T-1645-81
Lorac Transport Ltd. (Plaintiff)
v.
Owners and all those interested in the cargo ex the
ship Atra, Satkab Co., Ministry of Energy, Islamic
Republic of Iran (Defendants)
Trial Division, McNair J.—Saint John, New
Brunswick, September 12, 1983; Ottawa, April 12,
1984.
International law — Sovereign immunity — Sale of goods
to Iranian corporation — Goods unable to be shipped due to
war — Transport company claiming lien on cargo and suing
under contract of affreightment — Defendant moving for
dismissal of action for sovereign immunity as defendant
department of Iranian government — Defendant's articles of
association stating objects including carrying on any commer
cial activity — Statutory declarations defendant government
department not conclusive — Trend against applying sovereign
immunity doctrine to commercial transactions of foreign gov
ernmental agencies — Cases demonstrating trend reviewed —
Alter ego test — Motion dismissed.
Jurisdiction — Federal Court — Trial Division — Interpre
tation of s. 43(3) of Act — Section providing Court not
exercise jurisdiction in rem re claims in s. 22(2) unless
subject-matter owned by same person as when cause of action
arose — Jurisdictional requisite aimed at action rather than
warrant — Jurisdictional criterion satisfied by allegation re
ownership in statement of claim — Federal Court Act, R.S.C.
1970 (2nd Supp.), c. 10, ss. 22(2), 43(3).
Practice — Service of warrant — Rules not requiring exhib
it copy be certified — Federal Court Rules, C.R.C., c. 663,
RR. 2, 302, 332(1), 1002(5)(b), 1003(2),(6),(8).
Domtar contracted with the defendant, Satkab, for the sale
of a quantity of impregnated wooden poles. According to the
contract, it was to be governed and interpreted according to
Iranian law. Satkab was defined as meaning the Iranian Minis
try of Energy. The plaintiff, which was not a party to that
contract, chartered the Atra and contracted with Domtar to
transport the goods. The cargo was loaded at Saint John but it
had to be taken off and stored in a warehouse when a war broke
out between Iran and Iraq. The plaintiff claims a lien against
the cargo for amounts due under the contract of affreightment.
It commenced an action and had the cargo arrested. Judgment
in default of defence was obtained. The defendant subsequently
secured an order setting aside the default judgment and giving
leave to file a conditional appearance.
The present motion, by Satkab, is for an order dismissing the
action and for release of security on the following grounds: (1)
lack of jurisdiction in the Court; (2) defective service of the
warrant to arrest the cargo and (3) sovereign immunity of the
defendant as a department of the government of Iran.
Held, the motion should be dismissed with costs.
(1) In arguing lack of jurisdiction, the defendant points to
subsection 43(3) of the Federal Court Act. That subsection
provides that the Court shall not exercise its jurisdiction in rem
with respect to certain claims mentioned in subsection 22(2) of
the Act unless, when the action was commenced, the subject-
matter was beneficially owned by the person who was the
beneficial owner when the cause of action arose. While Rule
1003(1) envisages a warrant for arrest as an ancillary step in an
action already commenced, the defendant makes no such dis
tinction and argues that the matter of jurisdiction goes to the
warrant itself. But the wording of subsection 43(3) suggests
that the jurisdictional requisite is aimed at the action rather
than the warrant. In any event, the jurisdictional criterion was
satisfied by the allegation in the statement of claim that Satkab
was at all material times the owner or beneficial owner of the
cargo.
(2) In support of the contention that service of the warrant
was defective, the defendant notes that Exhibit "A" to the
affidavit of service is not a certified copy of the warrant. There
is, however, nothing in the Rules which requires that the
exhibit copy must be a certified copy of the original docu-
ment—in this case, the warrant for arrest.
(3) The defendant, Satkab, invokes the doctrine of sovereign
immunity and says that the poles belong to the state of Iran. It
contends that it is a department of the Energy Ministry.
Statutory declarations filed by the defendant reveal that
Satkab was incorporated as an electrical material supply and
manufacturing company, the shares of which are held by
regional electrical power companies. The shares of these com
panies are owned by the government of Iran. The officers,
directors and employees of Satkab are Iranian civil servants
paid out of public funds. The company's articles of association
state that its objects include carrying on "any Commercial
activities and transaction". The model portrayed is thus that of
a commercial corporation. The statutory declarations to the
effect that Satkab is a government department must be accord
ed due weight but they are not conclusive and have to be
weighed against the remainder of the documentary evidence. A
review of all the evidence would indicate whether Satkab was
under governmental control and exercised government func
tions to such extent as to constitute it a department of state in
the real and not fictional sense.
There has been a developing trend against applying the
doctrine of absolute sovereign immunity to ordinary commer
cial transactions engaged in by foreign governments or their
agencies. Reference might be made to the case Flota Maritima
de Cuba in which Ritchie J. quoted from a text writer to the
effect that the expansion of economic activities by the modern
state was such as to render unworkable a rule granting to the
state operating as a trader a privileged position as compared
with private traders. In Gouvernement de la République
Démocratique du Congo v. Venne, Laskin J. in a strong dissent
ing opinion, wrote that the doctrine of absolute sovereign
immunity was a spent force. The République du Congo case
was to be distinguished from the case at bar since the subject-
matter of the former was fully arrayed in the vestments of
sovereign authority.
