Rough Landing: Supreme Court of Canada ejects Iraq’s State Immunity Defence: Kuwait Airways Corp v. Iraq

Today’s decision of the Supreme Court of Canada in Kuwait Airways Corp. v. Iraq, 2010 SCC 40 [“Kuwait Airways”] reaffirms the “commercial activity” exception under s.5 of Canada’s State Immunity Act, R.S.C. 1985, c. S‑18 [“SIA”] based upon the doctrine of restrictive immunity. Section 5 of the SIA reads:

5. 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.

Section 2 of the SIA defines “commercial activity” as follows:

“commercial activity” means any particular transaction, act or conduct or any regular course of conduct that by reason of its nature is of a commercial character.

Section 12(1)(b) of the SIA excludes property used for this type of activity from the immunity from execution.

The dispute arose during the Gulf War, when the Iraqi government ordered its national airline, the Iraqi Airways Company (“IAC”), to confiscate the appellant’s, Kuwait Airways Corporation [“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 United Kingdom courts asserted jurisdiction over the dispute.  After protracted proceedings, the UK courts accepted KAC’s argument relying upon the “commercial activity” exception to state immunity under s. 3(1)(a) of the State Immunity Act 1978, (similar to the ss. 3(1) and 5 of the SIA above), which provides as follows:

3. — (1) A State is not immune as respects proceedings relating to —

(a) a commercial transaction entered into by the State;

The definition of the term “commercial transaction”,  is found in s. 3(3) which reads:

In this section “commercial transaction” means —

(a) any contract for the supply of goods and services;
(b) any loan or other transaction for the provision of finance and any guarantee or indemnity in respect of any such transaction or of any other financial obligation; and
(c) any other transaction or activity (whether of a commercial, industrial, financial, professional or other similar character) into which a State enters or in which it engages otherwise than in the exercise of sovereign authority;
but neither paragraph of subsection (1) above applies to a contract of employment between a State and an individual.

The High Court of Justice in London ordered IAC to pay amounts totaling over $1Billion (CDN) to KAC.  KAC then sought and was granted leave to have the Republic of Iraq joined as a second defendant to recover its costs in the UK proceedings, equivalent to approximately $84 million (CDN). On July 16, 2008, Steel J. of the High Court of Justice, Queen’s Bench Division, Commercial Court, granted the application and ordered Iraq to pay the amount claimed by KAC (Kuwait Airways Corp. v. Iraqi Airways Co., [2008] EWHC 2039 (BAILII) (T.C.C.)).Mr. Justice Steel held that since the Republic of Iraq funded, supervised and controlled all the litigation, and furnished material in support of the defence that was being raised by IAC, including perjured affidavit evidence (see Kuwait Airways Corp v Iraqi Airways Corp (“Perjury Action 1”) [2003] EWHC 31 (Comm) (24 January 2003) and Kuwait Airways Corp. v. Iraqi Airways Corp. (“Perjury Action 2”) [2005] EWHC 2524 (Comm) (14 November 2005)) , the nature of their activities falls within the exception to the immunity. (at para. 7 and 10-12).

KAC then applied for recognition of Steel J.’s judgment in the Quebec Superior Court and concurrently seized two immovables owned by Iraq in Montréal 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 the SIA, which Chaput, J. of the Quebec Superior Court granted ( 2008 QCCS 4560, [2008] R.J.Q. 2421) and the the Quebec Court of Appeal subsequently affirmed (2009 QCCA 728, [2009] R.J.Q. 992, per Robert C.J.Q. and Hilton and Doyon JJ.A.)

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 Québec 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 (at para. 10).

LeBel, J. 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 (at para. 20) or that the applicability of the SIA was res judicata (at para. 22), noting that:

“…It is a judicial demand that gives rise to an adversarial relationship to which the general rules of civil procedure apply as a result of arts. 785 and 786 of the Code of Civil Procedure, R.S.Q., c. C‑25.  I would add that the application for recognition is similar in nature under the rules of the conflict of laws in the Canadian common law (Beals v. Saldanha, 2003 SCC 72, [2003] 3 S.C.R. 416; Pro Swing Inc. v. Elta Golf Inc., 2006 SCC 52, [2006] 2 S.C.R. 612).  The application for recognition therefore remains a “proceeding” to which the state immunity provided for in s. 3 of the SIA applies.

[23] However, the court 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 (art. 3158 C.C.Q.; Canada Post Corp. v. Lépine, 2009 SCC 16, [2009] 1 S.C.R. 549, at para. 23).  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 Steel J.’s findings of fact.

The Court continues with a brief comparative law analysis of the United States’ Foreign Sovereign Immunities Act of 1976, Pub. L. 94‑583, 90 Stat. 2891, 28 U.S.C.) and the United Kingdom (the State Immunity Act 1978), noting that,
“[28] Both in the United Kingdom and in the United States, state immunity seems to be limited in the modern case law to true sovereign acts, with the exceptions being used to confirm an interpretation that corresponds to the restrictive theory of state immunity that has been developed in public international law.
[30] Thus, in both U.S. and English law, the characterization of acts for purposes of the application of state immunity is based on an analysis that focusses on their nature.  It is therefore not sufficient to ask whether the act in question was the result of a state decision and whether it was performed to protect a state interest or attain a public policy objective.  If that were the case, all acts of a state or even of a state‑controlled organization would be considered sovereign acts.  This would be inconsistent with the restrictive theory of state immunity in contemporary public international law and would have the effect of eviscerating the exceptions applicable to acts of private management, such as the commercial activity exception.
Justice LeBel concludes,
[33] For the purposes of this appeal, therefore, the first step is to review the nature of the acts in issue in KAC’s action against Iraq in the English courts in their full context, which includes the purpose of the acts.  It is not enough to determine whether those acts were authorized or desired by Iraq, or whether they were performed to preserve certain public interests of that state.  The nature of the acts must be examined carefully to ensure a proper legal characterization.
[34] To this end, it is necessary to accept the findings of fact made by Steel J. in the judgment the Quebec court is being asked to recognize.  As I mentioned above, the Quebec court is not to review the merits of the case. Steel J.’s findings are clear and compelling.  According to him, starting in 1991, Iraq, the sole proprietor of IAC, its state-owned corporation, had controlled and funded IAC’s defence throughout the long series of actions for damages brought against IAC in the English courts by the appellant.  Iraq had participated throughout this commercial litigation in the hope of protecting its interests in IAC.  In doing so, it was responsible for numerous acts of forgery, concealing evidence and lies (judgment, July 16, 2008, at paras. 10‑14).  These acts misled the English courts and led to other judicial proceedings, including the one in issue in the application for enforcement in which Steel J. found that Iraq was not entitled to state immunity and ordered it to pay substantial costs.

[35] 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 Steel J.’s 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.  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 actsKuwait Airways Corp. v. Iraqi Airways Co. (1995), at p. 711.  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. 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.” [emphasis added]
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 previous 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).

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