Québec – successful arbitral party seizes assets in hands of third party pending homologation of award – #160

In Instrubel N.V. v. Republic of Iraq, 2019 QCCA 78, Québec’s Court of Appeal upheld a successful arbitral claimant’s attempt to garnish funds owed by a third party to respondent pending an application to recognize and enforce its award. The Court determined that, independent of the location of the bank in which the funds were deposited, garnishee was domiciled within the jurisdiction of the courts of Québec and could be the subject of a garnishment when it is a debtor of a personal right owed to respondent. In reversing Instrubel, N.V. v. Ministry of Industry of The Republic of Iraq, 2016 QCCS 1184, the reasons provide meaningful, informed guidance for arbitration practitioners striving to preserve assets in anticipation of executing on successful arbitration awards.

Instrubel, N.V. (“Instrubel”), a Dutch company, obtained a March 12, 2003 award (“Award”) from the Chamber of Commerce of the International Court of Arbitration ordering the Republic of Iraq (“Iraq”) to pay Instrubel $32 million plus interest. On March 11, 2013 – ten (10) years less one (1) day after the date of the Award – Instrubel applied to the Québec Superior Court in Montréal to homologate the Award and for solidary condemnation against Iraq, the Ministry of Industry of the Republic of Iraq, the Ministry of Defence of the Republic of Iraq and the Salah Aldin State Establishment (“Respondents”) to pay the amount due.

Instrubel believed that Iraq had significant assets in Québec stemming from Iraq’s involvement in civil aviation. In particular, Instrubel alleged that Iraq imposed aerodrome and air navigation fees on civil airlines flying over its territory and using Iraqi aerodromes. Iraq imposed fees through its Iraqi Civil Aviation Authority (“ICAA”) for which the International Air Transportation Association (“IATA”) managed billing and collection in virtue of a contract between ICAA and IATA.

Instrubel considered that the recovery of its debt confirmed in the Award was at risk and applied on July 30, 2013 for a writ of seizure before judgment in the hands of IATA as garnishee. By its application, Instrubel sought to seize the funds belonging to Iraq and held by IATA. Instrubel alleged that those funds included all aerodrome charges and air navigation charges billed, collected and/or otherwise held by IATA wherever they were located, either at IATA’s head office in Montréal or at any of IATA’s worldwide branches.

The seizure was conducted under the now-abrogated Code of Civil Procedure, CQLR c C-25, (the “Former C.C.P.” ) Division IV articles 625 Former C.C.P. et seq. Most of the Former Code provisions were carried forward into the current Code of Civil Procedure, CQLR c C-25.01 (“Current C.C.P.”), Chapter III, Seizure in the Hands of Third Persons, articles 711 Current C.C.P. et seq. The current provisions are somewhat more mellow than the Former C.C.P. regarding consequences for a garnishee who fails or delays in providing its declaration.

Seizure by garnishment is effected by the service on the garnishee and on the judgment debtor of a writ of seizure by garnishment. The writ orders the garnishee to appear on a day and at an hour fixed to declare under oath what funds it owes to the debtor or will have to pay it and what movable property it has in its possession belonging to the debtor. The writ also orders the garnishee not to dispossess itself of the funds/movable property until the court has pronounced upon the matter. The effect of seizure by garnishment is to place under judicial control the funds/movable property belonging to the debtor and to make the garnishee the guardian thereof.

On July 30, 2013, the Superior Court issued a writ of garnishment and IATA was served a copy on the same date. On August 5, 2013, Iraq moved to quash the seizure.

A debtor or the garnishee can challenge the seizure provided it does so promptly. A ground to annul a seizure before judgment must, in principle, be raised within the five (5) day period set by article 738 Former C.C.P. That period is not mandatory and may be extended where justified. The Former Code, as well as the Current Code, provides that a seizure can be quashed if the allegations made to obtain the seizure were insufficient, false or both.

Insufficiency or falsity of the allegations are not the only grounds that justify quashing a seizure before judgment. The Court in Deloitte & Touche inc. v. Banque laurentienne du Canada, 1995 CanLII 5463 (QC CA) held that a court can quash a seizure on a ground of law other than the instances referred to in article 738 Former C.C.P. See also Société de développement de la Baie James v. Gestion pourvoirie Mirage inc., 2012 QCCA 1699.  Lack of jurisdiction can be raised as a declinatory exceptions. Lack of jurisdiction over the subject matter of a dispute can be raised at any time by the parties and even independently by the court because the jurisdiction of the court to issue the writ of seizure is a matter of public order.

The procedural history is summarized at paras 3-18 of the Superior Court decision and provide insights into the process by which such orders are obtained, modified and challenged by the parties affected by the orders. Certain paragraphs set out facts which will be of interest to arbitration practitioners interested in executing on their international commercial arbitral awards, including prior to recognition and enforcement of those awards.

The Superior Court reasons set out the amounts held by IATA and how the Superior Court adjusted for the amount to be held by IATA as garnishee. The amounts in issue are significant.