Also of interest was the Ferranti-Packard case in Ontario in
which it was held that the New York State Thruway Authority
could be impleaded in that Province since it was not the alter
ego or organ of the State. The Court took into consideration the
Authority's separate function, the nature of its commercial
activity and its independent initiative in establishing policy and
carrying out its responsibility.
In the I Congreso, Lord Denning of the Court of Appeal
approved a statement of law, made a century ago, to the effect
that a prince might not "assume the character of a trader,
when it is for his benefit; and when he incurs an obligation to a
private subject to throw off ... his disguise, and appear as a
sovereign, claiming ... all the attributes of his character".
The case law has come to the point where the doctrine of
absolute sovereign immunity no longer applies to the commer
cial transactions of foreign governments or their agencies unless
such transactions are clearly of a governmental or sovereign
character. And for sovereign immunity to succeed in cases
where a state has set up a separate legal entity to transact
business in the market place, it must be shown that the legal
entity, on the tests of function and control and not mere status,
is the alter ego or emanation of the state itself.
On broad principle, the defendant could not sustain a claim
to sovereign immunity for the whole subject-matter possessed
all the attributes of a private commercial transaction and fell
outside the sphere of governmental activity.
The same result must be reached upon an application of the
alter ego test. A study of the objectives, powers and share
structure of the defendant led to the conclusion that whatever
governmental role it played, that was insufficient to render it a
mere functionary of the State of Iran.
CASES JUDICIALLY CONSIDERED
APPLIED:
The Philippine Admiral, [1977] A.C. 373 (P.C.); Trend -
tex Trading Corporation v. Central Bank of Nigeria,
[1977] 1 Lloyd's Rep. 581; [1977] 1 Q.B. 529 (C.A.);
Ferranti-Packard Ltd. v. Cushman Rentals Ltd. et al.
(1980), 115 DLR (3d) 691 (Ont. H.C.); I Congreso del
Partido, [1981] 3 W.L.R. 328 (H.L.); The Charkieh
(1873), L.R. 4 A. & E. 59.
NOT FOLLOWED:
Baccus S.R.L. v. Servicio Nacional del Trigo, [1957] 1
Q.B. 438; [1956] 3 All E.R. 715 (C.A.).
DISTINGUISHED:
Mellenger v. New Brunswick Development Corpn.,
[1971] 1 W.L.R. 604; [1971] 2 All ER 593 (C.A.); Flota
Maritima Browning de Cuba S.A. v. Republic of Cuba,
[1962] S.C.R. 598; 34 DLR (2d) 628; Gouvernement de
la République Démocratique du Congo v. Venne, [1971]
S.C.R. 997; 22 DLR (3d) 669.
REFERRED TO:
Waterside Ocean Navigation Co., Inc. v. International
Navigation Ltd., [1977] 2 F.C. 257 (T.D.); Fowler &
Wolfe Manufacturing Co. and the Dominion Radiator
Co., Ltd., v. The Gurney Foundry Co., Ltd. (1913), 14
Ex.C.R. 336; Fredericton Housing Ltd. v. The Queen,
[1973] F.C. 681; 40 DLR (3d) 392 (C.A.).
COUNSEL:
Gerald M. Lawson and Christopher M.
Correia for plaintiff.
Robert Jette and Frederick Welsford for
defendants.
SOLICITORS:
Lawson & Lawson, Saint John, New Bruns-
wick, for plaintiff.
Clark, Drummie & Co., Saint John, New
Brunswick, for defendants.
The following are the reasons for order ren
dered in English by
McNAIR J.: This is a motion by the defendant,
Satkab Co., for an order for dismissal of the
plaintiff's action and the release of security on the
grounds of lack of jurisdiction in the Court, defec
tive service of the warrant to arrest the cargo of
the ship Atra and the sovereign immunity of the
defendant, Satkab Co., as a department of the
government of the Islamic Republic of Iran. The
motion was heard at Saint John, New Brunswick,
on September 12, 1983, and was contested by the
plaintiff. Initially, the defendant took exception as
well to irregularities in the service of the statement
of claim but this ground of objection was aban
doned on the strength of a curative affidavit filed
at the hearing.
The subject of the action is a cargo of impreg
nated wooden poles ex the ship Atra. The contract
for purchase of the poles was dated October 16,
1979. It was made between the defendant, Satkab
Co., and Domtar Inc. The contract defines Satkab
Co. to mean the Ministry of Energy of the Islamic
Republic of Iran. Satkab Co. signed the contract
in that capacity. The price for the supply and
delivery of the wooden poles was $1,603,025. The
law governing the contract and its construction
was declared to be that of Iran. Delivery was to be
made to one or other of two specified southern
Iranian ports. The plaintiff was not a party to this
contract for the supply and delivery of poles.
The plaintiff chartered the ship Atra under a
charter-party made with the owner on July 21,
1980. The shipper, Domtar Inc., through its agent,
entered into a contract of affreightment with the
plaintiff for carriage of the wooden pole cargo. A
bill of lading was issued on September 16, 1980.
