Case Comment Volume 6:1

Municipality of St. John v. Fraser-Brace Overseas Corporation Et Al.

Table of Contents

No. 1 ]

CASE AND COMMENT

MUNICIPALITY OF ST. JOHN v. FRASER-BRACE

OVERSEAS CORPORATION ET AL.

The vast majority of international

The problem of immunity of a foreign sovereign and his property is, in one
form or another, as old as international law itself. In its embryonic form,
in fact, it antecedes nation-states and international law as we know it today.
the principles of
sovereign immunity to the feudal rule which decreed that no lord was to be
subject to the laws of another lord on the ground that all lords were equal:
par in parem non Izbet imperium. When nation -states emerged,
this rule
was logically extended to heads of state and tieir property as well as to state
property.’

law writers credit

law has been

local municipal

The extent to which a foreign sovereign and his property are exempt from
jurisdiction of
the subject of voluminous
international litigation, and has given rise to numerous pertinent problems.
Does not such immunity derogate from the sovereignty of the “host” state?
If immunity is admitted, should it be absolute or should it apply only to the
person of the sovereign himself and to his diplomatic agents acting in their
capacity as public officials? Should a distinction, then, be made between
private acts and public acts of a foreign state for the purpose of determining
where immunity lies? Should only property employed for the public use of
a foreign state be exempt from local jurisdiction, or should immunity apply
to all property owned abroad by a foreign sovereign? These are some of the
main questions generated by the concept of sovereign immunity.

The answers to most of these problems, even today, have not yet been fully
settled as both doctrine and jurisprudence often hold contradictory views regard-
ing the problems of immunity. The modem trend, however, has been to
recognize partial immunity of a foreign sovereign. Where a state or its agents
act in a limited, private capacity (jure gestionis) they can claim no immunity;
but where their acts are of public nature and for the benefit of the state as a
whole (jure imperii), immunity from local jurisdiction may be invoked. This
view has been adopted by the courts of continental Europe, especially France,
Italy, and Belgium.2 The Anglo-American view has tended to be more rigid,
and until recently has leaned towards absolute immunity.3

‘Criticism has been

levelled lately at the principle of immunity on the
ground that it belongs to a past era. “The principle of sovereign immunity is
an archaic hangover not consonant with modem morality, and it should

‘Lyons, A.B., The Avoidance of Hardships Resulting from

the Doctrine of
Sovereign Immunity, 42 The Grotius Society 61: Briggs, H.W., The Law of Nations,
second edition, 1952, p. 442; Lauterpacht, H., The Problems of Jurisdictional Immunities
of Foreign States, 28 B.Y.B.I.L. 220 at 221.

2For cases cited on the point, see 34 The Grotius Society 111, at 112.
3Ibid at 117; Briggs, op. cit., p. 447.

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in his criticism of sovereign

therefore be limited whenever possible.” 4 Proiessor Lauterpacht in particular
immunity. He claims
has been adamant
“it is productive of inconvenience, injustice, and resentment which may be
than the assumption of
more inimical to friendly international intercourse
jurisdiction.” 5 Moreover, he submits that the notions of dignity and equality
is no
which are the basis of sovereign immunity are “archaic”, and there
reason why a foreign state should not be subject to the same laws which bind
the “host” state. Any jurisdictional problems that do arise could be resolved
through international agreement. 6

Whatever may be the view regarding the principles and theory behind
sovereignty, it is quite clear that in its practical aspect the problem is of great
importance. The world has shrunk considerably since the 19th century, and
with the tremendous upsurge of the welfare state, inter-governmental transac-
tions and property ownership by one state in the territory of another are
that 19th
common, every-day occurrences. It is quite obvious,
century principles and concepts regarding immunity are no longer satisfactory
today. Moreover, the distinction between private and public acts of a state
has become virtually impossible to apply.

therefore

Uncertainty exists as to whether a foreign state can be sued for breach
of a commercial contract in a municipal court, or whether property owned by
a foreign state is subject to lbcal law. The problem of jurisdiction of municipal
to
courts over foreign states
what extent domestic statutes apply to foreign states.

