Bombardier Inc. v. AS Estonian Air et al.

[Indexed as: Bombardier Inc. v. AS Estonian Air]

Ontario Reports

Ontario Superior Court of Justice,

E.M. Morgan J.

May 24, 2013

115 O.R. (3d) 183 | 2013 ONSC 3039

Case Summary

Actions — Bars — State immunity — Republic of Estonia majority shareholder of Estonian airline — Plaintiff entering into agreement with airline for purchase and sale of new aircraft — Airline cancelling order and purchasing aircraft from Brazilian manufacturer — Plaintiff suing republic and airline and alleging that republic's tortious interference caused airline to select Brazilian manufacturer — Claim against republic stayed under State Immunity Act — Plaintiff failing to establish that republic's waiver of state immunity in shareholders' agreement with minority shareholder and airline was intended to bind non-parties to that agreement — Commercial activity exception in s. 5 of State Immunity Act not applying — State Immunity Act, R.S.C. 1985, c. S-18, s. 5.

The Republic of Estonia was the majority shareholder of Estonian Air. The relationship between the republic, Estonian Air and the minority shareholder was governed by a shareholders' agreement that contained a waiver of state immunity. Bombardier entered into an agreement with Estonian Air for the purchase and sale of new aircraft. Estonian Air cancelled the order and purchased aircraft from a Brazilian manufacturer. Bombardier sued Estonian Air and the republic in Ontario. The republic brought a motion for an order permanently staying the action against it on the basis that it had immunity under the State Immunity Act, R.S.C. 1985, c. S-18 ("SIA").

Held, the motion should be granted.

Bombardier failed to establish that the republic's waiver of immunity in the shareholders' agreement was intended to bind non-parties to that agreement. The commercial activity exception in s. 5 of the SIA had no application in this case. The fact that Estonian Air was a state-owned enterprise, and that the republic's investment in the airline was from one perspective a commercial investment, was not itself enough to bring Bombardier's claim within the s. 5 exception. The republic had done nothing in becoming the large majority shareholder in Estonia Air which would deprive it of immunity under the SIA. While Bombardier also alleged that by encouraging Estonian Air to make a deal with the Brazilian manufacturer, the republic overstepped its role as shareholder and involved itself, as government, in a commercial transaction, there was no evidence on this motion that the republic unlawfully interfered with the aircraft purchase. In fact, the evidence tended to point in the opposite direction.