The cargo was loaded on board the Atra at the
port of Saint John during the period September
19, to October 2, 1980. The bill of lading was
negotiated and the defendant, Satkab Co., became
the holder thereof. On September 22, 1980, war
broke out between Iran and Iraq. Because of the
war risk, the cargo of poles was discharged from
the ship at Saint John and placed in the custody of
a warehouseman. This occurred over the period
from November 26, 1980 to January 21, 1981. The
plaintiff claimed a lien against the cargo under
clause 12 of the bill of lading for amounts claimed
to be due under the contract of affreightment and
costs and expenses in connection therewith. The
total amount claimed was $565,718.64 plus inter
est thereon.
On February 26, 1981, the plaintiff commenced
action against the defendant by filing its statement
of claim. The plaintiff caused the cargo to be
arrested by warrant of the same date. The defend
ant posted as security a guarantee of the Toronto-
Dominion Bank for $650,000. In consequence, the
plaintiff applied for release of the cargo. By order
or direction of the Court made on January 7, 1982,
the cargo was released from arrest conditional
upon payment of sheriff's fees and charges
incurred in connection therewith.
In the meantime, other events had occurred.
Judgment in default of defence was entered
against the defendant on April 6, 1981, with dam-
ages to be assessed. The defendant brought on a
motion for stay of the assessment. An order was
made on May 4 staying the assessment for 20 days
on terms as to costs. The defendant then brought
on a motion for an order setting aside the default
judgment given by Addy J., and an order giving
leave to file a conditional appearance. The motion
was heard by Walsh J., on May 22, 1981, and an
order was made setting aside the default judgment
on terms that the defendant pay to the plaintiff its
taxed costs of the default judgment, the assess
ment of damages, and the motion to set aside. The
order gave the defendant leave to file a conditional
appearance within five days after payment of such
costs. The conditional appearance was not filed
until May 6, 1983. These were the essential facts
of the case when the motion for dismissal was
made.
The first objection goes to the jurisdiction of the
Court. The defendant relies here on subsection
43(3) of the Federal Court Act [R.S.C. 1970 (2nd
Supp.), c. 10] which provides that the Court shall
not exercise its jurisdiction in rem with respect to
certain claims mentioned in specified paragraphs
of subsection 22(2) of the Act unless, at the time
of the commencement of the action, the subject-
matter thereof is beneficially owned by the person
who was the beneficial owner at the time when the
cause of action arose. The present action is one in
rem. The subject of the action is within the claim
category of paragraph 22(2)(i) of the Act to which
subsection 43(3) relates. This paragraph catego
rizes claims arising out of any agreement relating
to the carriage of goods in or on a ship or to the
use or hire of a ship whether by charter-party or
otherwise. The defendant contends that those
interrelated statutory provisions mandatorily
require that the Court be satisfied before exercis
ing its arrest jurisdiction in rem that the property
sought to be arrested is beneficially owned by the
person who was the beneficial owner at the time
when the cause of action arose.
Rule 1002 [Federal Court Rules, C.R.C., c.
663] distinguishes actions in rem and in personam.
Subrule 1002(5) prescribes the mode for service of
the statement of claim in an action in rem.
Rule 1003 deals with arrest proceedings. Sub-
rule 1003 (1) states:
Rule 1003. (1) In an action in rem, a warrant for the arrest of
property may be issued at any time after the filing of the
statement of claim or declaration.
Clearly, the subrule envisages a warrant for
arrest as an ancillary step or proceeding in an
action already commenced. The defendant makes
no such distinction and argues that the matter of
jurisdiction goes to the warrant itself. I consider
that some controlling import must be ascribed to
the words "the commencement of the action" and
"the subject of the action" in subsection 43(3) of
the Act. It is my opinion that the jurisdictional
requisite is aimed at the action and not the war
rant for arrest exercised under its ægis. Moreover,
paragraph 5 of the statement of claim alleges as
follows:
5. The said Bill of Lading was in due course negotiated and
Satkab Co. is the holder thereof; it is a corporation having an
office in the City of Tehran in the Country of Iran and was at
the time the cause of action herein arose and, at all material
times since, has been and still is the owner or beneficial owner
of the said cargo.
This pleaded allegation is sufficient to satisfy the
jurisdictional criterion in terms of the commence
ment of action. If at the later stage of trial it
transpires that the proven facts do not support this
allegation then that is another matter and the
plaintiff will have his remedy. It is well settled that
the Court will not stop a proceeding and deny a
plaintiff the right to have a case heard unless it is
clear that the action is frivolous or vexatious or
that the plaintiff has no reasonable cause of action
and that to permit the action to proceed is an
abuse of its process.'
For the foregoing reasons, I reject this objection.
It necessarily follows that the defendant's objec
tion that the affidavit to lead warrant was sworn
anteriorly on January 26, 1981, before the actual
institution of action, also fails.
1 Waterside Ocean Navigation Co., Inc. v. International
Navigation Ltd., [1977] 2 F.C. 257 (T.D.), at p. 259.
The defendant launches a further attack on the
affidavit to lead warrant. Paragraph 6 of the
affidavit of John E. Frawley, President of the
plaintiff, says:
6. I believe the said cargo is now beneficially owned by the
same person who was the beneficial owner thereof at the time
when the cause of action herein arose.
The defendant objects that this statement of
belief does not disclose the affiant's grounds of
belief as prescribed by subrule 332(1).
