Airlines, Alter Egos and Arbitral Awards
On September 20, 2022, the Québec Court of Appeal in the case of Air India Ltd. c. CC/Devas (Mauritius) Ltd., 2022 QCCA 1264 largely overturned the Superior Court of Québec’s decision enabling shareholders of Devas Multimedia Services (collectively, “Devas” or “the Respondents”) to seize assets in the hands of the International Air Transport Association (“IATA”) that were owed on behalf of the Republic of India. Our analysis of the lower court’s decision can be found: here.
Canada is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), as well as the UNCITRAL Model Law. Although Québec has not expressly adopted the UNCITRAL Model Law, the provisions are tracked in the Civil Code of Québec (the “CCQ”) and the Code of Civil Procedure. As such, domestic and foreign entities are able to seek recognition and enforcement of foreign arbitral awards in Quebec. In this case, the Respondents sought enforcement through seizure of funds held by IATA, which is headquartered in Montreal.
This appeal arose out of the termination of a contract between Antrix Corporation Limited (“Antrix”), a company that is wholly owned by the Republic of India, and Devas. The termination of the contract triggered an arbitration process, which resulted in Devas obtaining an award for $111 million USD (plus interests and costs) against India (the “Treaty Awards”). The Respondents had also commenced an arbitration under the International Chamber of Commerce (“ICC”), and were awarded another $562.5 million USD in damages against Antrix, plus 18% interest per annum.
The Superior Court of Quebec’s Decisions
When Devas applied to enforce the Treaty Awards in Quebec, the Court authorized two seizures: one against the assets of the Airport Authority of India (“AAI”), referred to as the “First Seizure”, and another against the assets of Air India, Ltd. (“Air India”) referred to as the “Second Seizure”, for funds held by IATA (collectively, the “Seizures”). Despite the fact that AAI and Air India were not parties to the arbitration agreement nor involved in the arbitration process, the Court justified both Seizures on the grounds that AAI and Air India are wholly-owned state corporations and alter egos of the Republic of India.
AAI applied to the Superior Court of Québec for a dismissal and stay of the First Seizure. Air India also applied to the Court to stay and quash the Second Seizure, and IATA applied to quash both the First and Second Seizures. Justice Pinsonnault dismissed the First Seizure against AAI on the basis of the State Immunity Act, noting that AAI had not waived immunity. Regarding the Second Seizure against Air India, Justice Pinsonnault dismissed the application to quash the seizure, in part, although he did reduce the scope of the seizure to 50% of the funds held by IATA.
Ultimately, the alter ego doctrine and the evidence that it would be next to impossible for Devas to collect its arbitral awards, led Justice Pinsonnault to permit the seizure of 50% of Air India’s assets in the hands of IATA.
Court of Appeal Decision
Air India appealed, asking the court to determine a novel issue of law in Québec, namely: whether the assets of a state-owned company with a distinct legal identity and no involvement in the original claim between Devas and the Republic of India, can be validly seized ex parte before judgment in the hands of another third party (IATA), to pay the debt of the State itself on the basis of a prima facie claim that Air India is an alter ego of the State. Air India claimed that the trial judge erred by allowing the Respondents to lift the corporate veil to access the funds at issue.
In contrast, the Respondents argued that Justice Pinsonnault was justified in allowing the seizure of assets of Air India to satisfy the Republic of India’s debt on the basis that Air India is an alter ego of the Republic of India.
The Court of Appeal found in favour of the Appellants, concluding that Art 317 of the CCQ permits the piercing of the corporate veil only where one or more of three circumstances applies: concealing a fraud, an abuse of right or a contravention of a rule of public order. In this case, none applied.
Article 317 of the Civil Code of Québec
The Court began its analysis by acknowledging that, prior to 1994, the CCQ did not allow for variation from the principle of distinct, juridical personality for corporations. As such, Québec courts at that time turned to the common law when they believed that variance was necessary, including where it appeared appropriate to pierce the corporate veil. Over time, Quebec courts came to recognize four situations where piercing the veil would be permitted, three of which were subsequently codified in 1994 under Article 317 of the CCQ: namely dissembling fraud, abuse of right and contravention of a public order. This addition was a legislative effort to clarify the law.
While Art 317 is not expressly exhaustive, the Court of Appeal maintained that the legislature intended, in drafting Article 317, to limit piercing of the corporate veil to instances where an alter ego corporation engages in the enumerated “prohibited” conduct. In other words, the mere existence of an alter ego will not be sufficient to pierce the corporate veil.
Application of Article 317 to State-Owned Entities
The Respondents did not suggest there was any evidence of fraud, abuse of right, or contravention of a public order by Air India or the Republic of India. Interestingly, Devas also did not claim that the corporate veil can be lifted any time a company has an alter ego. Instead, Devas claimed the practical reality and difficulties with enforcing foreign arbitral awards necessitates piercing the veil when an entity seeks to enforce a foreign arbitral award against a foreign state, where there is evidence that the company is an alter ego of the state. Some other jurisdictions recognize this reality and permit piercing the corporate veil in such cases, and Devas asked the Court to recognize the same here.
The Court of Appeal rejected this argument. First, the Court pointed out that the purpose of the New York Convention is to ensure that foreign arbitral awards are enforced by contracting states in the same way that those states enforce domestic awards. However, the New York Convention does not impose an obligation to apply foreign laws on contracting states. Second, the Court emphasized the CCQ is the basis of all private law in Québec. As such, it was neither necessary nor appropriate to apply common law rules in matters governed by the procedure, methods, and principles of Quebec civil law. Ultimately, the Court held that Devas failed to provide support for the notion that the alter ego rules developed in other jurisdictions should be brought to bear on Québec law.
The Québec Court of Appeal was ultimately unwilling to deviate from the CCQ. In making its findings, the Court confirmed that arbitral awards owed by foreign governments, despite the difficulty of enforcing them otherwise, do not give rise to a right to pierce the corporate veil to seize assets held by state-owned corporations.
While Canadian courts generally favour the recognition and enforcement of arbitral awards, it is important for parties to take due care in considering the domestic rules and laws governing enforcement to ensure their application is on side.
Devas appears to be considering an appeal of this decision to the Supreme Court of Canada. Be sure to visit The International Arbitration Blog for our analysis of any future consideration of this case.
 See CC/Devas (Mauritius) Ltd c Republic of India, 2022 QCCS 7. Treaty Awards refers to the “Merits Award” issued on July 25, 2016 against India which was found liable for breaches of the Agreement between the Republic of India and the Republic of Mauritius for the Promotion and Reciprocal Protection of Investments (the “Treaty”) and the “Quantum Award” issued on October 13, 2020 ordering India to pay Plaintiffs USD $111 million plus interest and costs (collectively the Merits Award and the Quantum Award are referred to as the “Treaty Awards”).
Civil Code of Québec, CQLR c CCQ-1991, Article 317.
CC/Devas (Mauritius) Ltd., 2022 QCCA 1264 at para. 42.
arbitration international arbitration arbitration agreement Arbitral Award alter ego enforcement IATA Quebec lifting the corporate veil