Sovereign immunity boosted in Ontario court ruling

Canadian companies doing business with foreign state-owned enterprises should be mindful of the reality that it won’t be easy to bring sovereign states into Canadian courtrooms should a dispute arise, a recent ruling from the Superior Court suggests.

In Bombardier Inc. v. AS Estonian Air, Justice Edward Morgan permanently stayed the proceeding after finding the court doesn’t have jurisdiction over the Republic of Estonia, owner of 97 per cent of the shares of Estonian Air.

Bombardier brought the claim against Estonian Air and the government after a failed negotiation to sell five aircraft to the airline. Estonian Air instead purchased aircraft from Brazilian manufacturer Embraer.

The Montreal aircraft builder claimed the cancellation was wrongful and that the government had persuaded the airline to go with Embraer.

In a decision dated May 17, Morgan said Bombardier hadn’t met the evidentiary burden of proof necessary to waive the Estonian government’s defence of sovereign immunity.

A plaintiff can meet the requirement only when there’s sufficient proof that the government isn’t just a passive shareholder but an active commercial participant and decision-maker.

“There is no evidence in the
record before me to cast any doubt on the separate existence of Estonian Air from its governmental shareholder,” wrote Morgan.

“The republic’s only established involvement as shareholder was to finance the airline’s purchase of aircraft, which it accomplished by investing funds in Estonian Air in return for more shares.”

Morgan also said Bombardier was relying on the argument that the Estonian government had waived its sovereign immunity in the shareholder agreement it signed. But he rejected this argument, noting that a stranger to a contract can’t rely on it. “It’s trite law that ‘no one but the parties to a contract can be bound by it or entitled under it,’” the judge said.

He added: “Demonstrating an intention that the shareholders’ agreement was intended to bind others beyond the signing parties would be a necessary ingredient to any claim that Bombardier might put forward based on that agreement.

“Generally, a third party must not only be a contemplated beneficiary of the contract it seeks to rely upon; it must invoke the contract as a shield rather than a sword, and may not advance claims that would take the actual contracting parties by surprise.”

Jonathan Lisus, one of the lawyers who represented the defendants, says the decision provides much-needed clarification.

“I think it’s very significant from a number of perspectives, particularly given the current climate in which large Canadian and international companies are doing an increased volume of business with state-owned enterprises,” says Lisus of Lax O’Sullivan Scott Lisus LLP.

“The court’s clarification that mere shareholding is not going to be sufficient to meet the commercial activity exception and that a state, even if it takes active steps to protect its shareholding . . . that’s not necessarily going to constitute an exception of sovereign immunity,” he adds.

Canadian companies involved in business dealings with foreign state-owned enterprises must know that those sovereign nations “aren’t going to be brought into Canadian courts to have to justify their shareholding,” says Lisus.

The other clarification the court made was a more procedural one, according to Lisus, who notes that the onus of proof weighs heavily on the plaintiff’s side.

“It’s not enough to just allege things in the pleading. When a sovereign nation comes forward with an evidentiary record and says, ‘This was the extent of our involvement,’ there’s a strong burden to respond to,” notes Lisus.

The plaintiff, he adds, “has a positive evidentiary burden to discharge. Otherwise, you can bring any sovereign nation before the Canadian court and put them through a long trial process on the basis of an allegation in the pleading and that clearly isn’t the way the statute is supposed to work.”

In his decision, Morgan also noted the lack of an evidentiary record showing the Estonian government had a hand in the negotiation that never panned out.

“Bombardier itself appears to have known that the decision to purchase Embraer was made by the airline’s management alone,” wrote Morgan.

“Immediately after being informed of Estonian Air’s decision, Mr. Baseggio, Bombardier’s negotiator, wrote to deputy minister Kunnigas complaining about Estonian Air’s ‘exceedingly stupid decision’ and urged the government to ‘tell the supervisory council to wake up and do the right thing,’” the judge added.

Morgan’s decision is consistent with the jurisprudence in common law jurisdictions such as Canada, the United States, and Australia, says Lawrence Herman, an international trade lawyer at Cassels Brock & Blackwell LLP.

“The decision was based on the fact that the Estonian government was merely a passive shareholder in a state enterprise and the state itself was not the commercial player. It’s the airline and company that was,” says Herman, who calls the ruling “a well-reasoned and thoroughly analyzed decision.”

“This decision helps to make the line clear in cases where a state, or a government of a state, enters into the commercial world as an active participant and cases where the state is simply a shareholder that directs the activity of a state-owned enterprise.”

At first blush, according to Morgan, it may appear that an airline is an inherently commercial enterprise and that an investment in it is a commercial activity.

“However, in the hands of a national government, what looks like commercial investment may well be a form of regulatory regime or policy vehicle,” he wrote.

The Estonian government had claimed its investment in the airline was merely a result of its interest in strengthening the national economy through direct-flight connections.

Douglas Harrison, Bombardier’s counsel, didn’t respond to a Law Times request for comment.

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