Foreign sovereign state - Immunity from suit - Applicant company obtaining foreign judgment against one of Iraq’s government ministries

Bank and others: SC (Justices of the Supreme Court, Lords Phillips (president), Clarke, Sumption, Reed, Lady Hale): 17 August 2012

On 9 August 1988, the applicant company entered into a contract with the Iraq Ministry of Industry (the ministry) for the supply of equipment, machinery and related services required for the commissioning of a new copper and brass facility at the state-owned scrap metal factory of the interested party (Iraq).

The first respondent (Rafidain) was a state-controlled Iraqi commercial bank whose assets in the UK had been frozen as a consequence of the UN sanctions regime. Shortly after the invasion of Kuwait by Iraq, the applicant terminated the contract by notice dated 13 August 1990.

The applicant subsequently brought a claim against the ministry in the Paris Commercial Court for sums due under the contract. Provisional liquidators were appointed in respect of Rafidain on a winding-up petition. The Paris Commercial Court gave judgment in default in favour of the applicant in the sum of $14,152,800. Apart from two payments, the judgment remained unsatisfied and, as of November 2010, the outstanding debt due (including interest and allowable costs) was $34,481,200. In May 2003, Saddam Hussein’s regime in Iraq fell. The UN passed a resolution which established the Development Fund for Iraq (DFI). The High Court made an order that permitted Rafidain’s provisional liquidators to collect the assets of Rafidain’s London branch and to agree claims against Rafidain.

Iraq made a debt-cancellation agreement with government creditors comprising the Paris Club. In December, Iraq began a process of debt restructuring with its commercial creditors and the creditors of other specified Iraqi entities, including Rafidain, under the auspices of the Iraq Debt Reconciliation Office (the IDRO scheme). Iraq announced an offer to repurchase claims from the commercial creditors of specified Iraqi debtors, including Rafidain, where claims arose before 6 August 1990. Iraq issued an invitation to tender claims for cash purchase and for exchange. Thereafter, Iraq took assignments of certain debts owed to Rafidain’s creditors by Rafidain in accordance with the IDRO scheme.

The applicant did not register an interest in, and chose not to participate in, the IDRO scheme. The High Court sanctioned a scheme of arrangement for the distribution of assets held by Rafidain’s provisional liquidators to Rafidain’s creditors (the scheme). Iraq submitted claims in the scheme which were admitted in the sum of $253.8m (the admitted claims) and which were to be paid to the DFI.

The applicant obtained an order from the High Court registering the judgment of the Paris Commercial Court against the ministry and Iraq (the order). The order was served on Iraq and became enforceable against the ministry and Iraq. The applicant was granted its application lifting the stay on proceedings against Rafidain and enjoining Rafidain, the provisional liquidators and the scheme administrators from making any payment to Iraq under the scheme in respect of the admitted claims or recognising or giving effect to any assignment or transfer of the admitted claims to a third party which would have the effect of reducing the amount payable to Iraq to an amount less than the judgment debt.

The applicant sought a third-party debt order (the TPDO) against Rafidain in relation to the debt payable to Iraq by Rafidain by way of dividend under the scheme, seeking an order that Rafidain pay to the applicant such part of the money otherwise payable to Iraq as was necessary to satisfy the judgment. The applicant successfully applied for an injunction against the respondents, which was granted to preserve the assets which were sought to be made the subject of the TPDO.

Iraq issued an application to discharge the injunction on the ground, inter alia, that money due to Iraq by Rafidain was immune from execution by virtue of section 13(2)(b) of the State Immunity Act 1978. Iraq’s case was that the admitted claims had never been used, were not in use, and were not intended for use by Iraq for any commercial purpose as certified by the charge d’affaires of the Embassy of Iraq in London.

The application for the TPDO was dismissed, the court holding that Iraq’s admitted claims were entitled to immunity from execution by virtue of subsections 13(2)(b) and (4) of the 1978 act because they were not property which was for the time being in use or intended for use for commercial purposes within the meaning of section 13(4). The applicant’s appeal was dismissed by a majority of the Court of Appeal. The applicant appealed.