Subrule 1003(2) sets out the requirements for
an affidavit to lead warrant. The affidavit here
must show (a) the name, address and occupation
of the applicant for the warrant; (b) the nature of
the claim; (c) that the claim has not been satisfied;
and (d) the nature of the property to be arrested.
There is nothing requiring disclosure of the benefi
cial ownership of the property to be arrested.
Surely, if this were a necessary averment the
subrule would have said so. The lack of grounds of
belief in paragraph 6 of the affidavit to lead
warrant is not a fatal objection because the
impugned paragraph is extraneous and severable
from the rest of the affidavit. In all else the
affidavit is sufficient. Accordingly, I must con
clude that the affidavit to lead warrant is not
defective on this ground.
The defendant next objects that service of the
warrant was defective as appears from the affida
vit of service of Deputy Sheriff M. Frank Crilley.
One basis of objection seems to be that the Exhibit
"A" annexion to the affidavit of service is not a
certified copy of the warrant. The defendant con
tends that there is a complete lack of proof as to
how service of the warrant was effected.
Subrule 1003(6) requires that the warrant be
served in the manner prescribed for service of a
statement of claim or a declaration in an action in
rem. This invokes paragraph 1002(5)(b) which
provides that the statement of claim shall be
served on an off-ship cargo by attaching a certified
copy of the statement of claim to such cargo and
leaving the same attached thereto.
Paragraph 1 of the affidavit of service deposes
that on February 26, 1981, two certified copies of
the warrant filed in the cause on the same date
were posted on the cargo "... Ex the Ship `ATRA'
at Pugsley C, Saint John, N.B.".
Paragraph 2 of the affidavit identifies the
Exhibit "A" annexion as a true copy of the origi
nal of the warrant.
Form 3 to the Rules prescribes the form of an
affidavit of service. Paragraph 2 of the Form
reads:
2. That a copy of the said ... is Exhibit (A) to this my
affidavit.
This is what the affidavit of Deputy Sheriff
Crilley says. The affidavit further says that the
certified copy so served was authenticated by the
signature of a prothonotary of the Court and was
stamped with the seal of the Court.
I can find nothing in the Rules which requires
that the exhibit copy of what was served must be a
certified copy of the original document, in this
case, the warrant for arrest. The objection there
fore fails.
The defendant further objects that it appears
from the documents on file that no certified copy
of the warrant was ever issued by the Registry and
that, in consequence, no certified copy could have
been served on the cargo in the manner prescribed
by the Rules. There is a certificate of the Deputy
Clerk of Process, M. V. George, to the effect that
the original warrant was filed in the Registry on
March 2, 1981, meaning the Saint John office of
the Court. There is also the certificate of the
Registry Officer, Donna C. Brierley, that the
original warrant for arrest was filed of record in
the Registry on April 6, 1981. Obviously, this
alludes to the principal office of the Court in
Ottawa. In my view, the filing of the warrant in
the Saint John office on March 2, 1981 effectively
complied with the requirement for filing and also
circumvented the "forthwith" requirement of sub-
rule 1003(8). The date discrepancies are immateri
al. One thing is clear—the original warrant for
arrest was filed in the Saint John Registry after its
issuance on February 26, 1981. This in no way
precludes the certification of service copies on the
issuance date.
Rule 2 is the interpretative one. It defines certi
fied copy as follows:
Rule 2. ...
"certified copy" of a document, in the case of a document in
the custody of the Registry, means a copy of the document
certified by an officer of the Registry;
The word "custody" is capable of various shades
of meaning. It can be fleeting or momentary in
contrast to the connotation of permanency. The
defendant seems to ascribe to custody the meaning
of being permanently on file and proceeds from
that premise to draw the assumptive inference that
a certified copy of the warrant could not possibly
have been served. Whatever the case, I am not
prepared to go that far in the face of the affidavit
of service which does depose that certified copies
of the warrant were posted on the cargo. The fact
that two were posted instead of one is inconsequen
tial. In my opinion, there is nothing of substance to
belie the fact that certified copies of the warrant
for arrest were properly issued and served on
February 26, 1981, and that the original warrant
was shortly afterwards filed in the Registry. The
only defect I perceive in the service of the warrant
is the inconsistency disclosed by paragraph 1 of the
affidavit of service to the effect that the original
warrant was filed in the cause on February 26,
1981.
Rule 302 deals with formal objections and com
pliance requirements. Paragraph (a) states that no
proceeding shall be defeated by any merely formal
objection.
Paragraph (b) of the Rule provides that non
compliance with any of the Rules or with any rule
of practice for the time being in force shall not
render any proceedings void unless the Court shall
so direct. It goes on to further provide that such
proceedings may be set aside either wholly or in
part as irregular, or amended, or otherwise dealt
with in such manner and upon such terms as the
Court shall think fit.
Paragraph (c) says in part that no application to
set aside any proceeding for irregularity shall be
allowed unless made within a reasonable time.
The case has been before the Court since the
commencement of action and warrant for arrest on
February 26, 1981. The conditional appearance
was not filed until May 6, 1983. The defendant
now comes, two and a half years later, and objects
that the arrest proceedings are void ab initio
because of fatal defects in service of the warrant.