is a moot question

is unsettled, and

it

The close relationship between Canada and the United States has led to
considerable controversy lately .regarding questions of jurisdiction. Recently
the important question of the ability of one state to tax the property of another
has arisen between these two neighbours, with the issue coming to a head in the
Canadian Supreme Court case of Municipality of St. John v. Fraser-Brace
Overseas Corporation.7 The case is of unusual practical importance since it
concerned defense installations erected in Canada by the United States and
designed to serve both countries as a joint warning system against air attacks.
By special agreement the Canadian federal government granted the United
States government, without charge, the right of access, use, and occupation
necessary for the building of these radar installations. In 1952 an American
company, the Fraser-Brace Co., was given the task of constructing the system.
Towards this purpose, the Corporation proceeded to lease some property from
the Municipality of St. John in New Brunswick, and also bought moveable
property necessary for the construction of the installations. Some of the move-
able property was directly owned by the United States government while the

4Larson v. Domestic & Foreign Corporation, Sup. Ct. 337 U.S. 682, at 703.
5Lauterpacht, op. cit., at 226.
Mibid, at 231, at 237.
7 [1958] S.C.R. 263.

No. I1]

CASE AND COMMENT

rest was bought in Canada by Fraser-Brace with the understanding, mentioned
in the purchase orders, that the United States government would reimburse
the Corporations for these purchases. Finally, the contract between the United
States government and Fraser-Brace stated that title to all the property at
the installations, moveable and immoveable, would pass to the United States
government either upon reimbursement to the Corporations, or upon the
use of the installations by government personnel, whichever came first. In fact,
however, the leases were never transfered to the government, but instead were
transferred to Drake-Merrit Co., a co-contractor, who took over the work
on the installations in 1954.

From the beginning, Fraser-Brace claimed tax exemptions both on the
moveable and immoveable property alleging that the property was owned by
the United States government, and as such could not be taxed. A clause on their
purchase orders read as follows: these goods are “to become and remain the pro-
perty of the Government of the United States, and are not for Resale, Personal
or Private use, and are exempt from Sales Tax, Excise Tax, and ,Duty
by virtue of an Order in Council of the Dominion Government.” Although
the Municipality was undoubtedly aware of this exemption claim, never-
theless it assessed and collected taxes from Fraser-Brace in 1953 amounting
to $17,823.97. Fraser-Brace paid these taxes under protest. In 1955, the
Municipality further assessed the Drake-Merrit Co. for the years 1954 and
1955. Consequently in June of 1955, both companies took a joint action against
the Municipality to recover the taxes already paid, and to obtain an injunction
preventing the Municipality from levying the taxes assessed for 1954 and
1955.

claim

immunity from taxation upon

The main issue in the case is relatively clear: is the exemption claimed by
the companies justified? In other words, can a sovereign –
here the United
States government –
its property
situated in a foreign country? Before this question can be answered however,
the issue of wvhether or not the United States government actually owned the
property in question ‘had to be settled. Another subsidiary issue is the constitu-
tionality of the tax from the point of view of Provincial-Dominion relations.
The trial judge8 dismissed the action stating that the property was not
“destined for its [the United States] public use ;” nor was it “devoted to public
use in the traditional sense.” On the question of ownership, he held that legal
title both to the moveable and to the immoveable property was vested in the
companies, but held in trust for the United States government.

The majority of the judges of the New Brunswick Court of Appeal9 reversed
the judgment in part, holding that only the leases were liable to taxation but
that the rest of the property was immune. Bridges J., however, agreed fully with
the trial judgment. All three judges concurred that legal ownership of the pro-

8(1956), 39 M.P.R. 33.
9(1957), 9 D.L.R. (2d), 391.

66

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perty was vested in the Government. Thereupon the Municipality appealed to
the Supreme Court to reverse the Appeal decision on the property declared to be
immune, while the companies launched a cross-appeal praying that in addition
to the moveable property, the leases as well be.exempt from taxation.

