Date: 19971209
Docket: T-2416-97
ACTION IN REM AGAINST THE SHIP "NEL"
AND IN PERSONAM
BETWEEN:
THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND,
Plaintiff,
- and -
THE OWNERS AND ALL OTHERS INTERESTED
IN THE SHIP "NEL" AND OCEANPROFILE
MARITIME LIMITED,
Defendants.
REASONS FOR ORDER
MR. JOHN A. HARGRAVE,
PROTHONOTARY
[1] As a general rule courts will not approve a pre-arranged private sale of an arrested ship so as to grant the benefits inherent in a court ordered sale. However, in special circumstances, with appropriate safeguards, it may be an appropriate procedure to the benefit of all. Indeed, in the instant case of the "Nel", to do otherwise than to approve the sale would be a disservice to the maritime community, using that term in its broadest sense. The private pre-arranged sale of the "Nel" and her bunkers, pendente lite, was so approved by Order of 3 December 1997.
BACKGROUND
[2] The "Nel", formerly the "Brussel", is a 25,599 gross ton bulk and container carrier built in 1979, registered in Cypress, owned by Oceanprofile Maritime Ltd. ("Ocean Profile") and managed by Leond Maritime Inc. of Athens. By mortgage and deed of covenant of 27 February 1997, Ocean Profile mortgaged the "Nel", together with the "Anna L", "Angelina L", and "Blue L" to the Plaintiff, the Governor and Company of the Bank of Scotland (the "Bank of Scotland"), for $11,250,000.00 (U.S.).
[3] The "Nel" loaded 34,398 metric tonnes of bulk sulphur for Tunisia, at Pacific Coast Terminals, Port Moody, between 17 and 20 October 1997 and then moved out to anchorage in Vancouver Harbour. At that time, the "Nel" was under seige by a number of creditors. Moreover, the owner had failed to make May and August instalment payments to the Bank of Scotland. By letter of 31 October 1997, the Bank of Scotland made demand on Ocean Profile for $12,047,788.08 (U.S.), representing the principle secured by the mortgage on the "Nel" and her sister ships, together with interest. The Bank of Scotland arrested the "Nel" on 12 November 1997.
[4] The arrest of the "Nel" by the Bank of Scotland was followed by an arrest on behalf of Petromarine Products Limited, lubrication oil suppliers, to secure their claim in the amount of $58,802.07 (U.S.) and by filings on behalf of seven caveators, including Legend Marine Singapore Proprietary PTE Ltd., claiming $34,139.00 (U.S.) and Alpha Bunkering Co. Ltd. claiming $168,174.00 (U.S.). In addition to the claims of the oil and necessaries suppliers there is also a substantial claim by crew members for unpaid wages.
[5] The arrests and the claims against the "Nel" were to the consternation of Shell Canada Limited, the shipper of the cargo of Canadian crude bright yellow sulphur and to the concern of the Plaintiff, the Bank of Scotland, for the former had commitments to its customer in Tunisia and the latter, as the entity with the most at stake in the ship, was concerned about likely corrosion damage to the "Nel" should the sulphur remain in the vessel for a longer than usual period of time.
[6] Sulphur cargoes in bulk have been notoriously associated with fire and explosion risks in the past. Until some 15 years ago the dangerous characteristics of wet sulphur, its ability to attack the steel of a vessel, was relatively unknown for the reason that, generally, sulphur in bulk was customarily loaded in a dry or fairly dry condition. With the advent of sulphur being loaded in a damp or wet condition, principally by reason of environmental concerns (sulphur being sprayed with water during loading for dust abatement) and by reason of climate at the port of Vancouver, the potentially devastating effect of corrosion and pitting by the reaction of damp sulphur on steel came to be known.
[7] Perhaps the first and certainly the most notorious example of corrosion damage caused by bulk sulphur was the "Cambridgeshire", which carried a cargo of sulphur from Vancouver to Maputo in East Africa in the early 1980's. In that instance, the cargo was aboard for about three months. After much investigation, experts determined that the corrosion damage to the "Cambridgeshire", which necessitated replacing over 800 tons of steel, costing about $6,000,000.00 (U.S.), was caused by an electro-chemical reaction taking place when the wet sulphur came into contact with the steel plate of the ship's holds. While there are a number of factors which apparently determine the extent of corrosion, including priming the steel plate with a lime wash to create a barrier against corrosion and the vulnerability of newer vessels as opposed to older vessels where rust scale may form a protective barrier, the investigation, in the case of the "Cambridgeshire", established that the degree of corrosion is in direct proportion to the temperature and length of time of the contact between the sulphur cargo and steel plate.
