertheless, she found that the language of section 4.1 of the VCA, namely that the advances would be “on account” of the purchase price and that the advances were not considered “earned” until delivery and acceptance of the Vessel, implied the existence of an extended credit, and resultant potential debt, until the advances were considered earned (Federal Court Judgment, para. 53). Therefore, on a plain reading of the VCA, she concluded that Worldspan was, “not entitled to retain and not disgorge the advances if the Vessel was not delivered” (Federal Court Judgment, para. 56).
[47] The Judge found further support for an obligation to repay Sargeant’s advances in section 5.3 of the VCA which dealt with the issue of total loss of the Vessel. She concluded that this provision entitled Sargeant to recover all amounts paid to Worldspan pursuant to the VCA whether by insurance or otherwise. Although this provision clearly envisions any refund being paid by Worldspan to Sargeant from insurance proceeds, she found that it was not limited to such payments and would allow for recovery directly from Worldspan in the event of a denial of insurance coverage by Worldspan’s insurer (Federal Court Judgment, para. 58).
[48] The Judge also found support for an obligation to repay in the VCA provisions dealing with the sale of the Vessel in the event of Worldspan’s default under the VCA. She determined that the primary purpose of these provisions was to enable Sargeant to recover the sums contributed to the costs of construction. She further observed that the Final Purchase Price, a term defined in section 4.1 of the VCA, is an element of the formula set out in section 24 to determine the liabilities as between the parties in the event of a default and resultant sale of the Vessel. Section 4.1, in turn, states that Sargeant was to make payments on account of the Final Purchase Price in the nature of advances to Worldspan and that the Final Purchase Price was not to be considered earned by Worldspan until delivery and acceptance. She, therefore, concluded that, “it cannot be reasonably argued that the proceeds from the sale of the Vessel payable to Sargeant are anything other than repayment of the advances under this provision” (Federal Court Judgment, para. 60).
[49] With respect to the VCA’s term regarding a breach by Sargeant (section 13.5), the Judge found that this term meant that in such an event, the Builder’s Mortgage would have to be discharged so as to allow Worldspan to sell the Vessel with clear title. However, she determined that this would not impact upon Worldspan’s obligation to repay Sargeant’s advances prior to the sale of the Vessel.
[50] The Judge agreed with the Prothonotary that the parties to the VCA contemplated that, in the event of a breach of the VCA or the total loss of the Vessel, the Vessel would be sold to repay the advances made by Sargeant. However, she determined that as the Vessel had been arrested and made subject to claims by third parties, the VCA’s provisions pertaining to the Vessel’s sale were not directly applicable. Nevertheless, she concluded that these terms were relevant to the intent of the parties and the correct interpretation of the VCA as a whole in the context of the factual matrix. Specifically, she determined that the VCA contained an implied obligation on Worldspan’s part to repay Sargeant’s advances.
[51] The Judge thus concluded (at paras 72 and 74 of the Federal Court Judgment):
72. […] [I]nterpreting the transaction as a whole to determine the intent of the parties and within the relevant factual matrix, the Builder’s Mortgage and VCA implied an obligation to repay the unearned advances which created a potential debt that would, in effect, crystallize upon failure to deliver the Vessel in these circumstances. Although there was no actual “loan” there was a potential debt created by the provisions of the VCA and Sargeant secured the satisfaction of the potential debt by way of the Builder’s Mortgage.
[…]
74. Here, the potential debt was created by the advances that would not be earned until delivery. The satisfaction of that debt would have occurred by delivery of the Vessel. As that did not occur, and the VCA contractual terms that would have otherwise governed the parties upon default have no application in these circumstances, the debt crystallized and satisfaction would be achieved by repaying the advances, accounts of which were kept by both parties.
