Canada: Vessel Transaction Basics And Due Diligence Nuances

Most business lawyers would be familiar with the standard types of legal due diligence carried out in the usual commercial purchase and sale or financing transaction. Performing minute book reviews, conducting public searches and, reviewing material contracts and financial statements are some of the more common due diligence best practices in business transactions. Depending upon the nature of the transaction, local expertise is required, for example in areas such as real estate, wind energy and one that is familiar to lawyers who practice in Atlantic Canada, vessel transactions.

While much of the due diligence involved in vessel transactions relates to marine law which is primarily in the federal domain, there are location specific aspects to be mindful of and local counsel situated in the Atlantic provinces have both the expertise and the relationships required to ensure the smooth completion of a deal involving a vessel.

Canadian maritime law dates back to 1891 and the Admiralty Act, which established the Exchequer Court (the predecessor to the Federal Court of Canada) and granted that court authority over all matters related to admiralty. The Canada Shipping Act, 2001 (the "Act") governs vessels. It provides that a vessel shall have 64 shares, which may be owned by different persons as long as they are a "qualified person" under the Act. A qualified person is a Canadian citizen, permanent resident or a corporation incorporated under the laws of Canada or a province. There are, in addition, certain prescribed circumstances pursuant to which a foreign corporation can be registered as an owner of a vessel pursuant to the Act.

Registration under the Act is mandatory for vessels in commercial service and optional for pleasure craft. When acting for a party on a vessel transaction, it is important to know that registration is not considered conclusive proof of ownership. For example, a bareboat charter is an arrangement for the hiring of a ship or a boat, usually distinct from a normal charterparty relationship in that no crew or provisions are included as part of the agreement. The bareboat charterer of a non-Canadian vessel may be listed as the owner of such vessel on the registry, if certain prescribed conditions are complied with, but is not in fact the legal owner of the vessel. In such instances, a simple search of the Canadian vessel registry may not be sufficient to establish conclusive ownership of the shares of a vessel. A search of the registry of the primary flag state would be necessary.

The transfer of a vessel already registered on the Canadian registry from one qualified person to another is, on its face, a fairly simple process.

In addition to payment of the associated fee, three standard form documents are required to be filed: a bill of sale, a statement of qualification and an appointment of authorized representative. Additional documentation is required if the vessel is not flagged in Canada. Specific due diligence inquiries to confirm regulatory compliance must be made prior to the transfer. Also, the requirements pertaining to the execution of the transfer documents may vary depending upon the peculiarities of the local registrar. Engaging local counsel who is familiar with vessel related due diligence and who has an established relationship with the registrar will usually save time, aggravation and expense.

For financing transactions, one of the main benefits of the registration system under the Act is the ability to register a mortgage against a vessel, whether it's in operation or under construction. The mortgage itself is a statutory form. The credit terms and conditions of the mortgage are typically set out in a separate deed of covenants that is referenced in the vessel mortgage, but not filed with the registry. The mortgage charges the mortgagor's interest in the shares of the vessel and the vessel's boats and appurtenances. As with most registration systems, priority between multiple mortgages is governed by the sequence in registration or by an intercreditor type agreement amongst the mortgagees. If seeking to enforce under a vessel mortgage, a mortgagee has a statutory power of sale of the vessel, in addition to an in rem action and the remedy of a judicial sale. The Personal Property Security Act in each of the Atlantic provinces does not apply to a statutory vessel mortgage; however a deed of covenants can also create a security interest in certain accessories or equipment on or relating to the operation of the vessel that are not charged by the mortgage. Registering a financing statement in the personal property registry would then be required in addition to registration of the mortgage under the Act. It is essential to know where to conduct due diligence searches and where to effect registrations to protect a client's interests.

While there are many common elements between a vessel transaction and a typical commercial transaction - be it a purchase, sale, financing or other - there are, nonetheless, aspects which make any deal that involves one or more vessels inherently different. We were able to highlight a few of those nuances in this brief article.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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