Thursday, May 27, 2010

The Strategic Use of the Public-Private Divide and Politics By Corporate Means: From the Front Lines of the War Between Iraq and Kuwait

I have been suggesting that the distinction between public and private spheres has lost its essential meaning as a separation of spheres of governance that function on essentially different planes.  Yet it seems that the legal distinctions continue to provide states--and economic enterprises--with a substantial space in which they might deploy these formal legal categories for strategic effect.  A recent case provides some illumination:

Iraq's government has dissolved state-owned Iraqi Airways over a decades-old financial dispute dating back to Saddam Hussein's invasion of his oil-rich neighbor Kuwait, the Transportation Ministry said Wednesday.
Kuwait has long demanded $1.2 billion in reparations from the airliner for alleged theft of 10 airplanes and millions of dollars worth of spare parts during the 1990 invasion. It had sought to freeze the company's assets worldwide.
A Transportation Ministry spokesman said the company will continue to operate until it is fully dismantled, but he did not give any time frame.
"Iraq's Cabinet decided to close Iraqi Airways and announced its bankruptcy because the company doesn't own any airplanes and because of the Kuwaiti government's cases raised against the company," spokesman Karim al-Tamimi told The Associated Press by telephone. "We hope in the future to replace it by two or three companies to resume its operations." . . .
Iraqi Airways did not own any of its own planes, but chartered them from other companies.
On Tuesday, the airline said it had canceled routes to Britain and Sweden after Kuwait tried last month to confiscate the airliner's first plane to fly to London in 20 years.
Lawyers working for Kuwait attempted to confiscate the airplane that made the flight, but were not able to when it turned out to be chartered from a Swedish company and not owned by Iraqi Airways.
Hamid Ahmed,  Iraq dissolves Iraqi Airways over Kuwait dispute, Bloomberg/Business Week, May 26, 2010.  There are a number of points worth considering here:

1.  The political issues underlying the dispute--the reparations claimed by Kuwait that have festered since the fist Gulf War were a political matter but resolved through resort to the traditional mechanics of private dispute resolution of commercial disputes.  In this case, the Kuwaiti and Iraqi governments continued their disputes over reparations through their controlled entities--their respective national airlines organized and operating in corporate form.  Indeed, the public was never far from the private form in which this dispute has been cast. 

2.  The resort to private sector commercial measures were most successful in the courts of a foreign jurisdiction.  "Kuwait Airlines won a British court order to freeze Iraq Airways' global assets on April 25, the same day the Iraqi Airlines flight landed in London for the first time in twenty years."  Iraq Dissolves Airline, Thwarting Kuwait, International Herald Tribune, May 27, 2010, at 21.  Strangely enough, this case appears in U.K. courts years after the United States directly intervened in the region militarily.  The odd missing element in this story is the United States--either as the occupying power immediately after the conquest of Iraq or thereafter during its administration when it might have been possible to obtain a consent to reach Iraqi assets.  The passive and silent role of the United States speaks volumes, though it is not clear that anyone is ready to hear what that silence suggests.

3.  The Iraqi venture into the airline business was strongly protected by the strategic use of legal devices that created a separation of ownership from control and effectively insulated the actual assets of the controlling entity--the government of Iraq--from the reach of legal process. This is not the separation of ownership from control that dominates the discourse of corporate lawyers and is the private sector analogue of the great debates about the nature of applied principles of mass democracy to economic entities.  Rather, this is a well understood method of avoiding risk to assets through arrangements that transfer control of assets but not their ownership. As a consequence--the operation of the Iraqi national airline will change form but will otherwise continue unimpeded by Kuwaiti action.  Indeed, even as the Iraqi government announced the dissolution of the airline, Amer Abdul-Jabbar, the Iraqi Transport Minister "said that three private airline companies were being established."   Iraq Dissolves Airline, Thwarting Kuwait, International Herald Tribune, May 27, 2010, at 21. 

4. The use of bankruptcy by a state owned enterprise provided a powerful strategic tool for states to avoid obligations while protecting their business ventures.  Bankruptcy leaves both the claimants, Kuwait and its Airline entity, along with the owners of the chartered aircraft, exposed.  "A lawyer for Kuwait Airways called the Iraqi government's strategy a 'cynical tactic' and said it would not end the dispute because Kuwait would still hold the government accountable for the debt."   Iraq Dissolves Airline, Thwarting Kuwait, International Herald Tribune, May 27, 2010, at 21.  However, the result is still the same, Kuawit will not be able to avoid political discussion.

5.  The Iraqi government can continue to run a public airline through private intermediaries by applying a strict regimen of regulation and a special taxing policy that would mimic the arrangements of corporate control and distribution of dividends.  Regulatory power substitutes for financial investment and a formally private enterprise is effectively transformed into an instrument of state power. Europeans have understood this in their own way as they constructed their legal regimes for state aids and free movements of capital within European Union Law.  See, e.g., Larry Catá, Backer The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law. Tulane Law Review, Vol. 82, No. 1, 2008. But the parties in this dispute appear to have embraced the nearly opposite view, one that inclines to the notion that formalism in law serves as the predicate fig leaf to cover the realities of state control and operation, but with no financial exposure of state assets.

The moral of the story is ironic and perverse to some extent at least.  Two states, operating transportation sector operations in corporate form seek to resolve disputes related to the financial consequences of political action (war and occupation) through the use of private sector dispute resolution normative frameworks that favored, in this case, the defending jurisdiction because of its strategic use of operations structuring in the management of its business.   The dispute is being fought outside the jurisdictions of either state--and not subject to the jurisdiction of the courts of either of them.  But the dispute remains essentially juridified--a matter for judges applying the law of enterprises, subject to the  limitations of the sovereign character of the states that control the entities through which states invoke the process of private resolution for public (political) disputes. The element of farce permeates.  Yet, when broken down into its individual elements there appears nothing out of the ordinary.  But put together in this interesting way--the legal battles between Iraq and Kuwait point to an important blending of private methodologies and public policies, or better put, the political objectives of states.  In a perverse way, the old Marxist notion of the convergence of the political and economic, of the public and private, has been both inverted (the public is now the private and the economic is now the political) and globalized.  Markets are the new arena of political activity within a context in which territorial authority and judicial jurisdiction do not necessarily correspond.   See, e.g., Larry Catá Backer, The Other Face of Modern Warfare: The U.K. Battlefront in the Israel-Palestine War,  Law at the End of the Day, Dec. 15, 2009.

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