(b) Advances as a fund [52] The Judge found that the Prothonotary had erred in finding that the advances were not a loan as they were to be utilized in the construction of the Vessel and therefore would not exist as a “fund”. She stated that a commercial absurdity would arise if, “advanced funds could not be used for the intended purpose of the construction of a ship, and instead had to be set aside to repay the advances” (Federal Court Judgment, para. 81).
(c) Evidence of account current [53] The Judge found that the Prothonotary had erred when he concluded that there was no evidence of an account current having been created pursuant to the VCA.
[54] She concluded that the VCA’s terms contemplated that the monthly payments claimed by Worldspan would be subject to verification and audits. Indeed, she noted that Worldspan was required to keep appropriate records in this regard and to submit a Claim Certificate, which set out and supported its claimed monthly expenditures to Sargeant for verification and approval. This process verified what had been spent by Worldspan each month, and therefore, what Sargeant owed. This process allowed the parties to determine, each month, the total cost of the construction to date (Federal Court Judgment, para. 84).
[55] Therefore, she concluded that the intention was that the sums advanced would comprise the account current secured by the Builder’s Mortgage, regardless of the fact that the VCA does not explicitly reference an account current (Federal Court Judgment, para. 89).
(d) Lack of particulars of the Builder’s Mortgage [56] The Judge found that the Prothonotary had erred when he focused on the parties’ failure to include certain formalities in the Builder’s Mortgage, namely the amount owing and the “time of payment”. She determined that the Prothonotary should have focused on determining the parties’ intentions with respect to the substance of their agreement and should not have adopted an overly formalistic and literal approach to the interpretation of the Builder’s Mortgage. Looking at the Builder’s Mortgage, she concluded that the amount owing and time of payment were not required to be specified as these sums could be ascertained by reference to the VCA, specifically its verification and audit procedures.
[57] The Judge specifically rejected Offshore’s submission that the Builder’s Mortgage was strictly intended to secure delivery of the Vessel. Pointing to the plain language used in the VCA, she noted that a first priority security interest in the Vessel, as supported by the Builder’s Mortgage, was granted to Sargeant in order to “secure the sums advanced or paid to the Builder under this Agreement,” and that neither the VCA nor the Builder’s Mortgage made reference to its simply securing the delivery of the Vessel. She found that delivery was instead secured by other terms in the VCA, particularly those pertaining to default and total loss. She concluded that (Federal Court Judgment, para. 99):
99. […][T]he Builder’s Mortgage was intended to secure Sargeant’s first priority rights in the Vessel as against third parties in circumstances, such as these, where the terms of the VCA do not govern the disposition of the Vessel as between Worldspan and Sargeant as it has been arrested by third parties and will be sold by the Court.
[58] After laying out the above analysis, the Judge concluded that the Prothonotary had not interpreted the VCA and the Builder’s Mortgage so as to ascertain the true intent of the parties. Specifically, she found that the Prothonotary had failed to take account of the whole transaction in its relevant factual matrix and had also failed to interpret the VCA and the Builder’s Mortgage in order to avoid a commercial absurdity. She concluded that this was a palpable and overriding error which led to the erroneous conclusion that the Builder’s Mortgage did not create a lien or charge against the Vessel other than to secure its delivery.
(3) The Judge’s determination of whether the Prothonotary erred when he did not consider Sargeant and Comerica’s alternate claim under the Act, paragraph 22(2)(n) [59] Regarding the third issue, the Judge began by reproducing the excerpt of the portion of Offshore’s written submissions which the Prothonotary adopted in his decision. She noted that this excerpt did not address Sargeant and Comerica’s arguments with respect to paragraph 22(2)(n) of the Act. Instead, the submissions solely focused on the question of whether Sargeant or Comerica had a claim to an equitable mortgage. The Judge noted, aside from this adopted excerpt, the Prothonotary had failed to provide any explanation as to why paragraph 22(2)(n) of the Act did not apply or explained why such reasons would be unnecessary in the circumstances (Federal Court Judgment, paras. 102-103). In light of this failure, the Judge determined that she should properly address this submission.
