Kuwait Airways Corporation v Iraqi Airways Company

A non-party may be ordered to pay litigation costs where it funded and controlled the proceedings and was the real beneficiary of the litigation. The court may take account of the non-party’s involvement in advancing or maintaining a false defence. State immunity does not prevent proceedings relating to a state’s commercial transaction. The statutory exception applies where the state engages in activity of a commercial, industrial, financial, professional or similar character otherwise than in the exercise of sovereign authority.

Kuwait Airways Corporation applied for an order that the Republic of Iraq pay the assessed costs of four actions brought against Iraqi Airways Company. Iraq had been joined as a second defendant for costs purposes under CPR 48.2. It did not oppose the application and was not represented at the hearing.

The application raised two principal issues: whether Iraq was protected by state immunity, and whether the circumstances justified imposing costs on a non-party which had funded, supervised and controlled Iraqi Airways’ defence.

1. The application was granted. The Republic of Iraq was ordered to pay Kuwait Airways Corporation’s costs of the four actions.

2. Section 1 of the State Immunity Act 1968 states the general principle of state immunity, but section 3 provides a relevant exception for proceedings relating to a commercial transaction. A commercial transaction includes activity of a commercial, industrial, financial, professional or similar character undertaken otherwise than in the exercise of sovereign authority. Iraq’s funding, supervision and control of the litigation fell within that exception. The state-immunity objection therefore failed.

3. The court applied the principles concerning non-party costs orders discussed in Dymocks Franchise Systems (NSW) Pty v Todd (2204) UKPC 39, [2004] 1 Weekly Law Reports 2807, and R + V Versicherung AG v Risk Assurance [2005] EWHC 2586 (Comm).

4. The relevant circumstances were cumulative and compelling. Iraq was the only source of funding for Iraqi Airways’ defence; it supervised and controlled the conduct of the litigation through senior governmental bodies; it was, in substance, the intended beneficiary of a successful defence; and it participated in advancing a false defence, including by supplying false evidence and arranging the destruction or disposal of aircraft spares.

5. Although Iraq was not an active party to the substantive proceedings, these matters made it appropriate to exercise the discretion against it. The court found no good reason to withhold the order.

Not stated in the judgment.