State Immunity and the Commercial Activity Exception in Australia

In a previous post, we discussed a recent decision of the UK Supreme Court, SerVaas Incorporated v Rafidian Bank & Ors [2012] UKSC 40 which considered the meaning of the expression “property which is for the time being in use or intended for use for commercial purposes” per s. 13(4) of the UK State Immunity Act 1978, such property being exempted from the protection of state/sovereign immunity.

According to the commercial activity exception, the state’s immunity to the jurisdiction of the courts does not apply when the activity in issue is a commercial one. This commercial exception also applies to attachment proceedings against state property. This issue is particularly relevant in the region given the prevalence of state owned enterprises, government linked entities and sovereign wealth funds in Asia.

Likewise, we had also previously explored the issues of enforcing arbitral awards against states and state owned enterprises, which in the context of state/sovereign immunity, prevents domestic court proceedings from being taken against a state or its assets.

In the case of a state owned enterprise, the question is generally whether the enterprise can be considered a “separate entity” from the state such that it is not entitled to rely on the state’s immunity from proceedings, or conversely whether it should be considered an “organ of the state” such that it is entitled to assert state/sovereign immunity.

These two issues came before the Australian High Court (the apex court in the Australian judicial system) in the case of P.T. Garuda Indonesia Ltd v Australian Competition & Consumer Commission,[2012] HCA 33. The appellant, Garuda, is the national flag carrier of Indonesia. It is substantially owned by the Republic of Indonesia to the tune of 95.5%, with the minority interest held by government linked corporations. 4 of the 5 members on its Board of Commissioners are senior officials of the Indonesian government (See paragraph [2]).

Garuda argued that this was sufficient for it to attract the general (state) immunity under Part II of the Australia Foreign Sovereign Immunities Act (FSIA), and thereby provide a complete defence to the proceedings taken out by the ACCC. These proceedings were taken out for Garuda’s contravention of the Australian Trade Practices Act and in particular allegations that Garuda formed part of a cartel to fix air freight fuel and security surcharges from 2001 to 2006.

The material provision of the FSIA in this instance was s 11(1) which reads, “A foreign State is not immune in a proceeding in so far as the proceeding concerns a commercial transaction“.

Question of “organ of state” or “separate entity” not relevant

One of the particular quirks of the FSIA is that the question of whether a particular entity is a “separate entity” from the state or an “organ of the state” is irrelevant. By virtue of s 22 of the FSIA, a separate entity of the state is entitled to the immunity under s 11(1). The term “separate entity” is defined in s 3(1) as a body corporate, not established under Australian law, which is an agency or instrumentality of a foreign State but is not a department or organ of the executive government thereof. Interestingly, no provision is made under s 40 for the issue by the Minister of  Foreign Affairs for a certificate respecting the status as a “separate entity“.

The Australian High Court noted that but for the FSIA, “[a]t common law, a question would be presented whether Garuda could be identified with Indonesia as a “foreign State” for the purposes of s 11(1)“.

Garuda’s Arguments

The question therefore turned on whether the proceedings brought by ACCC against Garuda “concerned” a “commercial transaction” as per s 11(1). S 11(3) of the FSIA defines commercial transaction as,

“a commercial, trading, business, professional or industrial or like transaction into which the foreign State has entered or a like activity in which the State has engaged and, without limiting the generality of the foregoing, includes:

(a) a contract for the supply of goods or services;

(b) an agreement for a loan or some other transaction for or in respect of the provision of finance; and

(c) a guarantee or indemnity in respect of a financial obligation; but does not include a contract of employment or a bill of exchange.”

Garuda accepted that the ACCC proceedings might involve an investigation into commercial transactions i.e. the individual contracts for carriage of freight entered into by Garuda to determine if any anti-competitive cartel behaviour existed. However, Garuda argued that the “commercial activity” exception of s 11(1) did not bite because the ACCC “[did] not plead the terms of any such contract, nor seek any remedy by way of variation, rescission, compensation or otherwise with respect to any of the contracts for the carriage of freight by Garuda. Further…no party to any such contract, or person claiming to have suffered loss by reason thereof, joins in the proceeding“.

Essentially, Garuda sought to argue that in as far as the ACCC proceeding did not seek to vindicate any “private law right” (i.e. loss or damages) in respect of any freight contract, then absent this, s 11(1) of the Act does not apply to deny immunity (see paragraphs [40] to [42]).

Whether the proceedings involved a “commercial transaction”?

The majority of the High Court held that it did. It held at [42] that,

“…it should be emphasised that the definition does not require that the activity be of a nature which the common law of Australia would characterise as contractual. The arrangements and understandings into which the ACCC alleges Garuda entered were dealings of a commercial, trading and business character, respecting the conduct of commercial airline freight services to Australia. The definition of a “commercial transaction” is satisfied.”

The remaining High Court judge agreed in slightly broader terms. Heydon J held that the alleged anti-competitive arrangements or understandings between Garuda and the other members of the cartel were themselves sufficient to engage the exception (see paragraph [73]). He reasoned that “[i]f a [formal] contract in contravention of [anti-competitive behavior] is capable of being a commercial transaction, non-contractual arrangements or understandings are capable of being “a commercial, trading … transaction … or a like activity”‘ for the purposes of s 11(1) (see paragraph [74]).

Whether the ACCC proceedings “concerned” a commercial transaction?

The majority of High Court rejected Garuda’s “postulated dichotomy between private and public law as controlling the meaning of “concerned” in s 11(1)“. It held at [43] that the alleged cartel behaviour was sufficient to bring it within the meaning of “concerned“,

“The Federal Court proceeding “concerned” a commercial transaction, within the meaning of s 11(1), in an immediate sense. This is apparent from the relief sought. The ACCC seeks declarations that the arrangements and understandings contravene Australian law, pecuniary penalties, and injunctive relief against the giving of effect to the arrangements and understandings.”

Heydon J in turn simply dismissed the argument at [68] on the basis that, “there is nothing in s 11 or in any other provision of the Act to support the distinctions the appellant sought to draw between public and private rights, between proceedings brought by a regulator and proceedings brought by beneficial objects of the regulating legislation, and between specific statutory norms and general law norms“.

Conclusion

This case is a timely reminder that commercial dealings in this region involve states and state owned entities more often than would be the case in other parts of the world. In such cases, special considerations apply because of issues of state/sovereign immunity. Parties should always take into account the jurisdiction where enforcement of any arbitral award is likely and it is therefore prudent for such parties to take legal advice on the enforceability of the same against state parties or state owned enterprises in those jurisdictions.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for DNDR at the KLRCA.
This entry was posted in Asean, Indonesia and tagged , , , , , , . Bookmark the permalink.

One Response to State Immunity and the Commercial Activity Exception in Australia

  1. Pingback: Case Update: GMR and Male Airport Dispute | Singapore International Arbitration Blog

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