Cases referred to

Active Fire Protection 2000 Ltd. v. B.W.K. Construction Co., 2005 24226 (ON CA), [2005] O.J. No. 2892, 200 O.A.C. 275, 25 C.C.L.I. (4th) 103, 45 C.L.R. (3d) 278, [2006] I.L.R. I-4467, 141 A.C.W.S. (3d) 217 (C.A.); AIG Capital Partners Inc. v. Kazakhstan, [2006] 1 W.L.R. 1420, [2005] EWHC 2239 (Comm.), [2006] 1 All E.R. 284 (Q.B. Div.); Bedessee Imports Ltd. v. Guyana Sugar Corp., [2010] O.J. No. 4575, 2010 ONCA 719, 329 D.L.R. (4th) 382, 90 C.P.R. (4th) 284; Bouzari v. Islamic Republic of Iran (2004), 2004 871 (ON CA), 71 O.R. (3d) 675, [2004] O.J. No. 2800, 243 D.L.R. (4th) 406, 220 O.A.C. 1, 122 C.R.R. (2d) 26, 132 A.C.W.S. (3d) 275 (C.A.); Brown v. Belleville (City) (2013), 114 O.R. (3d) 561, [2013] O.J. No. 1071, 2013 ONCA 148, 302 O.A.C. 354; [page184] C. Czarnikow Ltd. v. Rolimpex, [1979] A.C. 351 (H.L.); Canada Labour Code (Re), 1992 54 (SCC), [1992] 2 S.C.R. 50, [1992] S.C.J. No. 49, 91 D.L.R. (4th) 449, 137 N.R. 81, J.E. 92-919, 92 CLLC Â14,025 at 12137, 33 A.C.W.S. (3d) 1132; Carrato v. United States of America (1982), 1982 2254 (ON SC), 40 O.R. (2d) 459, [1982] O.J. No. 3615, 141 D.L.R. (3d) 456, 17 A.C.W.S. (2d) 275 (H.C.J.); Congo (République Démocratique) v. Venne, 1971 145 (SCC), [1971] S.C.R. 997, [1971] S.C.J. No. 77, 22 D.L.R. (3d) 669; Dadourian Group International Inc. v. Simms, [2009] EWCA Civ. 169 (C.A.), affg [2006] EWHC 2973 (Ch. D.); Ferranti-Packard Ltd. v. Cushman Rentals Ltd. (1980), 1981 1766 (ON CA), 30 O.R. (2d) 194, [1980] O.J. No. 3085, 115 D.L.R. (3d) 691, 19 C.P.C. 132 (H.C.J.); Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., 1999 654 (SCC), [1999] 3 S.C.R. 108, [1999] S.C.J. No. 48, 176 D.L.R. (4th) 257, 245 N.R. 88, [1999] 9 W.W.R. 380, 127 B.C.A.C. 287, 67 B.C.L.R. (3d) 213, 50 B.L.R. (2d) 169, 11 C.C.L.I. (3d) 1, 47 C.C.L.T. (2d) 1, [1999] I.L.R. I-3717, 90 A.C.W.S. (3d) 786; Grand River Enterprises Six Nations Ltd. v. Canada, [2011] F.C.J. No. 516, 2011 FCA 121, 418 N.R. 48; Greenwood Shopping Plaza Ltd. v. Neil J. Buchanan Ltd., 1980 202 (SCC), [1980] 2 S.C.R. 228, [1980] S.C.J. No. 59, 111 D.L.R. (3d) 257, 32 N.R. 163, 39 N.S.R. (2d) 119, 10 B.L.R. 234, [1980] I.L.R. Â1-1243 at 914, 3 A.C.W.S. (2d) 351; Kuwait Airways Corp. v. Iraq, [2010] 2 S.C.R. 571, [2010] S.C.J. No. 40, 2010 SCC 40, 407 N.R. 145, EYB 2010-180775, 94 C.P.C. (6th) 197, 2010EXP-3404, 325 D.L.R. (4th) 236, J.E. 2010-1877; La Générale des Carrières et des Mines v. F.G. Hemisphere Associates LLC, [2012] UKPC 27 (P.C.); Laane v. Estonian State Cargo & Passenger Steamship Line, 1949 37 (SCC), [1949] S.C.R. 530, [1949] S.C.J. No. 24, [1949] 2 D.L.R. 641; Loat v. Horwarth, [2011] O.J. No. 3166, 2011 ONCA 509, 338 D.L.R. (4th) 644, 204 A.C.W.S. (3d) 800, 282 O.A.C. 264, 89 B.L.R. (4th) 177; London Drugs Ltd. v. Kuehne & Nagel International Ltd., 1992 41 (SCC), [1992] 3 S.C.R. 299, [1992] S.C.J. No. 84, 97 D.L.R. (4th) 261, 143 N.R. 1, [1993] 1 W.W.R. 1, J.E. 92-1650, 18 B.C.A.C. 1, 73 B.C.L.R. (2d) 1, 43 C.C.E.L. 1, 13 C.C.L.T. (2d) 1, 36 A.C.W.S. (3d) 669; Mellenger v. New Brunswick Development Corp., [1971] 1 W.L.R. 604, [1971] 2 All E.R. 593 (C.A.); Playa Larga v. I Congreso del Partido, [1983] 1 A.C. 244 (H.L.); Royal Bank of Canada and Corriveau (Re) (1980), 1980 1778 (ON SC), 30 O.R. (2d) 653, [1980] O.J. No. 3801, 117 D.L.R. (3d) 199, 17 C.P.C. 290, 5 A.C.W.S. (2d) 437 (H.C.J.); Salomon v. Salomon & Co., [1897] A.C. 22 (H.L.); Schreiber v. Canada (Attorney General), [2002] 3 S.C.R. 269, [2002] S.C.J. No. 63, 2002 SCC 62, 216 D.L.R. (4th) 513, 292 N.R. 250, J.E. 2002-1705, 164 O.A.C. 354, 167 C.C.C. (3d) 51, 22 C.P.C. (5th) 207, 116 A.C.W.S. (3d) 372, 54 W.C.B. (2d) 416; Smith v. Chin, [2006] O.J. No. 4091, 31 C.P.C. (6th) 114, 152 A.C.W.S. (3d) 149 (S.C.J.); Trendtex Trading Corp. v. Central Bank of Nigeria, [1977] 2 W.L.R. 356, [1977] Q.B. 529 (C.A.); United States of America v. Friedland (1999), 1999 2432 (ON CA), 46 O.R. (3d) 321, [1999] O.J. No. 4919, 182 D.L.R. (4th) 614, 128 O.A.C. 201, 44 C.P.C. (4th) 47, 93 A.C.W.S. (3d) 552 (C.A.); Virk v. Sidhu, [2010] B.C.J. No. 499, 2010 BCSC 369; Walker v. Bank of New York Inc. (1994), 1994 8712 (ON CA), 16 O.R. (3d) 504, [1994] O.J. No. 126, 111 D.L.R. (4th) 186, 69 O.A.C. 153, 45 A.C.W.S. (3d) 318 (C.A.)

Statutes referred to

State Immunity Act, R.S.C. 1985, c. S-18 [as am.], ss. 3(1), 4(2)(a), 5

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rule 21

Authorities referred to

OECD Guidelines on Corporate Governance of State-Owned Enterprises (Paris, France: OECD, 2005) [page185]

MOTION by the Republic of Estonia for a permanent stay of an action against it.

Douglas Harrison and Vanessa Voakes, for plaintiff.

Jonathan Lisus and James Renihan, for defendants.

[1] E.M. MORGAN J.: — This motion challenges the jurisdiction of the court over the defendant, the Republic of Estonia through its Ministry of Economic Affairs and Communications (the "Republic"), under the State Immunity Act, R.S.C. 1985, c. S-18 ("SIA").

[2] More specifically, the motion asks whether a foreign state that is the majority shareholder of a national airline waived its immunity to suit in this court in its shareholders' agreement. It also asks whether a foreign state's investment in an airline run for profit, and the state's alleged intervention in the purchase of new aircraft, falls within the commercial activities exception in the SIA.

I. The Parties

[3] Bombardier Inc. ("Bombardier") is a Canadian manufacturer and leading international designer and supplier of commercial aircraft.

[4] AS Estonian Air ("Estonian Air"), as its name suggests, is the national air carrier of the Republic of Estonia, with headquarters located in Tallinn, Estonia. It was created in the early 1990s with the Government of Estonia having a minority interest, and was reorganized in 2010-2011 when the government acquired a majority interest.

[5] The Republic of Estonia is a sovereign state and a member of the European Union. Estonia regained its independence from the Soviet Union in 1991.