[8] For a number of years now vessels loading sulphur at Vancouver have been advised, in writing, not only to wash down their holds with fresh water before taking aboard a sulphur cargo, in order to minimize the reaction between any traces of salt on bulkheads, tank tops and the vessel's shell plating and sulphur, but also to lime-wash the holds using a pressure spray system. These steps, of course, are not a guarantee against corrosion damage, but rather are designed to minimize the damage on voyages taking a usual length of time.
[9] The apparent abandonment of the "Nel", loaded with sulphur at Vancouver, by her owner, concerned the mortgagees, the Bank of Scotland. The owner essentially advised the master of the "Nel" that he was on his own, closed its office, removing the furniture and disappeared. The Bank of Scotland had no information whether the holds of the "Nel" had been properly prepared to receive the cargo in the first place. The temperatures at Vancouver, between 17 October 1997, when loading commenced and 3 December 1997, when this motion was heard, were unseasonably warm.
[10] The Bank of Scotland explored the possibility of off-loading the cargo at Vancouver. That option would have cost about $1,330,000.00 (U.S.). As an alternative, the Bank of Scotland considered a private sale of the "Nel" to a buyer prepared to carry the cargo to its destination. In addition to the sulphur being aboard the vessel for some six weeks here at Vancouver with, as I have said, warmer than usual temperatures, she still had to complete her voyage. A usual voyage from Vancouver to Tunisia, not taking into account delays at the Panama Canal and delays in discharge at Tunisia, would take about 26 days assuming a speed of 15 knots.1 Taking into account that most of the voyage from Vancouver, through the Panama Canal and to Tunisia would take place in sub-tropical and tropical climates, the concern of a corrosive reaction, between steel plate and wet sulphur, was a real and valid concern. However, the Bank of Scotland was able to find a buyer, Marplan Shipping Limited of Cypress, prepared to purchase the "Nel" and to undertake the voyage.
[11] The sale which the Bank of Scotland brought to the Court, for the "Nel", was at $5,000,000.00 (U.S.), apportioned $89,500.00 (U.S.) for fuel oil, which is claimed by the cargo owner Shell Canada Limited, and the balance, $4,910,450.00 (U.S.), for the vessel. In addition to arranging a private sale of the "Nel" and her bunkers at $5,000,000.00 (U.S.) to an owner prepared to complete the delivery of the sulphur to Tunisia, the Bank of Scotland provided two valuations of the "Nel" prepared by ship brokers. One valuation of 14 November 1997, by CTL Westrans, of Vancouver, whose appraiser attended aboard, estimated the vessel's worldwide market value at about $4,000,000.00 (U.S.). The second valuation, of 28 November 1997, by Seascope Shipping Limited of London, England, valued the vessel at $3,750,000.00 (U.S.). In addition, the Bank of Scotland was able to advise that the "Anna L" had been sold for $2,850,000.00 (U.S.), applying a net amount of $2,125,000.00 (U.S.) in reduction of its loan. In order to avoid a marshalling argument the Bank of Scotland provided valuations of the "Angelina L" and the "Blue L". CTL Westrans, which is a division of Cunningham Transportation Limited, valued the "Angelina L" at $1,200,000.00 (U.S.) and the "Blue L" at $3,500,000.00 (U.S.). Seascope put the value of the "Angelina L" at $1,300,000.00 (U.S.) and the "Blue L" at $3,500,000.00 (U.S.). One may observe, at this point, that even were the vessels standing as security for the Bank of Scotland's loan sold at appraised value, or at a reasonable premium over appraised value and were the costs of sale kept to a minimum, the recovery would in all likelihood be less than the outstanding balance, principle and interest, of the Bank of Scotland's loan.
