The B.C. Court of Appeal has confirmed that a ship owner which
is a party to a bill of lading has the right to direct payment of
unpaid freight that would otherwise be payable to a third party. In
doing so, the Court has adopted, for the first time, the
longstanding position in English law in Canada. [Byatt
International SA v. Canworld Shipping Company Ltd. et al,
(2013) BCCA 427]
Byatt International SA ("Byatt"), the owner of the
vessel "LOYALTY",had time chartered it to Korea Line
Corporation ("KLC"). KLC in turn had time chartered the
ship to MUR Shipping BV ("MUR").
Subsequently Canworld Shipping Company Limited
("Canworld"), who had a service agreement with Prism
Sulphur Corporation ("Prism") to transport Prism's
sulphur worldwide, voyage chartered the vessel from MUR. In this
case, the sulphur was being shipped to Australia pursuant to a bill
of lading signed by the "LOYALTY's" master and Prism
was named as the shipper.
During the term of the time charter KLC became insolvent and
defaulted on its hire payments to Byatt. MUR however remained
current in its hire payments to KLC.
Byatt then moved to secure its position by serving a Notice of
Lien under its charter party on Prism. The Notice sought to
exercise a lien over the freight payable by Prism and still
outstanding under the bill of lading. As a result of that Notice
and the competing claims of Canworld and MUR for the freight, Prism
brought interpleader proceedings in order to have the Court
determine which party was entitled to the unpaid freight.
After the freight had been interpleaded but before the
Court's determined which claimant was entitled to the
interpleaded funds, Byatt served a Direction to Pay on Prism
requiring Prism to pay to Byatt the unpaid freight payable pursuant
to the bill of lading.
At the trial level both MUR and Canworld succeeded in their
argument that Byatt was not entitled to the freight. However,
the Court of Appeal has now reversed that decision and held that
Byatt was entitled to the freight.
Pursuant to a settlement between Byatt and KLC reached in
separate insolvency proceedings in Korea, any monies that were
received by Byatt pursuant to its contractual rights to exercise
liens against hire or freight were to be credited against the
amount owed by KLC to Byatt. MUR and Canworld therefore, argued
that it would be unfair for Byatt to receive the funds as this
would make for double recovery by KLC, as it had already been
repaid by MUR. Equity therefore prevented Byatt from receiving the
funds. This argument was successful in the trial court.
However, the Court of Appeal has held that there were no
equitable principles preventing payment to Byatt. In particular, it
followed Dry Bulk Handy Holding Inc. v. Fayette International
Holdings Limited,  EWHC 2107 (Comm), aff'd 
EWCA Civ 184, in finding that compromises made in insolvency
proceedings are not relevant in assessing the legal entitlements
between parties not involved in the compromise. It held that if
there is a valid contractual claim by Byatt to the freight, then
the result should follow commercial reality and not what a judge
thinks is "fair".
The Court then followed Wehner v. Dene Steam Shipping
Company,  2 K.B. 92 and the The
"Cebu",  1 Lloyd's L.R. 302, and held that
Byatt was entitled to direct payment of the freight so long as the
freight had not already been paid by Prism. The Court further
held that the Direction to Pay given after the interpleader
proceedings had commenced but before determination was binding as
the monies had not been "paid" by Prism.
This decision affirms in Canada the longstanding English
position of the right of a ship owner who is a party to a bill of
lading to direct the shipper to pay the freight to itself so long
as the shipper has not yet already discharged its obligation to pay
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