[6] Following a corporate reorganization in 2010-2011, the Republic owns some 97 per cent of the issued shares in Estonian Air, the remaining 3 per cent being owned by the Swedish airliner SAS Group AB ("SAS"). Estonian Air is managed by a management board composed of five executives, none of whom are members of or are appointed to represent the Government of Estonia. The management board, in turn, is overseen by a six-person supervisory council, which functions as the equivalent of a board of directors. Three of the six members of the supervisory council are representatives of the government, one being a member of the Estonian Parliament. [page186]

[7] Estonian Air, SAS and the Republic have a shareholders' agreement governing their relationship. Section 16.1 of the shareholders' agreement provides:

The State warrants and represents that this Agreement constitutes a private act, subjecting State to private civil law in Estonia as well as abroad. State expressly acknowledges that it is bound by the arbitration clause in Section 13, and that it waives all defenses based on sovereign immunity or other form of immunity.

[8] In general, the Republic's role as shareholder is restricted to oversight and the furtherance of governmental objectives. The shareholders' agreement gives the government no role in managing Estonian Air's commercial activities, and limits government to identifying the strategic goals of the airline as part of the Republic's economic development planning.

[9] As indicated, the shareholders' agreement provides the Republic with the ability to appoint three members of the supervisory council. It also allows the Republic to give direction to those members in exercising their vote. However, this power is exercised within the limitations on government involvement with management as set out by the Organization for Economic Co-operation and Development ("OECD"), of which the Republic of Estonia is a member.

[10] The limited role of government as shareholder is a significant part of OECD policy. The OECD Guidelines on Corporate Governance of State-Owned Enterprises (Paris, France: OECD, 2005) make this clear, by providing (at p. 13):

The government should not be involved in the day-to-day management of SOEs [state owned enterprises] and allow them full operational autonomy to achieve their defined objectives.

[11] The Republic has submitted an affidavit by its Deputy Minister of Economic Affairs, Ahti Kuningas, in which the overall relationship between the national airline and the Government of Estonia is described. Deputy Minister Kuningas testifies that there are two policy goals guiding the government's involvement with Estonian Air: (1) creating a transportation hub at Tallinn that will connect the country to key business centres in Europe; and (2) ensuring sustained profitability for the airline.

[12] The goal of making Tallinn a regional hub is part of the Estonia's economic planning, and is set out clearly in the ruling coalition's party platform. In art. 10 of the coalition agreement between the Pro Patria and Res Publica Union and the Estonian Reform Party, the government has set itself the specific goal of developing flight connections for its capital city "so that it would [page187] be possible to fly from Tallinn to all the main European business centres 'there in the morning, back in the evening'".

[13] Efficient connections to European capitals became a more pressing policy objective for Estonia upon its admission to the European Union in May 2004. To this end, the Republic's shareholding in Estonian Air is a public policy vehicle for accomplishing significant state economic goals.

[14] This transportation policy was fostered by Estonian Air in 2011, when it implemented its strategy of transitioning from a point-to-point flight network to a hub-and-spoke network. This strategy required financing by the government, and led to the Republic injecting substantial funds into the airline in exchange for more shares. The state investment in the airline part and parcel of the policies of integrating into European trade and encouraging direct foreign investment.

[15] In early 2011, with the injection of fresh capital by the government (which made the Republic the majority shareholder), Estonian Air took delivery of three aircraft which it purchased from Bombardier. At the time, Deputy Minister Kuningas publicly stated that the government was making its investment so that, among other things, the national airline could continue to operate important code-shared routes between Estonia, Lithuania and Sweden.

[16] Again, this investment strategy by the government as shareholder was a way to use Estonian Air as a corporate vehicle in pursuit of national policy goals. This relationship was well known to Bombardier when it entered negotiations to sell more aircraft to Estonian Air later in 2011; after all, Bombardier had been a beneficiary of the government's investment in Estonian Air in 2010-2011.

[17] As for the goal of ensuring profitability for Estonian Air, this is, of course, the goal of all corporate shareholders. Importantly for the Republic, it is also a requirement of both Estonian and European Union law. Estonian legislation applicable to all state assets apparently requires the Republic to "guarantee the performance of the rights and obligations established for the shareholders". Likewise, European Union competition law obliges all member states to foster the independent profitability of all state-owned enterprises. Governments are not permitted to indefinitely subsidize unprofitable business enterprises, or they risk sanctions imposed by European competition authorities.

II. The Claim

[18] In mid-2011, Estonian Air entered into new negotiations with Bombardier over the purchase of five new aircraft. For this [page188] purchase, it was proposed that financing would be arranged not by the Government of Estonia, but by the Government of Canada. Beginning in September 2011, Bombardier facilitated discussions between Estonia Air and Export Development Canada ("EDC"), a federal Crown agency that assists Canadian companies seeking financing to expand their international business.

[19] As part of its search for capital, EDC requested that the Republic guarantee any loans made to Estonian Air for its acquisition of Bombardier aircraft. In a teleconference call on September 22, 2011, Deputy Minister Kuningas specifically declined to provide a state guarantee for the loan. At the same time, he indicated that the Estonian government was proposing to inject further cash into the airline as part of its new air strategy, and that this would increase the number of flights and destinations connecting to Tallinn.

[20] The air strategy was approved by the Estonian cabinet on November 4, 2011. In its press release announcing the policy, the government declared that it intended to increase its share capital in the national airline. It also took the opportunity to articulate its rationale for the increased investment, reiterating the twin goals of the air strategy: "offering more regular connections between Tallinn and key business centres in Europe and ensuring sustainable profitability".

