Canada: BC Court Of Appeal Upholds The Right Of A Shipowner To Direct Payment Of Freight

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, [2012] EWHC 2107 (Comm), aff'd [2013] 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, [1905] 2 K.B. 92 and the The "Cebu", [1983] 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 freight.

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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