The Supreme Court, by a unanimous decision dismissed the appeal of the
Municipality and maintained the cross-appeal of the companies, thus holding
the entire property at the installation immune from taxes. The Court devoted
little time to the question of the legal title of the property. Whether or not
the United States government was the legal owner was not really an important
consideration. The companies were undoubtedly the trustees or agents of the
United States government and, as Justice Rand pointed out, there is no author-
ity “which holds a trustee taxable in respect of the interest of a beneficiary
exempt.”10 The contractors were merely passive agents charged with no
responsibility beyond that arising out of the construction contract.”

In -their judgments both Justices, Rand and Locke, traced a short history of
the development of the notion of immunity of a foreign sovereign. They cited
various authorities but seemed to rely principally on the two leading decisions
of the Schooner Exchange v. M’lfadden, and the Parlement Belge.12 Both
these cases concerned the question of immunity of war ships during peace
time. In both cases it was held that the ship, being a public vessel, was exempt
justices
these cases, the
from local
approved the principles of dignity and international comity:

jurisdiction. In referring to

learned

Our King owes no kind of subjection to any other potentate on earth. Hence it
is that no suit or action can be brought against the King, even in civil matters,
because no court can have jurisdiction over him. For all the jurisdiction implies
superiority of power; authority to try would be vain and idle without authority
to redress, and the sentence of the court would be contemptible unless the court
had power to command the executive of it, but who shall command the King?13
From these comments, one wonders to what extent support is given to the
principle of absolute immunity. Although the modern trend, certainly on the
part of the executive in most countries, leads away from the notion of absolute
immunity, Justice Rand in his remarks seems to echo 19th century principles
the immunity of a sovereign, his ambassadors,
when he says: “In general
ministers, and their staff, together with his or their property, extends to all
processes of the courts, to all invasions or interferences with their person,
or property, and to all application of coercive public law brought to bear
affirmatively, including taxation.” 14 Yet neither Rand J., nor Locke J. rely
entirely on the principles of dignity and non-submission. Both emphasize that
behind sovereign immunity there lies the consent of the host state to such

10[1958] S.C.R. 263, at 270.
11For a similar view on the question of state ownership see The Rahbnoola Case

[1957] 3 A.E.R. 441, at 462.; U.S. v. Dolfus [1952] A.C. 582, at 586.

12(1812) 11 U.S. (7 Cranch) 116; [1880] L.R. 5 P.D. 197.
13[1880] L.R. 5 P.D. 197, at 206; Quoted at 279.
14[1958] S.C.R. 263, at 268.

No. 1]

CASE AND COMMENT

immunity, a consent which in the present case is implied from the Dominion
government invitation extended to the United States to construct the installa-
tions.

For authoritative precedent in regard to the taxation issue, the court relies
heavily on the Foreign Legations case. 15 This was a reference case in which
the question was put before the Supreme Court whether or not it was
within the power of the City of Ottawa to levy rates on property owned and
occupied as legations by foreign governments, viz., France, United States, and
Brazil. The majority of the Court (Justices Rinfret, Taschereau and Duff),
answered the question unqualifiedly in the negative. Judges Kerwin and Hudson
held that the city was entirely within its rights in assessing and levying these
taxes, but that no judicial recourse could be exercised against the legations
if they refused to pay voluntarily.

Mr. Justice Locke, in the present case, was of the opinion that the Foreign
Legations case had settled the question of immunity in respect to taxation even
though the latter case “related to property of different nature.”‘ 6 Mr. Justice
Rand is not quite as certain about the applicability of the Foreign Legations
case, and although he does cite it as authority, he seems to rely more on
,common sense and practicality as the real basis of his judgment. One must
always find the rule which “reason and good sense . . . would prescribe.”’17
Each issue must be determined on the merit of its facts and implications “in
the international sphere”. Rand J. goes on to cite the Armed Forces case,1 8
in which the United States was held to have exclusive jurisdiction in criminal
matters over its soldiers stationed in Canada, as authority for the proposition
that a state must be allowed to excercise the “powers of -high sovereign character”
in the unique circumstances of national defence. “Public works of this sort
are not ordinarily considered subjects of taxation. Their object is to preserve
the agencies that produce national wealth, the source of taxation.”’19