[21] The twin goals, reflecting the two roles of the Estonian government as shareholder and as national government, were again emphasized in an e-mail from Wade Stokes, the chief finanacial officer of Estonian Air, to EDC. This e-mail responded, in part, to a suggestion by EDC that if the Republic could not provide a guarantee for Estonian Air's loans that it provide a comfort letter in support of Estonian Air, which would assist EDC in securing financing for the purchase from Bombardier. In that e-mail, Mr. Stokes explained:

Comfort letter. This one is a bit more thorny. The government has two roles with Estonian Air, one as the body ruling the country in which the airline operates, and the other as a shareholder. To my eyes, EDC is asking for a bit of a split personality here. The government can do some things as the country's ruler, but it has both to protect its rights as a shareholder and also to ensure that it does not impair the rights of its minority shareholder SAS. If such a letter is possible from the government, I would see the need for some serious lawyer-to-lawyer discussions here, possibly involving SAS.

[22] This comfort letter was never signed. Nevertheless, in November 2011, Bombardier and Estonian Air entered into a new contract -- called Contract Change Order No. 3 (the "CCO") -- for the purchase and sale of five new CRJ900 aircraft. The [page189] CCO was conditional on financing which, as indicated, was being worked on by EDC.

[23] At some point during the October-November 2011 negotiations leading up to the CCO, the chief executive officer of Estonian Air, Tero Taskila, called Bombardier's director of international sales, Robert Baseggio, and told him that a Brazilian aircraft manufacturer, Embraer S.A. ("Embraer"), had made a highly competitive bid to sell aircraft to Estonian Air. Moreover, Mr. Taskila allegedly signalled to Mr. Baseggio that Embraer was lobbying the Republic directly -- "romancing the government", as Mr. Baseggio relays it in his testimony -- to convince it to go with Embraer's "one-fleet-type" solution to Estonian Air's aircraft needs.

[24] Deputy Minister Kuningas, in his reply affidavit, states that in fact there was no direct approach by Embraer to the government. It is the Republic's evidence that while this reference to an approach to government was a negotiating ploy adopted by Mr. Taskila, in fact all dealings with aircraft suppliers were done by management of Estonian Air.

[25] Ultimately, Estonian Air withdrew from the CCO and cancelled the order of aircraft from Bombardier. In their place, Estonian Air purchased the aircraft it needed for its fleet from Embraer.

[26] It is Bombardier's position that the cancellation by Estonian Air was wrongful and that it resulted from, inter alia, tortious interference by the Republic whose officials caused Estonian Air to select Embraer over Bombardier. It is Estonian Air's position that the financing condition in the CCO was not satisfied by its expiry date on December 7, 2011, thereby subjecting the CCO to cancellation without any further steps being taken.

III. Sovereign Immunity

[27] The Republic seeks to have the claim permanently stayed as against it for lack of jurisdiction. It submits that s. 3(1) of the SIA makes it immune from the jurisdiction of any court in Canada unless it falls into one of the specific statutory exceptions to that general immunity. The Republic further submits that the onus of proof is on Bombardier to establish that one of the exceptions to immunity applies, and that Bombardier has failed to satisfy that onus.

[28] As LeBel J. stated in Schreiber v. Canada (Attorney General), 2002 SCC 62, [2002] 3 S.C.R. 269, [2002] S.C.J. No. 63, at para. 17, "[d]espite the increasing number of emerging exceptions, the general principle of sovereign immunity remains an important [page190] part of the international legal order". In Canada, the international legal principle of sovereign immunity has been incorporated into the SIA.

[29] The Republic is correct that the onus of proof lies with the party seeking to bring a foreign state within the court's jurisdiction. Lebel J. again noted in Kuwait Airways Corp. v. Iraq, 2010 SCC 40, [2010] 2 S.C.R. 571, [2010] S.C.J. No. 40, at para. 22, that "s. 3 [of the SIA] establishes a presumption of immunity from jurisdiction in legal proceedings against sovereign states. Since the subject of the application, Iraq, is a state, it is entitled to this immunity. It is up to KAC to establish that it may rely on an exception to this immunity."

[30] Bombardier contends that in its shareholders' agreement with Estonian Air and SAS, the Republic has waived its immunity, thus bringing it within the exception contained in s. 4(2)(a) of the SIA. Bombardier also submits that the action against the Republic falls within the exception for "commercial activity of the foreign state" contained in s. 5 of the SIA.

(a) Waiver of immunity

[31] The waiver argument advanced by Bombardier is based on what might be called a universalized reading of s. 16.1 of the shareholders' agreement. As set out in full above, this section contains an express waiver of a sovereign immunity defence. In addition, it makes the Republic subject to the "private civil law" of Estonia and makes specific reference to the arbitration clause that also forms part of the shareholders' agreement.

[32] Bombardier concedes, of course, that it is not a party to the shareholders' agreement. However, it places significance on the fact the Republic has acknowledged that the shareholders' agreement is a private act. Further, it is Bombardier's position that the choice of law language in favour of Estonian law makes the waiver of sovereign immunity generally applicable. Bombardier submits that the acknowledgement in s. 16.1 that "the Republic will be subject to private civil law in Estonia 'as well as abroad' would be unnecessary" were it not meant to refer to more than disputes subject to arbitration under the shareholders' agreement.

[33] It is trite law that "no one but the parties to a contract can be bound by it or entitled under it". Greenwood Shopping Plaza Ltd. v. Neil J. Buchanan Ltd., 1980 202 (SCC), [1980] 2 S.C.R. 228, [1980] S.C.J. No. 59, at para. 9. As Iacobucci J. has pointed out, "[o]n the one hand, [the doctrine of privity of contract] precludes parties to a contract from imposing liabilities or obligations on third parties. On the other, it prevents third parties from obtaining [page191] rights or benefits under a contract": London Drugs Ltd. v. Kuehne & Nagel International Ltd., 1992 41 (SCC), [1992] 3 S.C.R. 299, [1992] S.C.J. No. 84, at para. 200.

