After decades of war and sanctions, during which time Iraq's aviation sector stagnated, the revelation that Iraqi Airways is poised to invest $6bn in 50 new planes has put the country's national airline back on the map. But it has also given new life to one of the region's longest-running legal battles and revived memories of the 1990 invasion of Kuwait.

With plans to begin building a new domestic and regional network this year, and the promise of long-haul international routes in the future, the Iraqi flag carrier will, once more, be taking to the skies.

In neighbouring Kuwait, however, reports of Iraqi Airways' spending plans have caused outrage. Kuwait Airways is still fighting to have $1.2bn returned to the company in compensation for aircraft and equipment stolen by Iraqi Airways during the invasion.

Kuwait Airways and its lawyers have fought for 18 years to recover this money through UK courts, making it the longest-running commercial dispute in UK legal history. The case has set numerous legal precedents along the way, and twice required judgements by the UK's highest court, the House of Lords.

In nearly two decades of bitter wrangling, lawyers and witnesses have received death threats from Saddam Hussein's regime, while 12 previous years of rulings were thrown out after a series of perjury findings against Iraqi Airways in 2002. However, the dispute finally appears to be nearing a close.

Privatisation plans

Both governments harbour plans to privatise their national airlines within the next two years and need to get the companies' accounts in order. Neither will be able to attract the desired level of investment if they are liable for a $1.2bn bill, so it is in their interests to resolve the matter quickly. The Iraqi aircraft order has brought matters to a head.

“Iraqi Airways has been claiming for years that it did not have this money; that we would have to agree to a reduced settlement,” says Christopher Gooding, a partner at UK law firm Howard Kennedy, which has represented Kuwait Airways in the case since 1990.

“So we were rather taken aback when we discovered that it apparently has $6bn to spend on new planes.

“This is typical of the way it has operated up to now, so we should not be surprised. But we have judgements against it in excess of $1bn and if it flies those planes outside Iraq, they will be seized to settle that debt.”

Kuwait has registered the judgement against Iraqi Airways throughout Europe and is widening the net to other jurisdictions worldwide. If any Iraqi planes touch down in these countries, they can be impounded.

“We have had to be patient, which has not always been easy, but the purpose of this has been to deny them the skies,” says Gooding. “Our attitude throughout has been that, eventually, Iraq would come out of the dark ages and we would be waiting.”

Kuwait Airways has been waiting a long time. On 3 August 1990, the second day of the invasion, Iraqi troops and Iraqi Airways staff entered Kuwait City's international airport, where 10 of the 19 Kuwait Airways aircraft were standing. A few days later, the Iraqis made off with all 10 planes, along with about 3 million spare parts.

This included engines and sections of fuselage, and all the equipment from the airport terminal. The following month, Iraqi Airways' then director general, Noureddin Saffi, publicly welcomed the merger of the two airlines.Four of the aircraft would later be destroyed by coalition forces in the US-led counter strike that followed the invasion. The remaining six were moved to Iran for safe keeping and were eventually returned in 1992.

Kuwait Airways issued a writ against its Iraqi counterpart in January 1991. The Iraqi defence throughout has been twofold: first, that the theft was undertaken as part of an invasion of Kuwait by a sovereign nation, so the airline is not liable; and second, that the company staff taking part were given no choice, their hands forced by a malign dictatorship.

Establishing liability

It has taken many years, and several reversals and appeals, to establish the company's liability. As revealed in MEED last month, however, Baghdad had hoped to dodge the judgement by securing sovereign immunity for its 50 new aircraft under UN Resolution 1790, which extended the mandate of the US-led coalition forces in Iraq.

Rather than own the planes outright, the Iraqi airline will lease them from the government. As state-owned assets, it hopes they will not be subject to seizure.

In addition, US officials in Baghdad have suggested that the $1.2bn should be transferred onto Iraq's national debt, shifting responsibility away from the airline itself, an idea rubbished by Gooding.

“This is a commercial debt from a commercial judgement,” he says. “The Iraqis cannot unilaterally move this debt around to suit themselves. This is a diplomatic misunderstanding of a legal issue.”