The practice of this Court, like that of its prede
cessor, is to administer justice between the parties
and not to defeat any proceedings on merely
formal objections. 2
It is my opinion that the incorrect averment in
the affidavit of service as to filing of the warrant
on February 26, 1981, and the related objections
as to the issuance and service thereof are at most
mere irregularities and not fatal defects. Accord
ingly, these grounds of objection must also fail.
Finally, the defendant, Satkab Co., invokes the
doctrine of sovereign immunity and says that the
wooden poles which were arrested are the property
of the sovereign state of Iran. It contends that it is
a department of the Ministry of Energy and hence
is part and parcel of the government of Iran. In
support of this, the defendant filed solemn declara
tions on the part of M. Hossien Adeli, Chargé
d'affaires of the Embassy of the Islamic Republic
of Iran, Dr. Assad Alizadeh Nobarian, a member
of the Managing Board and Chief of the Contract
Department of the defendant, and M. H. Fadai
Fard, Second Secretary of the Iranian Embassy.
The facts established by these statutory declara
tions can be summarized as follows.
Satkab Co. was incorporated as an electrical
material supply and manufacturing company
under the laws of Iran. It has a share capital of
550 fully paid shares. The shares are held by other
regional electrical power companies. The shares of
these other companies are owned by the govern
ment of Iran and -are non-transferable. The offi
cers, directors and employees of Satkab Co. are
said to be Iranian civil servants whose salaries are
paid out of public funds. The articles of association
2 Fowler & Wolfe Manufacturing Co. and the Dominion
Radiator Co., Ltd., v. The Gurney Foundry Co., Ltd. (1913),
14 Ex.C.R. 336; Fredericton Housing Ltd. v. The Queen,
[1973] F.C. 681; 40 DLR (3d) 392 (C.A.).
of the company provide for a managing director,
an auditor, a board of directors and ordinary and
extraordinary general meetings of shareholders.
The model portrayed is that of a commercial
corporation. Article 4 defines the object for which
the company was incorporated as follows:
To supply, whether by wholesale or by retail, prepare, clear and
deliver any kinds of goods, machinery, instruments, and devices
for generating, transfering and distributing electric power and
to provide and distribute water as required by Regional Water
and Power Companies, water and power Organizations or other
Governmental or non-governmental institutions. To provide
such services the Company is authorized to carry on any
Commercial activities and transaction, investment, to enter into
partnership of manufacturing companies which produce ma
terials for securing water and power for the Country, and to
purchase raw materials to meet their requirements. [Under-
lining added.]
Article 13 sets out the routine business for a
general meeting of shareholders. Clause (b) of this
Article refers to the election of the board of direc
tors. Clause (e) deals with the manner of distribu
ting the profit. Clause (h) of Article 13 provides as
follows:
Determining salaries, allowances and Bonus of the members of
the Board of Directors and Managing Director, with due regard
to the criteria approved by the Council of Salary and Remuner
ation, and the Auditor's fees.
The managing director is the key executive and
legal representative of the company and is given
extensive powers. It is of some significance that he
is selected by the board of directors and is not a
representative of the shareholders.
Article 16 provides:
Minister of Power, Minister of Economic and Financial Affairs
and one or several other Minister determined by the council of
Ministers or their representatives represent the Government's
Shares at the General Meetings, whether Ordinary or Extra
Ordinary Meeting, Minister of Power And the Superintendent
of Ministry of Water and Power will reside [sic] the General
Meetings.
Under Article 26, the company, through its
managing director, may defend, pursue and insti
tute penal or civil lawsuits.
Article 31 provides that the net profit, after
deducting a five per cent reserve, shall be dis
tributed among the shareholders and may, with
the approval of the general meeting, be transferred
to a capital increase account.
Article 68 of the Public Accounts Act pertains
to commercial transactions of ministries and gov
ernmental agencies. Generally, these are to be
conducted on the basis of high or low bid tender,
save for a number of enumerated exceptions. None
of the exceptions relate directly to state-controlled
power and communication facilities.
The statutory declaration of Dr. Nobarian says,
inter alia, that Satkab Co. was established for the
sole purpose of acting as a national purchasing and
distributing organization to supply the regional
electrical power companies and that it is the
agency through which the Government of Iran is
implementing a policy of upgrading its electrical
distribution system. The declaration of M. H.
Adeli reaffirms this and says that the sole reason
for the defendant's existence is to serve the public
interest of Iran. The statutory declaration of M.
H. Fadai Fard certifies that Satkab Co. constitutes
a department of the government of the Islamic
Republic of Iran, being a Department of the Min
istry of Energy thereof, exercising the rights of a
legal entity, and that the officers and employees of
Satkab Co. are employees of the government of
the Islamic Republic of Iran. Such certification
must be accorded due weight but it is by no means
conclusive. It has to be weighed against the articles
and other related documents contained in various
exhibits to the statutory declarations.
The test to be applied lies in the realm of
function and control. It is necessary to look to all
the evidence to see whether the defendant was
under governmental control and exercised govern
ment functions to such extent as to constitute it a
department of state in the real and not fictional
sense.
The plaintiff admits that the poles are the prop
erty of the defendant, Satkab Co., but denies that
they are the property of the Islamic Republic of
Iran. The issue is thus defined.