[34] Relaxation of the privity rule has been held appropriate where the contracting party is a trustee or agent of the third party, or where the third party is a successor to the original contractor (Brown v. Belleville (City) (2013), 114 O.R. (3d) 561, [2013] O.J. No. 1071, 2013 ONCA 148, at para. 84). Likewise, it may be possible for a stranger to a contract to claim rights where there is detrimental reliance by the claimant on the contractual provision and that provision is invoked in the very way contemplated by the parties (Fraser River Pile & Dredge Ltd. v. Can-Dive Series Ltd., 1999 654 (SCC), [1999] 3 S.C.R. 108, [1999] S.C.J. No. 48, at para. 38).

[35] There is no evidence anywhere that in entering the shareholders' agreement, the Republic of Estonia and Estonian Air contemplated anything but a waiver inter se of the Republic's sovereign immunity defence. 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 as a sword, and may not advance claims that would take the actual contracting parties by surprise (Virk v. Sidhu, [2010] B.C.J. No. 499, 2010 BCSC 369, at para. 15).

[36] The waiver clause in the shareholders' agreement specifically references the arbitration clause, which Bombardier must agree binds no one but the parties to the shareholders' agreement. If the mandatory arbitration clause bound Estonian Air and the Republic to Bombardier the way that Bombardier asserts that the waiver of immunity clause does, Bombardier could not have brought the present action in this court.

[37] Similarly, the waiver clause specifically provides that all rights and obligations between the signing parties are governed by Estonian law, which Bombardier again must agree is binding only for disputes between the parties to the shareholders' agreement. If that choice of law clause embraced Bombardier the way that Bombardier asserts that the waiver of immunity clause does, this entire action would have to be governed by Estonian law. I pause to note here that Bombardier has produced no Estonian law expert in the present motion and has not pleaded that Estonian law applies to its claim. [page192]

[38] Finally, I observe that Bombardier is not only a stranger to the shareholders' agreement, it is a party to the CCO. In interpreting a contract in which a party is alleged to have waived an otherwise available immunity, "the question is upon whom the assumption of risk falls": Active Fire Protection 2000 Ltd. v. B.W.K. Construction Co., 2005 24226 (ON CA), [2005] O.J. No. 2892, 200 O.A.C. 275 (C.A.), at para. 17. If Bombardier were relying on a waiver of sovereign immunity, the place to look for that waiver would be its actual contract with Estonian Air, and not the shareholders' agreement in which Bombardier had no involvement whatsoever. If a waiver had been negotiated by Bombardier as part of the CCO, it could have actually reflected what Bombardier says is the allocation of risk and benefits among the parties here.

[39] Section 4(2)(a) of the SIA requires that in order to make the Republic subject to the court's jurisdiction, the waiver clause in the shareholders' agreement must be carefully examined (Loat v. Horwarth, 2011 ONCA 509, [2011] O.J. No. 3166, 282 O.A.C. 264 (C.A.), at paras. 35-36). The test for waiver is a strict one; the Court of Appeal has instructed that any contractual waiver of immunity must be "clear and unequivocal; it cannot be presumed": United States of Americda v. Friedland (1999), 1999 2432 (ON CA), 46 O.R. (3d) 321, [1999] O.J. No. 4919 (C.A.), at para. 15.

[40] The waiver clause in the shareholders' agreement, as invoked by Bombardier, does not meet this standard. It does not clearly and unequivocally waive the Republic's immunity for a claimant such as Bombardier that is not a party to the shareholders' agreement.

(b) The commercial activity exception

[41] Bombardier makes what are really two distinct arguments about the commercial activity exception, although it tends to compress them into one in order to fit them both into s. 5 of the SIA.

[42] Firstly, Bombardier argues that the Republic's investment in Estonian Air as a means of implementing its strategic goals is itself commercial activity within the terms of s. 5. Secondly, Bombardier submits that the specifically pleaded torts of inducing breach of contract and interference in business relations flow from the Republic directly intervening in the commercial activities of Estonian Air and its contractual relations with Bombardier.

[43] As Bombardier puts this double-barreled argument in its factum:

The underlying basis for these claims is the Republic's role in the commercial aspects of Estonian Air, including approval if its Air Strategy (as defined [page193] below) by way of expansion of its share capital (as discussed below) and directing the votes of its appointees to the Supervisory Board in respect of economic activities and related decisions of Estonian Air.

[44] These arguments, in turn, reduce to two views of how the commercial activity exception in the SIA works. On the first view, the Republic comes within the exception as a result of its activities and status as shareholder of Estonian Air. On the second view, the Republic comes within the exception as a result of its allegedly tortious conduct toward Bombardier as seller of the aircraft.

[45] In Canada Labour Code (Re), 1992 54 (SCC), [1992] 2 S.C.R. 50, [1992] S.C.J. No. 49, the Supreme Court of Canada established a methodology for analyzing a claim based on the commercial activity exception under the SIA. The framework set out by the court contains a two-stage analysis: "First, what is the 'nature' of the activity in question -- i.e., does employment at the base constitute commercial activity? Second, are the proceedings in this case -- a union certification application -- 'related' to that activity?" Ibid., at para. 22.

[46] Bombardier's two views of commercial activity -- status of the foreign state as shareholder of a state enterprise and conduct of the foreign state as allegedly active participant in a transaction -- parallel the stages of analysis outlined by the Supreme Court. Each view will therefore be examined in turn.

