GOK FINESSING OF KUWAIT AIRWAYS CASE SETTLEMENT

C O N F I D E N T I A L KUWAIT 000109

SIPDIS

TREASURY FOR VINOGRAD

E.O. 12958: DECL: 02/03/2019
TAGS: PREL EAIR ECON IZ KU
SUBJECT: GOK FINESSING OF KUWAIT AIRWAYS CASE SETTLEMENT
OPEN TO DEBATE

REF: A. 08 KUWAIT 976

B. KUWAIT 105

Classified By: Economic Counselor Oliver John for reasons 1.4(b) and (d
).


1. (C) Summary: Parliamentary inquiries debate about the
terms of a possible settlement between Kuwait Airways
Corporation(KAC) and Iraq have highlighted a major disconnect
between the GOK and KAC. GOK MFA Undersecretary Jarallah
affirmed that the Amir had intended to resolve the issue
during side talks between the Kuwaiti and Iraqi delegations
at the recent Arab Economic Summit in Kuwait(ref B). KAC
officials, however, insist that no final deal has been
negotiated and that the effect of a $300 million payment
mentioned in press stories would only be to terminate a KAC
collection lawsuit in Canada which had frozen GOI assets
deposited for the purchase of ten Bombardier aircraft. The
GOK has reiterated to the GOI through its ambassador in
Baghdad that the GOK alone has the official word on the
matter. Although Jarallah has confided that the GOK would
prefer to keep the National Assembly out of what it wishes to
treat as a government to government deal, we understand that
the Kuwait Airways Privatization law and a separate statute
governing state actions substantially affecting public monies
and assets both require approval of a settlement by the
National Assembly. Jarallah also suggested that public
statements on the matter, by the GOI or KAC, undermine the
prospects for reaching a final settlement. End summary.


2. (C) Kuwait Airways Company(KAC) Legal Advisor Sattar
Mohammed Setareh told Econoff on January 29 that no
settlement had been reached in discussions between the
Kuwaiti and Iraqi delegations that occurred on the side of
the Arab Economic Summit held in Kuwait on Jan. 19-20.
Setareh said news stories quoting GOI spokesman Ali
Al-Dabbagh saying the outstanding $1.3 billion damage award
in favor of KAC and against Iraqi Airways and the Government
of Iraq had been settled for $300 million were inaccurate.



3. (C) Setareh acknowledged that the GOI FM had raised the
issue of the damages award with the Kuwaiti Amir during the
Summit. However, Setareh said the FM had focused on the
GOI's desire to obtain the ten Bombardier aircraft it had
ordered from the Canadian manufacturer and whose delivery had
been blocked by a KAC lawsuit seeking GOI funds deposited
with Bombardier in satisfaction of KAC's $1.3 billion
judgment from a London court. Setareh said that, in response
to the FM's plea for the release of the Bombardier aircraft,
the Amir had offered to prevail on KAC to drop its collection
efforts in Canada and allow delivery of the remaining nine
aircraft, if the GOI would make a $300 million payment toward
the $1.3 billion judgment. Setareh said the KAC's CEO, Hamad
Latif Al-Falah, had confirmed this understanding with the
Amir immediately following the discussions with the GOI FM.
According to Setareh, the Amir told Al-Falah that he did not
intend to indicate that the entire KAC damages award would be
settled by this payment nor that KAC would cease efforts to
be paid the remainder of the $1.3 billion damages award.
Setareh said that two more Bombardier aircraft are ready for
delivery according to KAC's Canadian attorneys (Note: KAC CEO
Falah was quoted in a January 29 press story also saying that
the $300 million was not a final settlement but only aimed at
allowing delivery of nine Bombardier aircraft still on order
for the GOI. End note).


