ASIL Insights

Regarding the first issue, the UNCC's jurisdiction is defined by UN Security Council Resolution 687, the operative provision of which provides that "Iraq, without prejudice to the debts and obligations of Iraq arising prior to 2 August 1990, which will be addressed through the normal mechanisms, is liable under international law for any direct loss, damage . . . or injury to . . . corporations, as a result of Iraq's unlawful invasion and occupation of Kuwait." The corporate claimants argued that the phrase "arising prior to 2 August 1990" was not intended to and did not have the effect of excluding certain contractual claims from the Commission's jurisdiction because pursuant to UN Resolution 687 Iraq was liable for all loss, damage and injury directly caused by Iraq's invasion and occupation of Kuwait, regardless of whether those debts and obligations arose before Iraq invaded Kuwait on August 2, 1990. At issue were billions of dollars in corporate claims sought by businesses and government entities that had pre-existing contracts with Iraq but for which Iraq, as of the time of the Gulf War, had refused to pay its invoices and other contractual obligations.

The UNCC rejected this argument, holding that debts and obligations that arose prior to August 2, 1990 are excluded from the Commission's jurisdiction. The UNCC reasoned that the language in UN Resolution 687 was written such that the Security Council clearly "intended to exclude from the jurisdiction of the Commission debts and obligations of Iraq arising prior to 2 August 1990." The UNCC also noted that the sheer size of Iraq's pre-war debt-approximately $42 billion-underscores the intention of the Security Council to exclude such debt from the Commission's jurisdiction, for to conclude otherwise would be to create "an unanticipated mechanism for the compensation of creditors long unpaid" resulting in a significant diversion of resources available to compensate the "victims most directly affected by the invasion."

Having concluded that UN Resolution 687 did have an exclusionary jurisdictional effect, the UNCC then sought to identify precisely when a debt or obligation had "arisen." It did so by establishing a rule for identifying "old debt" from "new debt" that likely will be used in future corporate claims: "In the case of contracts with Iraq, where the performance giving rise to the original debt had been rendered by a claimant more than three months prior to 2 August 1990, that is, prior to 2 May 1990, claims based on payments owed, in kind or in cash, for such performance are outside the jurisdiction of the Commission as claims for debts or obligations arising prior to 2 August 1990." Thus, the rule focuses not on when Iraq's debts and obligations actually came due-many of which had been rescheduled through deferred payment agreements and similar arrangements-but rather on when they should have come due assuming Iraq paid its obligations on a timely basis, i.e., within one to three months following the date of performance by the corporate claimant. This holding likely will mean that the vast majority of the billions of dollars of Iraqi pre-war debt claims will not be compensable by the UNCC.

Regarding the second issue as to what constitutes a "direct loss" resulting from Iraq's invasion and occupation of Kuwait, the UNCC distinguished between contracts depending on whether Iraq was a party to the contract and on whether the contracts were to be performed in Iraq, Kuwait, or Saudi Arabia. For contracts to be performed in Iraq and in which Iraq was a party, the UNCC held that in most cases those contracts were impossible to perform and therefore a direct causal link will be established if a claimant can show that the physical presence of personnel in Iraq was required to perform the contract and that its workforce departed from Iraq during the Gulf War. For contracts to be performed in Kuwait in which Iraq was not a party, the UNCC concluded that more was required. Unlike the situation of contracts with Iraq, claimants in these circumstances must provide "specific proof that the failure to perform was the direct result of Iraq's invasion and occupation of Kuwait." Finally, the UNCC was even more exacting with respect to losses occurring outside Iraq or Kuwait. In the case of loss or damage resulting from military operations in Saudi Arabia, for example, the UNCC concluded that a claimant must make a "specific showing that the loss or damage for which compensation is sought resulted from a specific military event or events." Clearly the UNCC was of the view that a direct loss will depend on the close nexus between the injury and the invasion and occupation of Kuwait, with more attenuated factual circumstances imposing additional evidentiary burdens.

Finally, regarding the third issue of whether compensation for contractual losses should be denied where performance of the contract violated the United Nations trade embargo, the UNCC concluded that it should, but that the UN trade embargo only prohibited the import or export of goods or capital into or from Iraq after 6 August 1990, and not the provision of services within Iraq after the trade embargo went into effect. On this basis, the UNCC concluded that "the provision of construction/engineering services within Iraq by non-Iraqi firms to Iraqi parties . . . insofar as it does not involve the transfer or transportation of goods or capital to or from Iraq, does not violate the terms of the trade embargo" but that work that does involve such transfer of goods or capital "violates the terms of the trade embargo and is not compensable." While not articulating a legal basis for this conclusion, it apparently flows from the general principle of ex delicto non oritur actio: no State shall be permitted to assert any right founded upon or growing out of a violation of international law.

The full text of the decision may be found online at: http://www.internationalADR.com/uncc.htm

Roger P. Alford, Hogan & Hartson L.L.P.* Washington, DC