(i) The foreign state's shareholder status

[47] Just as the first question in Canada Labour Code (Re) revolved around whether the foreign state's status as employer was commercial activity within the meaning of s. 5 of the SIA, the first question here is whether the Republic's status as shareholder brings it within the s. 5 exception. As Bombardier puts it in its factum, "Estonian Air is a commercial enterprise carried on for profit. The Republic is the majority shareholder of that commercial enterprise. As a shareholder it has engaged in certain activities, which by their nature, are commercial."

[48] Estonian Air is a majority state-owned national airline. As with many such companies, the record shows that it is a hybrid of a profit-making, commercial entity and a policy-oriented, governmental entity. The Republic as shareholder is likewise in a dual position as investor and policy-maker.

[49] Given this hybrid position, several principles central to the law of sovereign immunity must be kept in mind. On one hand, the state does not lose its sovereign immunity just because it implements public policy through a corporate vehicle (Mellenger v. New Brunswick Development Corp., [1971] 1 W.L.R. 604, [1971] 2 All E.R. 593 (C.A.), at p. 608 W.L.R.). [page194] On the other hand, an entity does not retain immunity just because it engages in commercial transactions through the offices of a governmental agency (Trendtex Trading Corp. v. Central Bank of Nigeria, [1977] 2 W.L.R. 356, [1977] Q.B. 529 (C.A.)).

[50] The courts' attitude toward state-owned enterprises has undergone significant change over time. In the mid-20th century, when state-owned enterprises were often the product of nationalizations by non-western governments, courts tended to view the independence of such entities from their governmental owners with skepticism. Ironically, the high point of this skepticism about the independence of state-owned corporations was pronounced by the Supreme Court of Canada in the late 1940s with respect to none other than the Government of Estonia. The Soviet-era, state-run shipping line of Estonia was perceived by the court as agent of a state "in which the institution of private property . . . has been abolished": Laane v. Estonian State Cargo & Passenger Steamship Line, 1949 37 (SCC), [1949] S.C.R. 530, [1949] S.C.J. No. 24, at para. 54.

[51] In more modern times, however, courts have taken the opposite view. As the House of Lords stated in C. Czarnikow Ltd. v. Rolimpex, [1979] A.C. 351 (H.L.), at p. 364 A.C., "[s]tate-controlled enterprises, with legal personality, ability to trade and to enter into contract of private law, though wholly subject to the control of their state, are a well-known feature of the modern commercial scene. This distinction between them, and their governing State, may appear artificial: but it is an accepted distinction in the law of England and other states."

[52] Unlike Estonia S.S.R. of the late 1940s, which had acquired its shipping line through forced nationalization, Laane, supra, at para. 11, the post-independence Republic of Estonia has purchased its shares in the national airline. As indicated, there is a shareholders' agreement in place, and all evidence points to the investment having been made on a market basis.

[53] A shareholder's investment in a corporation is, generally speaking, 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. Indeed, there is often substantial ambiguity in the status of a state-owned strategic enterprise such as a sovereign fund or, for that matter, a national airline (AIG Capital Partners Inc. v. Kazakhstan, [2006] 1 W.L.R. 1420, [2005] EWHC 2239 (Comm.) (Q.B. Div.), at para. 92).

[54] At first blush, Bombardier is correct when its counsel states in its factum that "[a]n airline is an inherently commercial [page195] enterprise; the decisions affecting its management and operation are inherently commercial decisions". On further reflection, the Republic is also correct when its counsel states in its factum that "[t]he strengthening of the national economy through an increase in direct flight connections has been a strategic goal of the Republic since at least October 2006 . . . The pursuit of this goal is the reason why the Republic holds shares in Estonian air and has invested money in the airline on various occasions."

[55] Steele J. best expressed this dichotomy in Carrato v. United States of America (1982), 1982 2254 (ON SC), 40 O.R. (2d) 459, [1982] O.J. No. 3615 (H.C.J.), at p. 461 O.R., where he observed that "acts that some persons might normally consider to be commercial are not so when they are done in the performance of a sovereign act of state". This duality, in turn, has given rise to some difficult questions of characterization for the courts.

[56] By way of illustration, a landlord-tenant relationship, although commercial in all appearances, may be subject to immunity where the property is a foreign state consulate or embassy (Royal Bank of Canada and Corriveau (Re) (1980), 1980 1778 (ON SC), 30 O.R. (2d) 653, [1980] O.J. No. 3801 (H.C.J.)). By contrast, it is also possible that a governmental program takes a distinctly commercial form, such as the collection of tolls on a highway, and that its enforcement therefore falls within the commercial exception despite its public regulatory function (Ferranti-Packard Ltd. v. Cushman Rentals Ltd. (1980), 30 O.R. (2d) 194, [1980] O.J. No. 3085 (H.C.J.)).

[57] Where the state uses an arm's length agency or parastatal corporation to regulate or control a market, the question of immunity will often turn on whether the particular activities by the government shareholder/creator are ordinary aspects of its role.

