Kuwait Airways Corporation v Iraqi Airways Company

MR JUSTICE DAVID STEEL: This is an application by KAC, Kuwait Airways Corporation, for an order pursuant to Section 51 of the Supreme Court Act 1981, and to CPR part 48.2, that the costs of four actions, namely 1991 folio 69 and 2587, 2000 folio 1137 and 2003 folio 223, all of which had been brought by the claimant, KAC, against Iraqi Airways Company, should be paid by the Republic of Iraq. The costs concerned are very substantial and amount to no less than £41,824,398, as assessed by the court.

The claimants duly applied to the court to join Iraq to these proceedings, as a second defendant, for the purposes of costs only, and an order to that effect was made by Mr Justice Langley on 24 March 2006. Thereafter, there has been a delay whilst the relevant application notices were served upon the Republic of Iraq, and a further delay in respect of applications by the Republic of Iraq for extensions of time to furnish evidential material in defence of the claim. To that end, the Republic of Iraq had retained Messrs Teachers, Stern & Selby ("TSS") had acted, at least in the latter stage of the litigation, for Iraqi Airways Company. An unless order was made by Mr Justice Tomlinson to the effect that, in the event that this material was not furnished by 4 June 2008, that the Republic of Iraq be debarred from relying upon any evidence.

The fact that the Republic is aware of this application and hearing today, and had an opportunity of being represented, is clear from a letter from TSS addressed to Mr Justice Tomlinson, who no doubt was expecting to be dealing with this matter, and dated 14th July. It reads:

It follows that this application for costs is not opposed, but counsel for Kuwait Airways Corporation have carefully and thoroughly taken me through the material, drawn my attention to the relevant authorities, indicated the basis upon which they assert that it is appropriate to make the order that they seek, and identifying as they did so, any points that they thought might conceivably be taken on Iraq's behalf in defence of the claim.

At the outset, KAC drew my attention to one discrete issue that might arise in an application of this kind; namely the question of state immunity. The general principle of state immunity is set out in Section 1 of the State Immunity Act 1968, but there are important exceptions to the principle, and the one of particular significance in the present case is furnished by Section 3 of the Act, which as far as material, reads:

Clause 3, or sub-section 3:

Since it is the claimant's case that 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, the nature of their activities falls within the exception to the immunity which I have just read, and in my judgment their point is made good.

As far as the substance of the matter is concerned, KAC have reminded me of a number of decisions which deal with the principles to be applied when considering the liability of non-parties for costs, and in particular Dymocks Franchise Systems (NSW) Pty vs Todd (2204) UKPC 39, [2004] 1 Weekly Law Reports 2807, and R + V Versicherung AG vs Risk Assurance [2005] EWHC 2586 (Comm). The features of the present litigation which are said to fully justify an order against the Republic, albeit it was not an active party to the suit (although ironically the Republic was named as a defendant in the original proceedings, but it did not prove possible to effect service upon the Republic) are in effect threefold. Firstly, the Republic of Iraq was the source, and indeed the only source, of funding of this litigation in the form of the defence by Iraqi Airways Company. There are numerous references in the statements, and in the correspondence to the effect that IAC had no assets of its own which would enable them to run a defence, and that the funds that they relied upon were furnished from time to time by Iraq. If such funds had not been forthcoming, there was no possibility of them affording a defence. I have been referred to a number of the passages which are relied upon, which make the point entirely clear and beyond contradiction. I don't propose to recite all the passages that I have been shown, but it is sufficient to read one paragraph from the evidence of Mr Kosky, the solicitor retained by the defendants, in an affidavit sworn in November 1997 to this effect:

That state of affairs remained the same throughout the course of the litigation. The scale of the funding is such that IAC has expended not perhaps the same level of costs as have been incurred by KAC but legal costs mounting to tens of millions of pounds. In addition, the only substantial payment in respect of costs paid as a condition for a stay of enforcement of the judgment (pending an appeal by IAC to the House of Lords in the main liability action) was itself furnished by Iraq.

Secondly, not only was Iraq funding this litigation, it was also supervising and controlling it. It was contended that from a very early stage the supervision of this litigation was under the auspices of the very highest levels of the state of Iraq. The defendants have produced only very recently under cover of a letter dated 27 May 2008, a memorandum of the Cabinet of the Republic of Iraq dated 30 December 1991, addressed to all ministries and to amongst others, Iraqi Airways Company, a notification, and I quote:

Thereafter, there are named various senior officials from the Cabinet Office, from the Ministry of Justice, from the Central Bank, from the Ministry of Foreign Affairs, together with some, no doubt, state owned insurance banking companies. In fact, that picture had emerged, although perhaps not in its fullness, in the course of the litigation, when it was made plain through both correspondence and through affidavits furnished on behalf of IAC, that the conduct of the litigation was in the hands of Government authorities. For instance, in a statement of a Mr Esho made in December 2004 in his capacity of Deputy Director General of IAC, he described himself, amongst other things, as being the chairman of a special committee of IAC, which was established, he says, in mid 2004 to coordinate with the legal department of the Ministry of Justice in the conduct of the litigation brought by the claimant against IAC. Thereafter, in the same affidavit, he explains that the litigation was, and I quote:

To the same effect, a Mr Kadoon, who was the Director General of the legal department of the Iraqi Ministry of Justice made a statement again in 2004, which explained, amongst other things, that the legal department of which he was the Director General:

The third feature which is of great significance in the context of this application, is that the state of Iraq was intimately involved in the preparation of material in purported support of the defence, which was being made by IAC to the effect that the takeover of the Kuwaiti fleet of aircraft was by way of an exercise of the powers of the state of Iraq, a proposition that was successful in the initial stages, but slowly unravelled. The reason that it was unravelled was that material emanating directly from offices of the state of Iraq was false, and was put forward by way of a bogus defence of a claim. The most striking examples of this were firstly evidence that was adduced by IAC from Mr Al-Zubaidi. Mr Al-Zubaidi was the Deputy Prime Minister in July 2000. The Minister of Transport had invited him to furnish some assistance to IAC, in defending the claimant's petition to the House of Lords in regard to sovereign immunity. He furnished a statement in response to the invitation to deal with various matters, which as I have stated in my judgment in Perjury 2, dated 14 November 2005, was almost entirely false. Indeed, the contents were accepted to be untrue by IAC by the time that hearing got underway.

The second feature of the unattractive involvement of the state of Iraq in the litigation relates to the dispute that arose with regard to the spares, which KAC alleged had been pillaged by IAC and removed from Kuwait into Iraq. The defence to that claim was broadly to the effect that the spares, at the end of the hostilities, had been returned, but in fact it emerged as a result of the investigations of KAC and public spirited people who furnished assistance to KAC, that far from having been returned, the state of Iraq had given instructions sometime in March 2003 to IAC for the destruction or disposal of the spares in Iraq, with the aim of preventing the discovery of such spares. In due course, as I say, that state of affairs was unearthed and the immediate consequence was that IAC admitted liability in the Spares action, an admission which had been effectively postponed by the activities of the state of Iraq in seeking to disguise the true state of affairs.

Having regard to the authorities to which I have been referred, I have no doubt at all that this is a proper case for the award of costs against the state of Iraq, despite the fact they were not parties to the proceedings. They are not, as I have found, just funders of the litigation, they supervised, they controlled it, they were to all intents and purposes the purported beneficiary of any successful defence, and to that end they assisted in posing an entirely false defence to the claim. For all those reasons, I have not seen any good grounds for exercising the discretion in any other way. The claimants are entitled to an order that the state of Iraq pay the costs.