I reviewed carefully the authorities cited by both
counsel. Counsel for the defendant placed much
reliance on Baccus S.R.L. v. Servicio Nacional del
Trigo, 3 Mellenger v. New Brunswick Development
Corpn., 4 Flota Maritima Browning de Cuba S.A.
v. Republic of Cuba, 5 and Gouvernement de la
République Démocratique du Congo v. Venne. 6
Counsel for the plaintiff stressed particularly
Trendtex Trading Corporation v. Central Bank of
Nigeria,' Ferranti-Packard Ltd. v. Cushman
Rentals Ltd. et al. 8 and I Congreso del Partido. 9
There had been developing over the years a
discernible trend of opinion against applying the
doctrine of absolute sovereign immunity to ordi
nary commercial or trading transactions engaged
in by foreign governments or their agencies. Schol
ars and some jurists spoke favourably of a restric
tive theory of sovereign immunity where the
subject-matter was purely commercial.
The question was canvassed in Baccus S.R.L. v.
Servicio Nacional del Trigo. The plaintiff brought
an action against the defendant for damages for
breach of a contract for the sale of rye. The
defendant had corporate status by the laws of
Spain and there was evidence that it was a depart
ment of the Spanish Ministry of Agriculture, not
withstanding its separate juristic personality. The
majority of the Court held that a foreign depart
ment of state did not lose its sovereign immunity
because it conducted some of its trading activities
through a separate legal entity. Singleton L.J.,
dissented on the ground that it would be wrong to
extend the principle of sovereign immunity to a
corporation or legal entity set up by a sovereign
state, even though it be a department of state,
where the activity involved is one of a commercial
or trading nature.
3 [1957] 1 Q.B. 438; [1956] 3 All E.R. 715 (C.A.).
' [1971] 1 W.L.R. 604; [1971] 2 All ER 593 (C.A.).
5 [1962] S.C.R. 598; 34 DLR (2d) 628.
6 [1971] S.C.R. 997; 22 DLR (3d) 669.
7 [1977] 1 Lloyd's Rep. 581; [1977] 1 Q.B. 529 (C.A.).
8 (1980), 115 DLR (3d) 691 (Ont. H.C.).
9 [1981] 3 W.L.R. 328 (H.L.).
Parker L.J., speaking for the majority, entered
this significant caveat ([ 1956] 3 All E.R. 715, at
page 736):
I do not think that our decision involves an extension of the
recognition of sovereign immunity, because on this basis the
defendants are a department of the state. They are not a
company limited by shares, in which the state holds the whole
or a controlling interest, and they are not a body which for that
or some other reason is wholly distinct from the state. If that
were so, as it seems to me that was so in the American case to
which SINGLETON, L.J., has referred then to grant sovereign
immunity to such a body would be a real extension of the
principle. [Underling added.]
Mellenger v. New Brunswick Development
Corpn. formulated new guidelines for testing the
applicability of the doctrine of sovereign immunity
to a statutory corporation established to promote
industrial development on behalf of the govern
ment of New Brunswick. The corporation's activi
ties were subject to the approval of the govern
ment. The evidence showed that the corporation
had never engaged in trading or commercial activi
ties. The corporation had no issued capital. The
plaintiffs sued for commission for introducing a
commercial enterprise in New Brunswick. The
government itself was the party involved in the
contract transactions and the Premier of New
Brunswick played a leading role in the negotia
tions. The corporation had not contracted with
anyone. The Court held that sovereign immunity
availed to the defendant corporation on the
grounds that it was the same as a government
department in carrying out government policy and
was, to all intents, the alter ego and part and
parcel of the government of New Brunswick.
The restrictive theory gained further promi
nence in The Philippine Admiral. 10 Here the Privy
Council held that the doctrine of absolute sover
eign immunity did not apply to an action in rem
involving a government ship engaged in ordinary
trade on the ground that [at page 403]:
... the restrictive theory is more consonant with justice ....
10 10 [1977] A.C. 373 (P.C.).
Their Lordships took the view, however, that the
absolute theory still applied to actions in
personam.
Then along came Trendtex Trading Corpora
tion v. Central Bank of Nigeria. The defendant
bank had been incorporated by a Nigerian statute
as a central bank. It issued legal tender and acted
as banker and financial advisor to the Government
of Nigeria, besides acting for other banks. Its
affairs were under considerable governmental con
trol. The bank issued an irrevocable letter of credit
to the plaintiff to pay for cement which the plain
tiff had sold to an English company. The cement
was destined for use in the building of army
barracks. It was shipped to Nigeria under a con
tract of purchase with the Ministry of Defence.
There was congestion at the port of discharge and
claims for demurrage resulted. The bank declined
to honour the letter of credit and the plaintiff sued.
The plaintiff's claim was founded on the breach of
the letter of credit as a separate commercial con
tract. The bank claimed sovereign immunity as a
department of the Government of Nigeria, not
withstanding its separate legal entity status. The
argument was that the bank was so subordinated
to the Government of Nigeria as to be part and
parcel thereof. The Court of Appeal applied the
Mellenger test of looking to the functions and
control of the bank and rejected this contention. It
held that the bank, which had been created as
separate legal entity with no clear expression of
intent that it should have governmental status, was
not the emanation, alter ego or department of the
federation of Nigeria. Stevenson L.J., rested his
decision on this ground alone. His colleagues, Lord
Denning M.R. and Shaw L.J., took the view that
even if the bank were part of the Government of
Nigeria it would not be immune from suit in
respect of the letter of credit because of the ordi
nary commercial aspect of the transaction as dis
tinct from acts of a governmental nature. Lord
Denning ventured even farther by stating that he
preferred to rest his decision on the ground that
there was no immunity in respect of commercial
transactions, even for a government department.