[58] Again by way of illustration, a government minister can be sued in Ontario for defamatory statements made on behalf of the state-owned Guyana Sugar Corporation in "promot[ing] Guyana's 'brand' and disparag[ing] the brand of a competitor": Bedessee Imports Ltd. v. Guyana Sugar Corp., [2010] O.J. No. 4575, 2010 ONCA 719, at para. 6. And again by contrast, a New York bank that "acted at the request of U.S. government law enforcement officers" is immune from suit in Ontario as a temporary agency "assisting [U.S. officers] in their investigation of possible criminal activities": Walker v. Bank of New York Inc. (1994), 1994 8712 (ON CA), 16 O.R. (3d) 504, [1994] O.J. No. 126 (C.A.), at para. 10. It all depends on whether the impugned activity is within or without the ordinary functioning of the government that lies behind the state corporation or agent. [page196]

[59] This logic of ordinary functionality applies equally to governments as shareholders of commercially active corporations. The Privy Council in La Générale des Carrières et des Mines v. F.G. Hemisphere Associates LLC, [2012] UKPC 27 (P.C.), at para. 29, put in place a test for government liability as shareholder that requires a claimant to establish that the relationship was fundamentally different than that of ordinary shareholder:

But constitutional and factual control and the exercise of sovereign functions do not without more convert a separate entity into an organ of the State. Especially where a separate juridical entity is formed by the State for what are on the face of it commercial or industrial purposes, with its own management and budget, the strong presumption is that its separate corporate status should be respected, and that it and the State forming it should not have to bear each other's liabilities. It will in the Board's view take quite extreme circumstances to displace this presumption. The presumption will be displaced if in fact the entity has, despite its juridical personality, no effective separate existence.

[60] There is no evidence in the record before me to cast any doubt on the separate existence of Estonian Air from its governmental shareholder. 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. The exchange of cash for shares is as ordinary a shareholder activity as one can imagine -- indeed, it defines ordinary shareholding. It is well established that investment in a corporation does not attract liability to the shareholder (Salomon v. Salomon & Co., [1897] A.C. 22 (H.L.)).

[61] The fact that Bombardier has alleged breach of contract against Estonian Air, and will have its day in court against that company regardless of the outcome of this motion, does not give rise to a claim against the government as shareholder. "It is not permissible to lift the veil simply because a company has been involved in wrong-doing, in particular simply because it is in breach of contract": Dadourian Group International Inc. v. Simms, [2006] EWHC 2973 (Ch. D.), at para. 683, affd [2009] EWCA Civ. 169 (C.A.).

[62] In fact, the evidence in the record points to the Republic staying as close as possible to the role of ordinary shareholder. It appears to have kept its own investor side and policy-maker side quite distinct. The best illustration of this is provided by one of the government-appointed members of Estonian Air's supervisory council -- Raul Alliviki -- in his response to management when it sought supervisory council approval for the change from Bombardier to Embraer:

First, I'd like to clarify that there is no political guidance in terms of fleet decisions from Ministry of Economic Affairs and Communications side. [page197] I have spoken with the Minister about the decision we need to make today. He has a full confidence in the Supervisory Board to make the informed and calculated decision in the best interest of the company.

[63] The contract negotiations between Estonian Air and Bombardier were, of course, commercial activities. But they were not the commercial activities of the Republic as shareholder. If the Republic was involved, which will be discussed below, it would be because it stepped outside of its shareholder role and involved itself qua government. The Republic's activities qua shareholder had, like those of all shareholders, an investment character, but they were not managerial or transactional in nature.

[64] Section 5 of the SIA requires that commercial acts of the foreign state be in the foreground, not the background, of the claim in order to qualify for the exception to sovereign immunity. As the Court of Appeal put it in Bouzari v. Islamic Republic of Iran (2004), 2004 871 (ON CA), 71 O.R. (3d) 675, [2004] O.J. No. 2800 (C.A.), at para. 51, "[i]t is not enough that the proceedings relate to acts which, in turn, relate to commercial activity of the foreign state".

[65] The fact that Estonian Air is a state-owned enterprise, and that the Republic's investment in this national airline is from one perspective a commercial investment, is not itself enough to bring Bombardier's claim within the s. 5 exception. The Republic has done nothing in becoming the large majority shareholder in Estonia Air which would deprive it of immunity under the SIA.

(ii) The foreign state's commercial acts

[66] The second question to be addressed under the Canada Labour Code (Re) framework is whether the proceedings are "related" to the foreign state's commercial activity. As this court has explained, "[w]hile any activity engaged in by a state can be said to have a sovereign aspect, the court's job . . . is to determine whether the proceedings impact on the commercial aspect, rather than the sovereign aspect, of the activity": Smith v. Chin, [2006] O.J. No. 4091, 31 C.P.C. (6th) 114 (S.C.J.), at para. 38.

[67] In its statement of claim, Bombardier has pleaded breach of contract against Estonian Air and several economic torts against the Republic. In short, Bombardier alleges that by encouraging Estonian Air to make a deal with Embraer, the Republic overstepped its role as shareholder and involved itself, as government, in a commercial transaction. Bombardier submits that the Republic's preference for Embraer over Bombardier constituted actionable interference with the transaction in issue and induced Estonian Air to breach the CCO. [page198]

[68] Based on the statement of claim alone, this claim would be a viable one. It is pleaded properly, and in referencing well-established economic torts it sets out causes of action known to the law.

[69] However, this is not a motion under Rule 21 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, which would be based on pleadings and legal argument alone. It is a jurisdictional challenge under the SIA arising from the fact that the action has been brought against a foreign sovereign state. As indicated above, the onus is on Bombardier as plaintiff to establish that its claim falls within one of the statutory exceptions in the SIA.

[70] Satisfying the burden of proof that falls on Bombardier requires more than a cause of action and a proper pleading. It requires evidence.

[71] In Canada Labour Code (Re), La Forest J. first explained that the commercial exception provision reflects the modern rule of restrictive immunity rather than the absolute immunity that had prevailed prior to the SIA's enactment. See Congo (République Démocratique) v. Venne, 1971 145 (SCC), [1971] S.C.R. 997, [1971] S.C.J. No. 77. He then made it clear that "a contextual approach is the only reasonable basis of applying the doctrine of restrictive immunity": Canada Labour Code (Re), supra, at para. 28. A contextual approach demands an evidentiary record.

