Litigation as a commercial activity?

In October 2010, the Supreme Court of Canada released a decision dealing with recognition and enforcement of a foreign judgment against a foreign state. The decision will have particularly interesting ramifications in matters involving claims of state immunity and alleged commercial activity by foreign states but it also clarifies certain evidentiary rules governing recognition and enforcement proceedings.

Background

In 1990, following the invasion of Kuwait, the Iraqi government ordered its state-owned airline, Iraqi Airways Company (IAC) to appropriate the aircraft and equipment belonging to Kuwait Airways Corporation (KAC). When the war was over, KAC was only able to recover some of its aircraft from IAC. KAC brought an action against IAC before the United Kingdom’s High Court of Justice in 2008. The Republic of Iraq was added as a second defendant. In the UK proceedings, Iraq was found to have controlled, funded and supervised IAC’s defence throughout the proceedings and to have intentionally deceived the English Courts (through forgery, concealing evidence and lies). While IAC was ordered to pay KAC the equivalent of over $1 Billion CAD, Iraq itself was ordered to pay KAC the equivalent of approximately $84 Million CAD. The High Court of Justice held that the state immunity did not excuse Iraq because its control of IAC’s defence was not a sovereign act but, rather, fell into the commercial activity exception to the state immunity doctrine.

KAC sought to have the UK decision recognized by the Superior Court of Québec, and Iraq brought a motion to dismiss the application by KAC and invoked Canada’s State Immunity Act (SIA), which is similar to the law applied in the UK and which also contains an exception for "commercial activities". The Superior Court granted the motion and dismissed the application for recognition and enforcement, on the grounds that Iraq’s participation in the proceedings brought in England did not fall within the commercial activity exception to state immunity established in the SIA. That decision was upheld by the Court of Appeal of Québec and KAC appealed to the Supreme Court of Canada.

Decision and discussion

The Supreme Court of Canada allowed the appeal by KAC and sent the application for recognition and enforcement back to the Superior Court of Québec. The Court reiterated the principle that a Court hearing an application for recognition of a foreign judgment must not review the merits of the original decision itself but confirmed that it remains an adversarial "proceeding" such that the SIA applies. It was, however, open to KAC to establish that the commercial activity exception in the SIA also applied. The English Court’s decision on this issue was not determinative — but in order to reach its own conclusion on whether the commercial activity in the SIA applied, the local Court would rely on the findings of fact made by the English Court with respect to Iraq’s actions.

Finally, in overruling the lower Courts, the Supreme Court of Canada held that although the initial decision to appropriate KAC’s aircraft and equipment may have been a sovereign act, the issue before the English Court involved not the appropriation but the retention of the aircraft and Iraq’s involvement in that litigation therefore qualified as a commercial activity. The nature of Iraq’s actions that were the object of the English decision (forgery, concealing evidence and lies in the context of litigation about the retention of the aircraft) was such that it fell within the definition of commercial activity rather than that of sovereign acts. In other words, seizure of property by a state is not a commercial activity — but engaging in litigation to retain it later may be.

This case is a clear confirmation that, in the event of an application to recognize and enforce a foreign judgment, even if the local Courts do not review the merits of the original decision and rely on findings of fact made by the foreign Court, there is still a serious adversarial process here in which those original findings of fact will be considered in light of local law. The decision will be of particular interest, however, in cases involving foreign governments. The immunity normally granted to foreign states under the SIA will not always apply where the state’s actions can be tied to a commercial interest.

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