Gooding and the Kuwaitis have been unimpressed with the US attitude to their claim. With the Bush administration desperate to put Iraq back on the road to recovery, Kuwait Airways says Washington has been less than interested in the company's longstanding grievance. Instead, it claims, US officials from Baghdad have consistently sought to persuade Kuwait to drop the claim.

“We are not looking to grind Iraqi noses in the dust,” says Gooding. “The last solution proposed would have seen a compromise with Kuwait giving Iraqi Airways two aircraft and re-introducing co-operation and joint training programmes between the two companies. The US vetoed that idea.”

Michael McCormick, transport attache to the US embassy in Baghdad, concedes that settling the dispute was not a high priority in the immediate aftermath of the invasion, when the country was ruled by the Coalition Provisional Authority (CPA).

With the security situation now improving and Washington keen to reintegrate Iraq poli-tically and economically into the wider Middle East, the US has become more engaged with the case.

“There has been a shift in how we have been working with the case since the CPA days,” says McCormick. “We are more involved now and looking for a positive solution. The US has forgiven its Iraqi debt and we would encourage a resolution along similar lines.”

Sovereign immunity

McCormick says although the US continues to offer advice on the matter, the two countries must resolve it themselves at a diplomatic and ministerial level. He says the Iraqi government is divided over whether the recently proposed solution to grant the planes sovereign immunity will stand up in court.

“Some [government officials] feel strongly that by taking ownership out of Iraqi Airways' hands, they will be able to retain the planes, while others do not,” he says. “The prime minister is aware of the situation and requested US assistance to resolve it.

“Our official position is that Iraq needs to engage on this at a political level. Baghdad needs to name an ambassador to Kuwait and open high-level political discussions to resolve the situation.”

After nearly two decades of trying to avoid compensating Kuwait, there seems to be a recognition within Iraqi circles, however grudging, that the issue is not going away and the debt must be paid in full.

Both sides are keen to remove the huge anomaly from their accounts, pointing the way to a political resolution of the issue.

With the Iraq flag carrier now planning its own expansion and part privatisation, it needs the government to take the burden off its shoulders. With only six aircraft, only three of which it owns outright, the company does not want its new fleet to be impounded on the planes' maiden flights.

Likewise, Kuwait Airways' financial performance has been dismal since the 1990 invasion. The company has made a loss in 15 of the past 16 years. A $1.2bn windfall would be very welcome.

“This will be resolved at a government level,” says Ahmed al-Saadawi, an adviser to Iraq's Prime Minister Nouri al-Maliki on aviation and ports. “Kuwait is our neighbour and we should be on friendly terms. We want to see the issue resolved so we can push on with our own privatisation plans.”

Legal fees

However, despite their mutual desire for a resolution, the antipathy between the two airlines means that further complications are inevitable. Both sides are preparing to dispute the final level of legal fees stemming from the case, which sources estimate at $50-80m. It will require deft political handling to cool that simmering mistrust.

“Kuwait has been very intractable about moving the $1.2bn onto Iraq's general debt,” says McCormick. “A political solution is the only one that gives both companies the freedom to move forward with their privatisation plans.”

In Kuwait particularly, there is a lingering resentment and the issue remains deeply personal for the airline. Its recently appointed chairman, Hammed al-Falah, was deputy director of engineering at the time of the invasion and witnessed the theft of all his department's equipment.

At least one member of staff at Kuwait Airways had a relative executed by Saddam's troops and many others had friends or family killed in the conflict. Several Iraqis who have testified on behalf of the Kuwaiti airline are in witness protection programmes.

Kuwait Airways says it is only seeking justice. Moreover, in purely commercial terms, it is aiming to open itself up to public ownership.

The company argues, with some justification, that its prospective investors are entitled to know whether it is facing a $1.2bn gain or write-off. Those involved appear tired of emissaries from Baghdad promising much but offering little, except efforts to persuade them to reduce the claim.

“The doors are open to talks about repayment methods, but those talks need to be open and honest,” says Gooding “We know they have the money. We need someone to turn up with a chequebook open and with the authority to sign it.”