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Rough landing: Supreme Court of Canada rejects Iraq’s state immunity defence in Kuwait Airways

Trials & Tribulations
|Written By Antonin I. Pribetic
Rough landing: Supreme Court of Canada rejects Iraq’s state immunity defence in Kuwait Airways

The recent Supreme Court of Canada decision in Kuwait Airways Corp. v. Iraq reaffirms the “commercial activity” exception under s. 5 of Canada’s State Immunity Act based upon the doctrine of restrictive immunity.

The section notes “a foreign state is not immune from the jurisdiction of a court in any proceedings that relate to any commercial activity of the foreign state.”

And s. 2 of the same act defines “commercial activity” as meaning “any particular transaction, act or conduct or any regular course of conduct that by reason of its nature is of a commercial character.”

While s. 12 of the act excludes property used for this type of activity from the immunity from execution.

The dispute arose during the first Gulf War when the Iraqi government ordered its national airline, the Iraqi Airways Co. (IAC), to confiscate the appellant’s, Kuwait Airways Corp. (KAC), aircraft, equipment, and parts inventory. After the war, KAC recovered only some of its aircraft; the remainder of its equipment was either destroyed or disappeared. KAC sued IAC in the United Kingdom for damages in respect of losses sustained resulting from the theft of its property following the invasion. The U.K. courts asserted jurisdiction over the dispute. After protracted proceedings, the U.K. courts accepted KAC’s argument relying upon the “commercial activity” exception to state immunity under the State Immunity Act of 1978, which has similar provisions to the its Canadian version mentioned above.

London’s High Court of Justice ordered IAC to pay amounts totalling over $1 billion to KAC. The Kuwaiti company then sought and was granted leave to have the Republic of Iraq joined as a second defendant to recover its costs in the U.K. proceedings, equivalent to approximately $84 million. On July 16, 2008, the High Court of Justice (the Queen’s Bench Division, Commercial Court) granted the application and ordered Iraq to pay the amount claimed by KAC in Kuwait Airways Corp. v. Iraqi Airways Co. The judge in the case held that since the Republic of Iraq funded, supervised, and controlled all of the litigation and furnished material in support of the defence that was being raised by IAC, including perjured affidavit evidence, the nature of their activities falls within the exception to the immunity.

KAC then applied for recognition of that judgment in the Quebec Superior Court and concurrently seized two immovables owned by Iraq in Montreal as well as aircraft ordered, but not yet delivered, from the respondent Bombardier Aerospace. Iraq then moved for a dismissal of KAC’s application based upon a declinatory exception relying on the State Immunity Act, which the Quebec Superior Court granted in 2008 and the Quebec Court of Appeal subsequently affirmed in 2009.

The Supreme Court of Canada allowed the appeal, set aside the judgments of the Quebec Court of Appeal and the Quebec Superior Court, and dismissed the respondent’s exception to dismiss regarding the application for recognition of the judgment rendered by the High Court of Justice in London on July 16, 2008, with costs awarded to the appellant throughout.

The court held that the effect of s. 170 of the Act Respecting the Implementation of the Reform of the Civil Code is that the Civil Code of Quebec governs the application for recognition, because Iraq’s involvement and the order against Iraq are solely the result of the fraudulent acts in issue in the proceedings that resulted in the 2008 English judgment, which were brought after that code came into force.

The court rejected the appellant’s submissions that the application for recognition of a judgment cannot be a “proceeding” (or “instance” in French) within the meaning of s. 3 of the SIA or that the applicability of the SIA was res judicata.

The court notes that “hearing the application must confine itself to the role conferred on the Quebec authority for the consideration of an application for enforcement. As I mentioned above, the court cannot review the merits of the decision. It may not retry the case and therefore must not reassess the facts. Thus, the issue of state immunity and the exceptions to state immunity must be considered within the framework of the law currently applicable in Canada, including public international law, but on the basis of [the 2008 London court’s] findings of fact.”

The court concludes with a brief comparative law analysis of the United States’ Foreign Sovereign Immunities Act of 1976 and the U.K.’s State Immunity Act of 1978.

Supreme Court Justice Louis LeBel wrote the Quebec Superior Court and the Quebec Court of Appeal found that, owing to the nature of Iraq’s acts, state immunity applies and the commercial activity exception does not. But the London court’s 2008 findings of fact lead to a different legal characterization.

“It is true that the acts alleged against Iraq that resulted in the litigation were carried out by a state for the benefit of a state owned corporation,” wrote LeBel. “However, the specific acts in issue here are instead those performed by Iraq in the course of the proceedings in the United Kingdom courts. When all is said and done, the subject of the litigation was the seizure of the aircraft by Iraq. The original appropriation of the aircraft was a sovereign act, but the subsequent retention and use of the aircraft by IAC were commercial acts.”

LeBel added the English litigation, in which the respondent intervened to defend IAC, concerned the retention of the aircraft.

“There was no connection between that commercial litigation and the initial sovereign act of seizing the aircraft. As a result, Iraq could not rely on the state immunity provided for in s. 3 of the SIA,” he wrote. “The respondent’s exception to dismiss the application for recognition should have been dismissed. This conclusion means that it will not be necessary to discuss the issue of immunity from execution raised at first instance with respect to certain property the respondent allegedly owns in Montréal.”

Is the court’s conclusion that there was “no connection” between the English commercial litigation and the initial sovereign act of seizing the aircraft convincing? What about the argument that IAC was not an “agent” or “instrumentality” of the Republic of Iraq? (see my blog post: UPDATED: Only Time Will Tell: Canadian and American approaches to State Immunity) Does a foreign state’s funding, supervision, and control of litigation equate to waiver of state immunity in these circumstances? (see s. 4 of the SIA)

Antonin I. Pribetic is litigation counsel at Steinberg Morton Hope & Israel LLP, a sessional lecturer at UTM-Rotman School of Management’s diploma in investigative and forensic accounting program, and author of the Trial Warrior Blog.