[6] Meanwhile, on August 12, 2013, IATA filed its negative declaration. It stated that it “does not currently have in its possession any sums of money, securities or movable property that is marked as belonging to the Defendants”, but it added that it had in its possession an amount of approximately US$166 million that it held in trust for the benefit of the Iraqi Civil Aviation Authority (ICAA). IATA did not disclose where the funds were held.

[14] On December 11, 2013, the parties appeared before Justice Décarie, who rendered an order by consent limiting the amount seized to $90 million and allowing IATA to transfer the funds held under seizure to the trust account of its attorneys. The order was made “without prejudice to any and all rights or arguments that the parties may wish to invoke or make”.

The applications judge held that he lacked jurisdiction because the funds seized were located in Switzerland. He also concluded that, because of the contract between IATA and ICAA, IATA acted as ICAA’s mandatary and as such the funds held did not constitute a debt. Rather, he determined that the funds were property that always belonged to ICAA although not in its possession. Instead of quashing the writ altogether, he held that the writ should be reworded to remove mention of any of IATA’s branches outside of Québec. He did so because a Superior Court in Québec had no jurisdiction to order or effect the seizure of property outside of Québec.

Writing for the Court, Mr. Justice Mark Schrager agreed with the applications judge that a seizure before judgment could be challenged after the time period set out in the Former C.C.P. because jurisdiction, being of public order, could be raised at any time. In that regard, he agreed with the applications judge that the application to quash, even two (2) years after the seizure, was still timely.

Schrager J.A. reviewed the case law to reaffirm that there was no ownership or real rights in the funds held by IATA and that the court’s jurisdiction over IATA as a garnishee stemmed from where the debt is collectible and not where the bank account was opened. He considered other arguments in law, include trusts and patrimony by appropriation, but doubted that IATA ever segregated the deposits collected from different airlines or tracked them to particular civil aviation agencies. ICAA itself also had no contract with a bank holding the funds collected by IATA or any title to or authority over those IATA bank accounts.

Despite the use of the term “trust account”, Schrager J.A. concluded that there was no suggestion or evidence that IATA was a trustee of its own bank account for the benefit of ICAA. In addition, he held that the contract between IATA as debtor to ICAA as creditor for those funds did not alter the successful arbitral party seeking to recover on its Award.

[42] IATA is domiciled in Montreal, subject to the jurisdiction of the Quebec courts. It owes money to ICAA and that account receivable or debt is for purposes of private international law located at the place where it is collectible, which is ordinarily the domicile or principal place of business of the account debtor (IATA) – i.e. in Montreal. Any contractual stipulation between ICAA and IATA that sums were payable in New York is res inter alios acta and does not bind Appellant or have any bearing on its rights. This is not a case of enforcement against a foreign asset; the property seized is the debt due by IATA to ICAA, which is situated in Montreal.

[43] IATA owes ICAA a sum of money corresponding to sums collected on its behalf from various airlines less the fees earned by IATA in doing so. This obligation is, based on basic legal principles, a debt, and this is so irrespective of the characterization of the contract between IATA and ICAA as a mandate or some sui generis relationship. ICAA never owned the debts due it by various airlines in consideration of landing at Iraqi airports. It does not now own the funds collected in satisfaction of those debts and deposited by IATA in its bank account. IATA’s obligation is to pay a sum of money not to give the dollar bills received from third parties. It would be otherwise if IATA had collected some tangible asset on behalf of and owned by ICAA. The latter would have a real right in the object. A seizure of the asset would need to be effected in the place and before the courts where the piece of property was physically situated.

Schrager J.A. stated that IATA’s rights against the Swiss bank are personal rights not real rights and that the only “owner” of the sums on deposit is the Swiss bank. If not, the other civil aviation authorities would have equivalent, competing rights and make each a divided co-owner of a share of the Swiss bank account. Schrager J.A. identified the mischief if the contrary position was upheld.

[50] More significantly it seems that the Appellant and others in similar positions which seek to execute an unsatisfied claim would be forced into an international “shell game” of somehow discovering (or guessing) where the mandatary/garnishee (IATA), deposited the money – a virtually impossible task. The law, correctly applied, should not lead, in my view, to such unworkable results. As the in personam debtor of ICAA, it matters not whether IATA deposited the money it collected and giving rise to such indebtedness in a bank account in Geneva, New York or Montreal. The situs of its bank account does not change the situs of the debt IATA owes to its creditor. As such, that funds were initially collected in Montreal or at an IATA branch office in another country is inconsequential. Thus, the judge should not have struck the words “either… or at any of its [IATA’s] worldwide branches” from the writ of garnishment.

The analysis regarding the nature of such debts and the ability to act against local garnishees rather than distant assets will assist international commercial arbitration practitioners in executing on awards.

update July 4, 2019 – leave to appeal granted by Supreme Court of Canada, file no. 38562