Coming closer to home, the case at bar is not
like the situation in Flota Maritima de Cuba
where the Supreme Court of Canada held that the
arrested ships were the property of the Republic of
Cuba and necessarily had to be treated as public
ships in the traditional sense so as to be immune
from arrest under the doctrine of sovereign
immunity. The majority were doubtful whether the
doctrine applied to the property of a foreign state
used only for commercial purposes. Ritchie J.,
quoted several excerpts from the works of recog
nized authors on international law. One was from
Oppenheim's International Law, 8th ed., 1955,
Vol. 1, at page 273, where it was said:
... the vast expansion of activities of the modern State in the
economic sphere has tended to render unworkable a rule which
grants to the State operating as a trader a privileged position as
compared with private traders. Most States, including the
United States, have now abandoned or are in the process of
abandoning the rule of absolute immunity of foreign States
with regard to what is usually described as acts of a private law
nature. The position, in this respect, in Great Britain must be
regarded as fluid.
This was followed by Gouvernement de la
République Démocratique du Congo v. Venne
where the majority of the Supreme Court held that
the contractual dispute between the architect and
the Congo for its national pavilion at Expo 67 was
made by a foreign sovereign in the performance of
a public act of state and could not be impleaded in
our courts. Laskin J. [as he then was], with whom
Hall J., concurred, wrote a very strong dissenting
judgment. The learned Judge viewed the claim to
immunity from the standpoint of function rather
than status and concluded that the doctrine of
absolute sovereign immunity was a spent force.
The rationale of his dissent is contained in the
following passage at page 1020:
The considerations which, in my view, make it preferable to
consider immunity from the standpoint of function rather than
status do not rest simply on a rejection of the factors which had
formerly been said to underlie it. Affirmatively, there is the
simple matter of justice to a plaintiff; there is the reasonable
ness of recognizing equal accessibility to domestic courts by
those engaged in transnational activities, although one of the
parties to a transaction may be a foreign State or an agency
thereof; there is the promotion of international legal order by
making certain disputes which involve a foreign State amenable
to judicial processes, even though they be domestic; and, of
course, the expansion of the range of activities and services in
which the various States today are engaged has blurred the
distinction between governmental and non-governmental func-
tions or acts (or between so-called public and private domains
of activity), so as to make it unjust to rely on status alone to
determine immunity from the consequences of State action.
In my view, these two Supreme Court of
Canada cases are clearly distinguishable from the
case at bar because the subject-matter was in each
case fully arrayed in the vestments of sovereign
authority.
This brings us to the innovative case of Ferran-
ti-Packard Ltd. v. Cushman Rentals Ltd. et al.
The issue here was whether the doctrine of sover
eign immunity applied so as to protect the New
York State Thruway Authority from being imp-
leaded in a suit in the Ontario High Court of
Justice, Divisional Court, for damage to the plain
tiff's electrical transformers as the result of an
accident while being transported along the
Authority's highway. The theories of absolute and
restrictive sovereign immunity were fully expound
ed but the Court chose to dispose of the matter in
terms of the doctrine of absolute immunity as
stated by Lord Denning in the Trendtex Trading
case, at page 559:
The doctrine grants immunity to a foreign government or its
department of state, or any body which can be regarded as an
"alter ego or organ" of the government.
The Court then proceeded to apply the control
and function test prescribed by that case. This
raised the determinative question of whether the
Authority was under the complete control of the
state of New York in the sense of being its alter
ego or organ.
The Authority was a public statutory corpora
tion charged with the responsibility of construct
ing, maintaining and operating a throughway
system in the State of New York. The creating
statute gave the Authority power, inter alia, to
acquire real property, make contracts, fix and
collect fees and charges for the use of the through
way and issue securities. It declared that officers
and employees of state departments and agencies
could take employment with the Authority without
loss of any civil service status or rights. The statute
expressly provided that the Authority was to be
regarded as performing a governmental function in
carrying out its corporate purpose and in exercis
ing its powers. The Court held that the Authority
was not the alter ego or organ of the State of New
York and was thus not protected by the doctrine of
sovereign immunity, having regard to its separate
function, the nature of its commercial activity, and
its independent initiative in establishing policy and
carrying out its responsibility. Leave to appeal to
the Ontario Court of Appeal was refused: (1981),
123 D.L.R. (3d) 766.
In the I Congreso the House of Lords affirmed
the restrictive doctrine of sovereign immunity with
respect to the commercial transactions of foreign
states. The case started with a commercial con
tract for the sale of sugar made between a Cuban
state trading enterprise and a Chilean one. The
sugar was loaded on two vessels, one owned by the
Republic of Cuba and operated by a Cuban state
shipping enterprise and the other under charter to
the Cuban shipping enterprise. Charter-parties
were entered into whereby the sugar cargoes were
shipped on the two vessels destined for Chile. A
coup d'état toppled the government of Chile. A
new government, of which the government of Cuba
strongly disapproved, took power. Diplomatic rela
tions between Chile and Cuba were terminated.
