Canada: Freeze, Ship – You’re Under Arrest: Former Warship Now Underwater Following Court Order

The Federal Court ordered that a former Royal Canadian Navy destroyer be released from arrest before trial, without bail, so the ship could be sunk by its owner to create an artificial reef near Vancouver. The court's order demonstrates that plaintiffs who cause a ship to be placed under arrest could become at risk of losing the powerful benefit of the arrest if the plaintiff fails to actively pursue the claim or if it is seen to be using the arrest as leverage to try to obtain the defendant's agreement on issues that are collateral to the central claims that entitled the plaintiff to impose the arrest in the first place.

BACKGROUND

The Artificial Reef Society of British Columbia (Reef Society) is a non-profit organization that creates marine habitat and scuba diver attractions by acquiring, preparing and sinking large vessels as artificial reefs. In 2008, the Reef Society purchased the HMCS Annapolis (Annapolis) from the Government of Canada for the purpose of creating an artificial reef in greater Vancouver. The Annapolis is a 113-metre-long decommissioned helicopter-carrying destroyer designed primarily as an anti-submarine vessel. The Annapolis was then moved from Canada's facility on Vancouver Island to Long Bay, Gambier Island (in Howe Sound near Vancouver) to be prepared for sinking. Nearby Halkett Bay, Gambier Island was selected as the eventual sinking site.

Various preparations must be made to a ship before it can be sunk as an artificial reef. This work primarily includes (1) the dismantling and removal of the ship's systems and bulkheads in order to make the ship accessible for scuba divers, and to salvage any reusable or valuable materials, and (2) an extensive cleanup of any potentially harmful substances to meet environmental standards.

The Reef Society engaged W.R. Marine Services (W.R. Marine) to assist with preparing the Annapolis for sinking and provide moorage at Long Bay. Some of the terms of the agreement between the Reef Society and W.R. Marine were later disputed. However, the court found that under the agreement, W.R. Marine's compensation was to be 50 per cent of the proceeds generated from the sale of materials salvaged from the Annapolis with the balance being paid to the Reef Society. Progress on the project was initially slow and significant delays were caused mainly by a drop in market prices for scrap metals and emerging environmental issues that required more extensive clean-up operations than originally anticipated.

In April 2013, W.R. Marine commenced an action in Federal Court against the Reef Society and the Annapolis claiming unpaid fees of approximately C$100,000. W.R. Marine also caused the Annapolis to be placed under arrest, which prevented the Reef Society from moving forward with the sinking. By late 2014, the Reef Society had obtained all of the required regulatory approvals to carry out the sinking. There was also evidence of a growing risk that the Annapolis could sink accidentally at an unwanted location because of the severe corrosion of the ship's underwater through-hull fittings. Any failure in one of these fittings would likely have caused an uncontrollable flood and a rapid sinking because the ship's watertight integrity systems had been removed or dismantled as part of preparing the ship for sinking as an artificial reef.

MOTION FOR RELEASE FROM ARREST

The Reef Society brought a motion to the Federal Court for orders releasing the Annapolis from arrest so the Reef Society could sink the ship at the approved location in Halkett Bay. W.R. Marine filed a counter-motion for orders appointing W.R. Marine as the ship's husband, and for a judicial sale of the Annapolis before trial. The Reef Society filed extensive affidavit evidence in support of its motion addressing both the merits of W.R. Marine's claim and the surrounding circumstances such as the ship's deteriorating condition.

Following a hearing, the court dismissed W.R. Marine's motion and ordered that the Annapolis be released from arrest upon payment of bail in the amount of C$1. The court confirmed that it had discretion to release property from arrest with or without bail in appropriate circumstances. The court decided to release the Annapolis from arrest based on the exceptional circumstances including the court's finding that W.R. Marine's claim was "tenuous at best;" the Annapolis had little, if any, commercial value and therefore W.R. Marine would not be prejudiced from the release; and the mounting risk of an accidental sinking at an unwanted location. At the hearing, the court also heard evidence suggesting W.R. Marine had failed to diligently prosecute its claim and that it tried to use the arrest to leverage the Reef Society into an agreement on collateral issues relating to the Reef Society's governance structure. The court expressed its concern that this appeared to be an improper use of the arrest, but ultimately the court did not have to decide whether W.R. Marine's use of the arrest amounted to an abuse of process.

IMPLICATIONS

This outcome is relevant for both marine operators and parties that use marine services. The Annapolis case demonstrates that parties using a maritime arrest to pursue a debt claim against a ship and its owner should diligently prosecute the claim. Parties should also be aware that courts may not look favourably on plaintiffs that impose their harsh procedural right to arrest a vessel and then pursue a broader strategic objective that does not relate directly to the claim.

A maritime arrest can be a powerful tool to motivate a rapid resolution. However, due to the serious consequences that may flow from placing a ship under arrest, it appears that plaintiffs have some obligation to diligently pursue the claim and ensure the arrest is being used for its intended purpose—to provide some security for certain specific debts arising in the maritime context. The circumstances in the Annapolis case were highly unusual but this case provides a helpful example of the kinds of arguments that may have some traction with courts when they are asked to take the exceptional step of releasing property from arrest either without bail or with bail set at a reduced amount.

JUDICIAL REVIEW OF DISPOSAL AT SEA PERMIT

After the Annapolis was released from arrest, a group of residents from Halkett Bay commenced judicial review proceedings seeking to quash the Reef Society's Disposal at Sea Permit from Environment Canada, which authorized the sinking. That application was heard over two days in late February 2015. The court dismissed the application and upheld the Disposal at Sea Permit. That decision clarifies some of the key legal principles applicable to judicial review proceedings regarding permitting decisions, the statutory time limit for seeking judicial review under the Federal Courts Act and the disposal at sea permitting regime under the Canadian Environmental Protection Act, 1999.

The Reef Society successfully carried out the sinking of the Annapolis at Halkett Bay on April 4, 2015. Blake, Cassels & Graydon LLP was counsel to the Reef Society throughout the litigation.

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