It was common ground: (i) that the money payable under the scheme to Iraq was a debt and a chose in action and as such that it was ‘property’ within the meaning of section 13(2)(b) of the 1978 act; (ii) that Iraq’s stated intention was to transfer the proceeds of the admitted claims to the DFI; (iii) that, by virtue of section 13(5), the certificate from the charges d’affaires created a rebuttable presumption that the admitted claims were not in use or intended for use for commercial purposes; (iv) that the onus lay on the applicant to show a real prospect that it could rebut that presumption; and (v) that the debts were intended for use for sovereign and not commercial purposes.

The applicant submitted that the nature of the transaction which had given rise to Rafidain’s liability had been entirely commercial; the admitted claims and the right to a dividend contribution were properly described as in use, in order either to obtain payment or to complete the underlying commercial transactions giving rise to the claim or alternatively as part of the transaction pursuant to which Iraq had acquired the admitted claims, the nature of which had not been a sovereign act. Consideration was given to the expression ‘property which is for the time being in use or intended for use for commercial purposes’ in section 13(4) of the 1978 Act. The appeal would be dismissed.

The nature of the origin of the debts was not relevant to the question whether the property in question was in use for commercial purposes. The expression ‘in use for commercial purposes’ in section 13(4) of the 1978 act should be given its ordinary and natural meaning having regard to its context. It would not be an ordinary use of language to say that a debt arising from a transaction was ‘in use’ for that transaction. Property would only be subject to enforcement where it could be established that it was currently ‘in use or intended for use’ for a commercial transaction. It was not sufficient that the property related to or was connected with a commercial transaction (see [15], [17] of the judgment).

Parliament had not intended a retrospective analysis of all the circumstances which gave rise to property, but an assessment of the use to which the state had chosen to put the property. In enacting section 13(4) of the 1978 Act, parliament could have referred to property that ‘related to’ a commercial transaction, or arose ‘in connection with’ a commercial transaction as being susceptible to enforcement. It had chosen not to do so, which suggested that it had intended a difference in meaning to that in sections 3(1) and 10 of the 1978 act (see [16], [17] of the judgment).

In the instant case, the applicant could not show that the debt was or was earmarked (or in use) for being drawn upon in order to satisfy commercial liabilities. On the facts, the applicant could not show that the admitted claims had been property in use for a commercial purpose. It did not say that Iraq intended or intends to draw them down for commercial purposes. On the contrary, the applicant accepted that they were intended to be used for sovereign purposes.

By section 13(5) of the 1978 act, the burden was on the applicant to prove that the certificate from the charge d’affaires that the property was not in use for commercial purposes was not correct. It could not do so unless it could show that it was entitled to rely upon the source of the admitted claims and could show that the source was sovereign and not commercial. The source of the admitted claims was irrelevant.

Consequently, it was not necessary to express a view upon the question whether the source was sovereign or commercial. The determinative feature was the absence of any current or future commercial activity on the part of the state of Iraq.

Any dividends received from the administrators of Rafidain would be paid to and used by the DFI, which was manifestly not a commercial purpose. The admitted claims were nothing more than a legal mechanism by which Iraq’s entitlement to receive dividend payments was secured and given effect to. In those circumstances, it was artificial and highly technical to seek to distinguish the admitted claims from the dividends that they secured.

Neither was connected to, or destined for use in, any mercantile or profit-making activity by Iraq. It followed that neither could sensibly be described as ‘for the time being in use or intended for use for commercial purposes’ (see [30]-[32] of the judgment). Decision of Court of Appeal, Civil Division [2012] 1 All ER (Comm) 527 affirmed.

Martin Pascoe QC, Richard Fisher and Charlotte Cooke (instructed by Addleshaw Goddard) for the applicant; Mark Howard QC, Oliver Jones and Robert McCorquodale (instructed by Cleary Gottlieb Steen & Hamilton, London) for the interested party.