[60] The Judge determined that a claim for the “delivery, possession or ownership” of the ship is not required to support a claim made under paragraph 22(2)(n) of the Act. Instead, this provision allows for any claim arising out of a contract relating to the construction of a ship. She found that the case before her involved a claim based on the recovery of advances made for the construction of the Vessel pursuant to the VCA, a ship construction contract. She therefore concluded that this was a sufficient basis upon which to found an in rem claim pursuant to paragraph 22(2)(n) of the Act.
[61] The Judge therefore determined that the Prothonotary had erred in law when he failed to consider Sargeant and Comerica’s alternative submission. She found that this alternative claim had merit and ought to be considered at the priorities hearing.
III. ISSUES [62] The parties differ as to the characterization of the issues before this Court. Offshore takes the view that the Judge implied a repayment obligation into the VCA and frames its submissions based on the case-law regarding the implication of contractual terms. Sargeant and Comerica (collectively the “Respondents”) both argue that the Judge, first, interpreted the VCA and surrounding factual matrix such that she found a repayment obligation in its terms, and second, concluded that even if she had not interpreted the VCA in that way, she would have implied a repayment obligation into the VCA in the circumstances.
[63] I favour the Respondents’ characterization of the issues. The Judge relied upon authorities pertaining to the interpretation of contracts and their factual matrix in reaching her conclusions. Her analytical approach is most clearly revealed at paragraphs 71-72 of the Federal Court Judgment where she stated:
71. […] That wording in the VCA can be interpreted to characterize the advances as being in the nature of a loan. And, as I have addressed below, the mere fact that the Builder’s Mortgage itself does not state the particulars of the account current is not fatal.
72. Even if I had not found this I would have concluded that, interpreting the transaction as a whole to determine the intent of the parties and within the relevant factual matrix, the Builder’s Mortgage and VCA implied an obligation to repay the unearned advances which created a potential debt that would, in effect, crystallize upon failure to deliver the Vessel in these circumstances.
[Emphasis added]
[64] Offshore puts forward ten grounds for appeal. However, given my conclusion above as to the analytical framework that the Judge applied, I have regrouped these grounds under either alleged errors of interpretation or alleged errors with respect to the implication of a term into the VCA.
[65] In my view, four issues need to be determined in this appeal:
A. First, what is the correct standard of review for this Court when it reviews a decision of a Federal Court judge who has overturned a decision of a Prothonotary?
B. Second, was the Judge “plainly wrong” in her interpretation of the VCA, Builder’s Mortgage and their surrounding factual matrix such that Worldspan must repay the advances to Sargeant?
C. Third, was the Judge “plainly wrong” when she concluded that a repayment obligation on the part of Worldspan could be implied into the VCA?
D. Fourth, did the Judge err in law in her consideration of the Respondents’ claim under paragraph 22(2)(n) of the Act?
IV. ANALYSIS A. What is the correct standard of review? [66] Offshore submits that the Judge’s decision should be reviewed on the basis of palpable and overriding errors for questions of mixed fact and law. However, it also argues that the standard of correctness should apply to two questions of law: first, whether the claim gives rise to in rem rights under paragraph 22(2)(n) of the Act; and second, whether the Judge erred in law by determining that mortgages require a monetary debt in order to be effective.
[67] The Respondents submit that the standard of review enunciated by this Court in Bristol-Myers Squibb Co. v. Apotex Inc., 2011 FCA 34, [2011] F.C.J. No. 147 (“Bristol Myers”) at para. 7, applies to all issues before the Court. In that case, this Court determined that the standard of review applicable to the review of a Federal Court decision overturning the decision of a Prothonotary is whether the Federal Court, “had no grounds to interfere with the Prothonotary’s decision or, in the event such grounds existed, if the Judge’s decision was arrived at on a wrong basis or was plainly wrong” (see also Kniss v. Telecommunications Workers Union, 2013 FCA 29