Estonia retains sovereign immunity in lawsuit involving state-owned airline

Written on June 14, 2013.

A government does not give up its sovereign immunity simply because it owns a majority interest in a commercial airline. In Bombardier Inc. v AS Estonian Air, 2013 ONSC 3039, the Superior Court of Ontario held that it lacks jurisdiction over the Republic of Estonia (the “Republic”) in a claim accusing its government of wrongful intervention in a commercial aircraft transaction. The Republic’s actions as shareholder and government did not warrant removing its sovereign immunity under the State Immunity Act (the “SIA”).   

The Republic of Estonia acquired a majority interest (97%) in Estonian Air in 2010-2011. The Republic’s role in the Shareholders’ Agreement is restricted to oversight and the furtherance of government objectives, which are (1) to create a regional transportation hub and (2) to ensure sustained profitability of the airline. The government has no role in managing the airline’s commercial activities under the Agreement.   

In mid 2011, Estonian Air entered into negotiations with the plaintiff Bombardier to purchase five new aircraft. Both parties entered into a contract for their purchase and sale. As some point during the negotiations, Brazilian aircraft manufacturer Embraer made a competitive bid to Estonian Air. Ultimately, Estonian Air withdrew from its contract with Bombardier and purchased aircraft from Embraer instead. The airline said that the financing conditions in the Bombardier contract were not met in time.    

Bombardier brought an action against both Estonian Air and the Republic of Estonia. It argued that Estonian Air breached its contract and that the Republic wrongly interfered with the transaction and induced Estonian Air to cancel its contract.   

The Republic brought this motion to have Bombardier’s action permanently stayed for lack of jurisdiction. It argued that the SIA makes it immune from the jurisdiction of any court in Canada unless it falls into one of the specific statutory exceptions. Conversely, Bombardier argued that the government’s actions fell within the exception for “commercial activity of the foreign state” in the SIA because (1) the Republic is a majority shareholder and (2) the Republic allegedly overstepped its role as shareholder and involved itself as government in the commercial transaction with Embraer.

Justice Morgan held that a state does not fall within the commercial activities exception simply because it made a commercial investment in an airline. While a shareholder’s investment is generally a commercial activity, a national government investment may be a form of regulatory regime or policy vehicle as well. When a state uses a commercially active corporation to regulate or control a market, the question of immunity may turn on whether the impugned activities of the government shareholder fall within the ordinary aspects of its role as shareholder. The Republic’s only involvement as shareholder was to finance the airline’s purchase of aircraft, which it accomplished by purchasing more shares. Exchanging cash for shares is ordinary shareholder activity.   

Bombardier failed to establish that the Republic involved itself as government in a commercial transaction. Justice Morgan held that Bombardier did not put forward any real evidence pointing to the Republic’s interference in the aircraft purchase. Jurisdictional challenges under the SIA require the plaintiff to establish with actual evidence that its claim falls within a statutory exception. Bombardier argued that it was limited in bringing evidence because it had not yet conducted examinations for discovery, but the aircraft maker cannot satisfy the onus under the SIA by arguing that it might one day come up with more than its current unsubstantiated suspicions. The only evidence submitted by Bombardier was a tabloid newspaper article, which Morgan J. described as “nonsensical.”

Justice Morgan permanently stayed the action against the Republic. Bombardier’s action against Estonian Air, however, continues.

This ruling is important because it discusses what constitutes commercial activity when states own commercial enterprises and what actions must governments take to fall under the SIA’s commercial activity exception.