Although on its surface the decision would appear to engender little con-
troversy, and to conform to settled principle of law, nevertheless it does raise
some interesting points and important implications. It could well be argued –
certainly on the basis of Justice Rand’s judgment –
that the case was
decided upon the expediency and the practicality of defense needs rather
than on the basi of international law principles of sovereign immunity –
a kind of ex aequo et bono ground. If so, one wonders what would be the
attitude of Canadian courts if tax-exemptions would be claimed by American
state-owned companies dealing in non-defense matters. If again,
the ratio
of the case is immunity because of the special character of defense works, it

15[1943] S.C.R. 208.
18[1958] S.C.R. 263, at 278.
‘Ibid, at 269.
18[1943] S.C.R. 483.
19[1958] S.C.R. 263, at 270.

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would be interesting to speculate just how far this immunity would extend.
For example, could the federal government control –
by virtue of section
91(7) of the British North America Act and by virtue of the principles laid
down in this case –
the prices of defense materials sold, in a province under
provincial law, to foreign sovereigns? In other words, does the immunity
.granted in this case extend the powers of the Dominion government vis-a-vis
the Provinces?

This question raises a fine constitutional issue. Little mention is made of
it by any of the judges in the case. Only Justice Rand mentions, en passant,
the existence of the federal Order-in-Council inviting the United States govern-
ment to proceed with the construction of the installations, and permitting its
agent full immunity from any local jurisdiction. Prima facie this would appear
to be an encroachment on provincial rights, but quite obviously none of the
judges think so. Locke points out that the federal government was legislating
under its defense powers (s. 91(7) of the British North America Act) when it
issued the Order-in-Council. Here again is evidence of reasoning based on
the peculiar defense circumstances of the case.

Mr. Justice Rand, however, implies that it is by virtue of international
law principles that the government was justified in granting the exemptions.
If so, it must be presumed that international law is incorporated into the
domestic law of the province. This would seem
to be the basis of the
judgment in respect to the provincial-federal question. It still leaves open,
however, the question of the constitutionality of the Order-in-Council. But
this was not the issue in the case and the court did not rule on it.

in no way clothe

the Dominion with

As all the judges rely quite heavily on the Foreign Legations case, it is
interesting to note what was said there regarding the issue of extension of
federal powers into the provincial field. Taschereau J., in commenting on this
question -in that case, said to prohibit a municipality from assessing taxes for its
purpose “would
any enlarged
competence … [nor] would it extend the field of federal legislative power.”20
The other judges who touched on this question agreed. The Privy Council,
moreover, is further authority for this proposition: “No further legislative
competence is obtained by the Dominion from its accession to international
status and the consequent increase in the scope of the executive function.” 21
If one accepts that international law is part of provincial law the solution to
the question of federal encroachment is quite simple. In fact, it may be dis-
regarded altogether. One need only look at the New Brunswick statute relevant
to the taxation in question. Since this statute deals with taxation only in
general terms, one can readily apply the presumption of statute interpretation
that international law rules must be adhered to unless specifically excluded

20[1943] S.C.R. 208, at 249.
21AG of Canada v. AG of Ontario et al. [1937] A.C. 326, at 352.

No. 1]

CASE AND COMMENT

with the result that immunity of foreign sovereigns from taxation applies
vis–vis the provinces as much as it applies vis-A-vis the Dominion.

As a final question one must ask what theory of immunity this case
represents. The answer to this question is important as it may have far reaching
consequences upon American-Canadian commercial and defense relations. As
mentioned above, it could well be argued that the judgment was rendered on
in question. Yet,
the basis of the defense character of the installations
undoubtedly, there emerges from the judgments of Justices Rand and Locke
a fairly consistent and conservative doctrine of immunity, not unlike that
of the past century. While in defense matters such doctrine is undoubtedly
necessary, it could, nevertheless, seriously hamper commercial relations between
Canada and foreign, state-owned companies. Although the executive is bent
transactions of this
on reducing
type, the courts, as evidenced by the present case, have not followed suit. It is
imperative that this situation be remedied –
preferably through international
agreements.

the concept of immunity in commercial

GEORGE A. ROSENBERG*

*Of the Board of Editors, third year Law Student.

Lamb v. Benoit Et Al. in this issue Book Review(s)

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