CONSIDERATION
[12] A court may, for good reason, order the sale of a vessel, before trial, whether or not the action is defended, if there is good reason to do so: see for example Banco Do Brasil S.A. v. The Alexandros G. Tsavliris (1987), 12 F.T.R. 278 at 283. In that instance Mr. Justice Collier considered the continuing costs of maintaining the ship until trial and after a critical examination, ordered the vessel sold. Indeed, the aspect of ongoing charges, for example crews' wages, fuel oil and other necessaries, insurance and maintenance to avoid physical deterioration are usual factors that a court takes into consideration on an application for a sale pendente lite: see for example The Myrto, [1977] 2 Lloyds 243 at 260-261, The Western Horizon (1997), 125 F.T.R. 81 at 86 and following and The Alarissa (1994), 89 F.T.R. 137. By this sort of measure, ongoing costs and particularly, in this instance, the very real danger of disastrously expensive corrosion damage, together with abandonment by her owner, the "Nel" ought to be sold pendente lite. However, there is another complicating aspect: the Bank of Scotland wishes the Court's protection and approval of a privately arranged sale. A privately arranged sale is an understandable approach given the time it usually takes to complete a court ordered sale: in the present circumstances there would just not be time for a court ordered sale before the onset of likely corrosion damage. The Bank of Scotland is acting rationally for the option of discharging the cargo, for the safety of the ship and to prevent contamination of cargo due to corrosion products, is, at some $1,300,000.00 (U.S.), an exceedingly unattractive option for all concerned.
[13] A relevant starting point from which to deal with a request for court approval of a sale by private contract, without formal court ordered appraisement, is The Dora [No. 2], [1977] 1 F.C. 603, a decision of Associate Chief Justice Thurlow, as he then was. I do not say that The Dora is a similar case, for it is not, however it is pertinent. The situation in The Dora involved an application for sale by private contract, before judgment, without formal appraisement and without notice of a 95,000 ton dead weight tanker, the vessel then being under the arrest of the crew for wages. The motion for the sale was brought by the mortgage holder, claiming some $9,000,000.00 (U.S.) and proposing a private sale at $5,900,000.00 (U.S.).
[14] Associate Chief Justice Thurlow referred to, among other Federal Court Rules, Rule 1007(1), allowing a sale before judgment and to Rule 1007(2) allowing the Court to sell an arrested vessel on appropriate terms which may, but not must, include a usual procedure. Associate Chief Justice Thurlow makes the point that the Rules contemplate a sale on terms and under conditions ordained in advance by the Court in order to protect the interests of all parties, rather than upon submission to the Court of a sale arranged in advance to suit the Plaintiff's own purposes. In any event, the Court did not accept that The Dora would "... suffer undue physical deterioration by standing idle long enough to permit normal court procedures leading to her appraisement and sale to be carried out, provided she is adequately manned in the meantime, ..." (page 607). It is interesting to note that the claims against The Dora, other than that of the mortgage holder, were fairly modest being for wages and for ships agency work and that the ongoing cost of crewing and keeping the vessel maintained were manageable costs. Further, the Court was clearly of the view that the private sale was at too low an amount and that no harm would come to the vessel by continuing the arrest until a court ordered sale might by accomplished.
[15] In the present instance, the sale may well suit the Plaintiff's purposes, but there are also broader common purposes including the ability to obtain proper value for a vessel that is at present apparently seaworthy but if left for a number of weeks, to accomplish a court ordered sale, might develop corrosion damage, become suspect as to condition and seaworthiness and thus be difficult to sell at a good price. Moreover, any buyer would likely insist that the cargo be off-loaded, a large expense coming out of the sale price, for no knowledgable buyer would be interested in a ship loaded with a cargo of sulphur say three or four months old or with trying to deliver that cargo by a voyage through a tropical or sub-tropical climate, with the prospect of adding to the corrosion damage which would almost certainly have begun.
[16] Were this a situation similar to that in The Dora, where time had a modest price, I would consider it an extraordinary application indeed, an application that ought to be denied in favour of a conventional court ordered sale. But here time is critical, for the "Nel" could well, within weeks and certainly within months, become unsaleable except as scrap or at a minimal speculative price.
[17] Of all the represented parties who took part in the application to approve the sale, only counsel for Alpha Bunkering Co. Ltd., of Greece, expressed any concerns about the private sale brought to the Court by the Bank of Scotland. Alpha Bunkering, owed $168,174.00 (U.S.) if a mere in rem creditor, would not likely share any of the proceeds of the sale of the "Nel": even if the Bank of Scotland were required to marshal, the Bank's priority over necessary suppliers generally and the short fall on the price realized for the "Nel" and her sister ships, would in all probability leave nothing over for mere in rem creditors. Alternately, if Article 2 of the Brussel Convention of 1926 were to apply to Alpha Bunkering's claim for supplying bunkers2 and if it gave rise to a substantive claim of maritime lien under Greek law, taking priority over a registered mortgage, it might be that Alpha Bunkering could argue a priority ahead of the Bank of Scotland, in which case the sale cannot help but benefit Alpha Bunkering. But in any event counsel for Alpha Bunkering makes several valid points, although without evidence to support those points.