[72] Lord Wilberforce made a similar point in the leading English sovereign immunity case. In Playa Larga v. I Congreso del Partido, [1983] 1 A.C. 244 (H.L.), at p. 263 A.C., he reasoned that it is not sufficient for a claimant to plead in a way that "merely asserts that acts done within the trading or commercial activity are not immune. The inquiry still has to be made whether they were within or outside that activity." In order for a claimant to satisfy its onus of proof with respect to the commercial exception, it must establish, on the evidence, that there were commercial acts done by the sovereign state in respect of the transaction in issue.

[73] Bombardier's motion record relating to the Republic's alleged interference with the aircraft purchase is long on suspicion and short on actual evidence. Counsel argues that Bombardier is hampered in bringing forth any evidence at this stage as examinations for discovery have not yet been conducted. He submits that Bombardier simply does not have access to evidence that might eventually be disgorged by Estonian Air and the Republic, and that as plaintiff, Bombardier cannot at this stage be expected to translate its suspicions into hard evidence.

[74] With respect, that is not how the burden of proof operates. In the first place, courts have frequently disallowed discovery of [page199] matters that a party "suspects, but does not know", characterizing such a search as an "inquir[y] in the nature of a fishing expedition": Grand River Enterprises Six Nations Ltd. v. Canada, [2011] F.C.J. No. 516, 2011 FCA 121, at paras. 10-11. Bombardier cannot satisfy its onus under the SIA by arguing that if it could only cast a broad enough net into Estonia Air's business it might one day come up with more than its current unsubstantiated suspicions about the Republic's interference.

[75] Moreover, it is not the case that there is no evidence in the record relating to the Republic's level of involvement in the Bombardier contract. Bombardier's problem is that the evidence tends to point in the opposite direction.

[76] For example, Bombardier baldly asserts that the government used its ability to appoint three members of Estonian Air's supervisory council to influence the decision as to which aircraft to purchase. There is, however, direct evidence in the record in the form of an e-mail from Mr. Alliviki, a government appointee to the supervisory council, in which he specifically advised Estonian Air's management that the government has no view as to which aircraft to purchase. In fact, Mr. Alliviki went out of his way to explain that even posing the question to government as to which aircraft supplier they prefer "is going too much into detail and should be decided by professionals".

[77] Bombardier itself appears to have known that the decision to purchase Embraer was made by the airline's management alone. Immediately after being informed of Estonian Air's decision, Mr. Baseggio, Bombardier's negotiator, wrote to Deputy Minister Kuningas 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".

[78] In other words, the record shows that Bombardier was frustrated with the Republic having refrained from intervening in Estonian Air's decision, and not that it suffered loss due to any such interference. Mr. Baseggio's message to the Republic was to urge it to intervene, as it had not done so.

[79] The only document in the evidentiary record suggesting that there was government influence on Estonian Air's purchase decision is an article that appeared in an Estonian tabloid newspaper. On January 20, 2013, a newspaper called Eesti Paevaleht ("Estonian Daily") published an article that purported to quote the Estonian Minister for Economic Affairs to the effect that: "I have been kept up with developments of the negotiations right from the beginning and I accept them, because Bombardier started establishing adverse terms in every possible field." [page200]

[80] Mr. Baseggio testified in cross-examination that this article was the impetus for Bombardier's claim:

Q. Because this [article] is what caused you to believe that the Republic had in some way encouraged the airline to change its mind is that right?

A. I think that's fair, yes.

[81] The minister's quote as reported in the article has been denied by the Estonian government. It has not been verified either by the writer of the article or by Bombardier. Moreover, it appears in the middle of a piece of tabloid-style journalism that is difficult to take seriously.

[82] A translation of the article in its entirety appears in the motion record. To say that the reportage, for want of a better word, is colourful is to understate the matter. The article describes Bombardier as a "vampire lover". This vampire lover, according to the writer, demanded "new winter boots after receiving flowers, an opera and dinner". The article goes on to say that Estonian Air preferred Embraer, which it describes as a "Brazilian beauty", and that this beauty prompted the airline to "get rid of the Canadian lady".

[83] As indicated, this article is the one item in the record that Bombardier's officials point to as evidencing government involvement in the transaction. Otherwise, all of the evidence before me demonstrates that there was no involvement by the government and no political interference with Estonian Air's management in reaching its decision to withdraw from Bombardier and to go with Embraer. In the face of direct, unchallenged evidence by government and airline officials, and by Bombardier's own negotiator, the Estonian Daily article amounts to no evidence at all.

[84] In examining the foreign state's acts from the perspective of s. 5 of the SIA, a court is generally asked to determine not whether the state's acts "touch on" or are "merely incidental" to commercial activity, but whether the state has, as La Forest J. described it, "intruded deeply into the management sphere": Canada Labour Code (Re), supra, at para. 41. Under the circumstances, Bombardier has not come anywhere close to meeting this burden.

[85] I have examined the evidence in detail and see no sign of the imaginative creatures described in the Estonian Daily article. But on the record before me, I do see that Bombardier's suspicions about Estonian government interference amount to little more than a figment. [page201]

[86] There is no real evidence pointing to the Republic's intervention in or interference with the aircraft transaction. All of the evidence in the record, with the exception of this one nonsensical article, points in the opposite direction. There is therefore nothing to bring the claim within s. 5 of the SIA.

IV. Disposition

[87] The court lacks jurisdiction over the Republic of Estonia in this action. Bombardier's claim against the Republic is therefore permanently stayed.

[88] The parties may make written submissions as to costs. I would ask that these submissions be sent to directly to me within two weeks of the date of release of this judgment.

Motion granted.

End of Document