4. (C) In a February 2 meeting with Ambassador(ref B),GOK
Ministry of Foreign Affairs Undersecretary Khalid Al-Jarallah
acknowledged the discrepant stories but confirmed that the
GOK had intended for the case to be fully settled by the $300
million payment from the GOI: the Amir had instructed GOK
officials to "fix it" and believed the technical people had
reached a final agreement. Jarallah acknowledged Iraqi
confusion over the outcome of these talks but told Kuwait's
Ambassador in Iraq to inform the GOI that what they had heard
from the GOK was the official answer, i.e. $300 million was
intended to settle the entire matter. Jarallah suggested
that public statements out of Baghdad only served to invite
parliamentary intervention, given its contentious
relationship with the GOK government, which often involves
claims of GOK mismanagement of the public purse. Jarallah
stressed that the GOK had hoped to avoid Parliament's
involvement in this decision. (Note: The notion that
Parliament could be excluded from a settlement that wrote off
$1 billion of the damage award contradicts earlier statements
by KAC's Legal Advisor who stated that any write-down of the
$1.3 billion award would have to be approved by Parliament

under the terms of the 2008 Kuwait Airways Privatization Law
which prohibits any entity from diminishing KAC's "rights"
prior to completion of the privatization without the approval
of the National Assembly. Setareh said legal judgments and
claims qualify as property rights. Setareh said that
National Assembly approval would also be required under the
Protection of Public Funds law of 1993 which requires NA
approval for state actions which substantially affect public
monies and assets. End note.)


5. (C) Setareh said that as far as KAC was concerned, efforts
to collect the $1.3 billion award would continue; KAC
anticipated a decision from the Canadian court system in the
very near future and, if successful, KAC would seek the
transfer to KAC of any funds deposited by the GOI with
Bombardier.


6. (C) Setareh concluded the meeting by noting that GOI
complaints in October 2008 to the effect that the planes
which KAC had blocked the delivery of were intended for
Iraq's President and Prime Minister were false. He produced
a lease agreement that he said had been submitted by the GOI
in the Canadian case, which specified that the GOI Ministry
of Finance would lease all 10 Bombardier aircraft to Iraqi
Airways for the purpose of "transport of passengers, cargo
and goods." He characterized this as just one of many
instances of Iraqi deceit in the court proceeding in Canada.


7. (C) Comment: The GOK has long wished to resolve this
festering dispute and reportedly earlier agreed to settle the
matter for compensation of $500 million, reduced from $1.3
billion(ref A). That also proved to be too difficult for the
Iraqis. As post has noted previously, it may well be that
the Amir wanted to settle the matter quickly and quietly to
reward the Iraqis for their helpful Summit participation and
tried to finesse the issue by allowing the release of the
seized Iraqi aircraft in return for a $300 million payment.
Clearly there continues to be a major disconnect on the
Kuwaiti side between KAC and the political leadership. The
National Assembly may be in a position to foil GOK efforts to
put this matter to rest. Assuming the KAC Legal Advisor's
reading of the Privatization law and the Protection of Public
Funds law is accurate, the GOK would first have to overcome
almost certain parliamentary opposition to a $1 billion award
write-down at a time of economic downturn for many Kuwaitis.
The GOK has been reluctant to take unpopular stands in the
face of parliamentary opposition, even in less controversial
cases. Our sense is that the Amir hoped to game this as he
has the question of Iraqi debt, now estimated at $15-17
billion, by saying nothing, making no effort to collect, and
hoping the Iraqis would say nothing publicly to arouse a
parliamentary response here.


Comment continued
--------------


8. (C) The Iraqis appear to some Kuwaiti observers to be
gaming the system as well. The two most recent settlement
negotiations have occurred just as some of the
Iraqi-contracted Bombardier aircraft became available for
delivery, the first in September 2008 and now as the second
and third aircraft have come off the assembly line. The GOI
arranged delivery of the first aircraft during a brief
lifting of the asset freeze in the legal proceeding in Canada
in September, between the conclusion of an initial procedural
hearing in which the GOI prevailed and the filing of an
appeal by the GOK. Settlement discussions then halted until
the current GOK-GOI exchanges. Should the GOK leadership
fail politically to pull off the $300 million &settlement8
the GOI may have to rethink its strategy for satisfying the
damage award. End comment.

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For more reporting from Embassy Kuwait, visit:
http://www.state.sgov.gov/p/nea/kuwait/?cable s

Visit Kuwait's Classified Website:
http://www.state.sgov.gov/p/nea/kuwait/
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JONES