The two vessels were diverted on orders of the
Cuban government. One returned eventually to
Cuba where its sugar cargo was resold. The other
proceeded to North Vietnam where the sugar
cargo was discharged and donated to the people of
that country as a gift. The I Congreso del Partido
was being built in England for use in trade. The
Cuban state shipping enterprise initially acquired
title to her but the Republic of Cuba became the
eventual owner. The I Congreso was found, actions
in rem were started arising out of the repudiation
of the sugar contract by Cuba and the ship was
arrested. Cuba brought on motions to set aside the
writs and subsequent proceedings in the actions
and invoked the doctrine of sovereign immunity.
The lower court granted the motion relief sought.
The case was appealed. The Court of Appeal was
equally divided so the appeals were dismissed. The
plaintiffs appealed to the House of Lords. The
appeals were upheld on the broad ground that the
restrictive doctrine of sovereign immunity applied
to displace any absolute immunity with respect to
commercial or trading transactions engaged in by
foreign states or their agencies unless such trans
actions are in the nature of public acts coming
clearly within the sphere of governmental or sover
eign activity.
Lord Bridge of Harwich, in alluding to the
difficulty that had generally been encountered in
the problem of attempting to delimit the absolute
immunity doctrine within reasonable boundaries,
stated in classic terms the present day English
position at page 351:
It does seem to me that two propositions can be derived from
the relevant authorities which may often, and do in this case,
provide a useful guide in deciding whether or not a claim to
sovereign immunity can be sustained. First, if a sovereign state
voluntarily assumes a purely private law obligation, it cannot,
when that obligation is sought to be enforced against it, claim
sovereign immunity on the ground that the reason for assuming
the obligation was of a sovereign or governmental character.
Example: State A orders uniforms for its army from a supplier
in State B; when sued for the price in the courts of State B,
State A cannot claim immunity on the ground that the mainte
nance of its army is a sovereign function. This is really elemen
tary. But it leads on logically to the second proposition that,
having assumed a purely private law obligation, a sovereign
state cannot justify a breach of the obligation on the ground
that the reason for the breach was of a sovereign or governmen
tal character. Example: State A, having ordered uniforms for
its army from a supplier in State B, repudiates the contract,
when sued in the courts of State B for damages, State A cannot
claim immunity on the ground that, since the placing of the
contract, a government of a new political complexion has made
a sovereign decision, pursuant to a policy of total disarmament,
to disband its army.
In the Court of Appeal disposition of I Con-
greso, Lord Denning, in his affirmative judgment,
approved the statement of law made 100 years or
so before by Sir Robert Phillimore in The Char-
kieh (1873), L.R. 4 A.&E. 59, at pages 99-100:
No principle of international law, and no decided case, and no
dictum of jurists of which I am aware, has gone so far as to
authorize a sovereign prince to assume the character of a
trader, when it is for his benefit; and when he incurs an
obligation to a private subject to throw off, if I may so speak,
his disguise, and appear as a sovereign, claiming for his own
benefit, and to the injury of a private person, for the first time,
all the attributes of his character ....
So the pendulum made full swing and came
back to rest at the proper starting point. In my
opinion, the broad general principle running
through the modern day cases is simply this—the
doctrine of absolute sovereign immunity no longer
applies to the commercial transactions of foreign
governments or their agencies or entities unless
such transactions from the nature of the motivat
ing acts or the subject-matter thereof are clearly of
a governmental or sovereign character. There is,
however, a narrower appendage principle appli
cable to the doctrine of sovereign immunity in
those cases where a state sets up under its aegis a
separate legal entity with authority to transact
business in the marketplace of trade and com
merce. For sovereign immunity to succeed here,
the separate legal entity, on the determinative test
of function and control and not mere status, must
be the alter ego or emanation of the state itself.
In my judgment, the defendant is not entitled to
the benefit of sovereign immunity on the basis of
the broad principle above expounded. It is my
opinion that the whole subject-matter, including
even the contract for the sale and delivery of the
poles, possesses all the attributes of a private com
mercial or trading transaction and falls clearly
outside the sphere of governmental or sovereign
activity.
But there is an alternative ground to which the
other principle applies and by which I would reach
the same result. The focus here must necessarily
be on the contract of affreightment between the
parties as the act forming the basis of the transac
tion in terms of its explicit nature rather than
purpose, and not the contract for the sale and
purchase of poles. The defendant, Satkab Co., was
incorporated under the corporate law of Iran as an
electrical supply and manufacturing company for
the generation and distribution of electric power
and water to governmental or non-governmental
institutions with authority to deal generally in
goods, machinery and devices relating thereto and
to make investments. It had the general authority
to carry on any commercial activities and transac
tions. The defendant was set up as a corporation
having all the ear-marks of commercial activity. It
had a subscribed share capital. Share ownership by
the state was at least one step removed. Clearly,
the defendant had an initiative of its own in terms
of policy and function. Whatever governmental
role the defendant may have fulfilled was not
identifiably positive enough to make it a mere
functionary of the State of Iran. In my opinion,
the defendant was not the alter ego or emanation
of the government of Iran in any real sense. The
defence of sovereign immunity fails on this ground
as well.
Accordingly, the defendant's motion is dis
missed on all counts, with costs to the plaintiff.
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