[18] Counsel for Alpha Bunkering questions whether the sale is at a fair market value. The "Nel" has been valued by two internationally recognized ship brokers, who have independently arrived at prices within a fairly narrow range. The Bank of Scotland has managed a price about 25% over the valuations, but one must keep in mind first that a valuation is only an estimate of a world price; second, that there is a substantial value in the bunkers aboard the ship; and finally that both valuations are on a charterfree basis. I am satisfied that the price of $5,000,000.00 (U.S.) is a fair market value for the "Nel".
[19] Second, counsel for Alpha Bunkering expresses his client's concern that the buyer is not at arms length from the previous owner. There is no evidence of any link or connivance between the previous owner and the purchaser.
[20] The third point of substance made by Alpha Bunkering is that the Court has not had the opportunity to appoint an independent expert to assess the value of the ship. In this instance, I am prepared to accept the independent valuations placed on the "Nel" by two reputable established ship brokers, one of whom attended aboard. Indeed, this Court has in the past, to my knowledge, accepted valuations from CTL Westrans, or its predecessor, Cunningham Transportation Limited. I have no doubt that Seascope Shipping Limited, of London, is also a substantial entity whose certificate of valuation, as tendered to the Court, may be relied upon.
CONCLUSION
[21] All of the factors considered the situation of the "Nel" constitutes a very special circumstance which mandates the approval of an expeditious private sale. To deny a sale at this point would result in substantial expenses to remove cargo and/or the certainty, in the future, of a substantially lower sale price of a ship suspect of sulphur corrosion damage. In either event the proceeds available to in rem creditors would be smaller. This result is contrary to the objective of any court ordered sale, that of obtaining the best fair price for the ship in order to protect creditors. Thus the approval of the private sale of the "Nel" by way of an order and a commission for sale.
[22] The creditors, together with Shell Canada Limited who claim ownership of the bunkers, are protected by the procedure provided for in the sale order. The sale order includes the usual provisions as to advertising and filing of affidavits of claim, in order to locate creditors and to determine priorities to the proceeds. The order also provides appropriate protection to the Bank of Scotland for its disbursements necessary to affect the sale, including wage payments to the crew, crew repatriation expenses and for preservation and safe keeping costs, including the cost of protection and indemnity insurance on the "Nel".
[23] A final comment is called for. The sale of the "Nel" reflects both sensible bargaining on the part of counsel involved and the ability of all counsel to cooperate in order to bring about the only economic and sensible resolution. Counsel are to be congratulated.
(Sgd.) "John A. Hargrave"
Prothonotary
December 9, 1997
Vancouver, British Columbia
FEDERAL COURT TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
HEARING DATED: December 3, 1997
COURT NO.: T-2416-97
| STYLE OF CAUSE: THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND |
v.
| THE SHIP "NEL" et al. |
PLACE OF HEARING: Vancouver, BC
REASONS FOR ORDER OF MR. JOHN A. HARGRAVE, PROTHONOTARY
dated December 9, 1997
APPEARANCES:
Mr. Peter Bernard for Plaintiff
Ms. Shelly Chapelski for Claimant Canpotex Shipping Ltd.
Mr. Doug Morrison for Claimant Shell Canada Limited
Mr. John McLean for Claimant Aktina S/A
SOLICITORS OF RECORD:
Campney & Murphy for Plaintiff
Vancouver, BC
Connell, Lightbody for Canpotex Shipping Ltd.
Vancouver, BC
Bull, Housser & Tupper for Shell Canada Limited
Vancouver, BC
Edwards, Kenny & Bray for Aktina S/A
Vancouver, BC
McEwen, Schmitt & Co. for Petromarine Products
Vancouver, BC
Giaschi, Margolis for Legend Marine Singapore Proprietary PTE Ltd.
Vancouver, BC
Sproule Castonguay Pollack for Alpha Bunkering Co. Ltd.
Montréal, PQ
__________________1 The assumption of a 15 knot speed may be overly optimistic for the vessel's designed speed, in 1979, was only 15.5 knots.
2 see Tetley on Maritime Liens and Claims , published by Business Law Communications Ltd. of London in 1985 at pages 581 and 582.