Warren B. Milman

In a recent decision, the Federal Court of Appeal had occasion to consider a claim at the crossroads of bankruptcy and maritime law (ING Bank N.V. v. Canpotex Shipping Services Limited et al., 2017 FCA 47).   Normally in Canada, bankruptcy cases are adjudicated in the superior courts of the respective provinces.  This case was unusual because, although also a bankruptcy case, it fell under the Federal Court’s jurisdiction over admiralty matters.

The case arose out of the bankruptcy of the OW Group, which was, prior to the bankruptcy, the world’s largest supplier of marine bunker fuel.  The OW Group collapsed following an accounting scandal, which ultimately sent it into receivership.  This case is one of many hundreds of actions going on around the world involving the OW Group bankruptcy.  Similar actions have been pursued by way of arbitration and at all levels of court, in places as far afield as England, the USA, Singapore, Chile and India.   Many of these cases continue to be litigated or are under appeal.

When large cargo ships need gas, it can cost half a million dollars or more to fill up the tank.  OW was in the business of contracting with vessels and their charterers to arrange fill ups in many ports around the world, including Vancouver.  To meet its obligation to supply the fuel, OW would typically engage a local supplier in each port, often through a lengthy chain of supply.  When the OW Group went bankrupt, the physical suppliers were left unpaid and both they and the OW receiver demanded payment from the customers.  At issue in all these cases is who, as between OW and the suppliers that were engaged, is entitled to that payment from the customer.

The customer does not usually care who gets paid, as long as it does not have to pay twice.  In this case, like many others, the customer (a charterer of the vessels) paid the money into court, relying on a process called “interpleader.”  In an interpleader action, a debtor who faces competing claims and acknowledges liability may make the payment into court and leave it to the competing claimants to sort out between themselves who has the better claim to the funds in court.

A proper interpleader occurs where the claimant is facing competing claims in respect of a single debt, however.   The problem in this case was that the customer was facing multiple sources of liability that it was seeking to extinguish in the one action: it had contracted directly with OW, but it also faced a lien claim indirectly from the physical supplier (the physical supplier enjoyed a lien arising by statute, but that was a claim against the vessels and their owners; the charterer would be liable only indirectly on such a claim through its obligation to indemnify the owners against lien claims under the charter party agreement).   The OW receiver argued that the physical supplier had contracted only with OW so its only claim in contract was against OW.  By claiming directly against the customer in the interpleader action and relying on its maritime lien, the physical supplier was, it was argued, seeking to make an improper “end-run” around the OW bankruptcy process.

Initially, in the court of first instance, the customer and the physical supplier were successful and the money in court was ordered to be paid to the physical supplier and its maritime lien was consequently ordered extinguished.   On appeal, however, the judgment was set aside on various grounds.   First, the Court of Appeal sided with the receiver in holding that the interpleader action could only determine which of the claimants had the better claim to the funds paid into court, as a matter of contract.  The physical supplier’s lien claim was found to be a separate cause of action that was beyond the jurisdiction of the interpleader court to resolve, and irrelevant to the interpleader claim before it.  Second, the Court of Appeal held that the court below had erred in its application of the rules of evidence in deciding which version of the contract applied as between the customer and OW.

In the result, the Court of Appeal has sent the matter back to the Trial Division for a fresh hearing in light of its decision.  If the receiver succeeds this time round, the interpleaded funds will be paid out to it and the customer may end up having to pay twice for the fuel (because the payment to the receiver from the interpleaded funds will not invalidate the physical supplier’s lien claim against the vessels).

The Canadian chapter of the long OW Group saga continues.