Sovereign states can be sued in Australia over bond defaults, and certain foreign judgments registered and enforced here too, but getting access to their funds to pay the judgment debt is a more complicated matter, following a decision by the High Court (Firebird Global Master Fund II Ltd v Republic of Nauru [2015] HCA 43 ‒ Clayton Utz acted for Firebird).

The High Court's decision on a sovereign's immunity against suit is a sensible and clear one, but its decision on its immunity against execution (ie. using its assets to satisfy a judgment against it) means each claim against a sovereign's assets will require great scrutiny of that sovereign state's everyday governmental functions.

Suing a nation: sovereign immunity against suit and execution

Basically, the traditional position has been that you can't sue a sovereign, unless it submitted to that court's jurisdiction. This immunity against suit has been chipped away globally; the trend now is to say that if a sovereign is acting as a commercial actor, then it's the same as anyone else and can be sued. Australia's Foreign States Immunities Act 1985 (Cth) follows that trend by having an exception in section 11 to this immunity "in so far as the proceeding concerns a commercial transaction".

Accompanying the immunity against suit is a second immunity ‒ the immunity against execution which protects the sovereign from having its assets in another country (such as its embassy or investments) seized. Again, the global trend is now to distinguish between property used for commercial purposes and property used for ordinary aspects of its governmental functions. Again, the Foreign States Immunities Act has this carve-out in section 32 for commercial property.

Nauru defaults on its bonds

Bonds were issued by the Republic of Nauru Finance Corporation (known as "RONFIN"), a statutory corporation. These bonds were guaranteed by the Republic of Nauru.

RONFIN defaulted, and Nauru refused to meet its obligations under the guarantee. These bonds were then offloaded, and bought in part by Firebird. It sued Nauru in Japan, and was awarded ¥1.3 billion plus interest.

There are no Nauru assets in Japan, but there are in Australia, in the form of various Westpac accounts. Firebird registered the Japanese judgment in Australia under the Foreign Judgments Act 1991 (Cth). It then obtained a garnishee order attached to those accounts to pay the judgment debt, which, with interest, now amounted to approximately $31 million.

Nauru challenged the registration on the basis of sovereign immunity, based on the Foreign States Immunities Act 1985 (Cth).

Registering a foreign judgment against a sovereign state in Australia

Following this decision in the High Court:

  • a sovereign state's immunity against suit does extend to the registration of a foreign judgment under the Foreign Judgments Act 1991 (Cth);
  • but if that foreign judgment was in relation to a commercial transaction, the exception in the Foreign States Immunities Act applies, and the immunity against suit does not prevent its registration under the Foreign Judgments Act 1991 (Cth);
  • the special rules in the Foreign States Immunities Act for serving the sovereign state do not apply to the registration of a foreign judgment against it;
  • whether a sovereign state's assets are immune from seizure or garnishing will depend on whether the activities for which the property is used are ordinary aspects of the governmental functions of that particular sovereign state ‒ which means there is no hard and fast rule about particular assets.

In this case, the Westpac accounts were held for purposes such as buying fuel, receiving revenue from the supply of electricity and water, providing micro-loans, or leasing aircraft. These were all found to be ordinary aspects of the Nauruan Government's provision of basic services to a small, isolated nation with little industry.

Commercial effect of the Firebird decision: sensible result on immunity against suit 

Firebird did succeed on the basic principles of when a sovereign state can be sued. A decision the other way, however, could have signalled that Australia is a good place to stash assets beyond the reach of a court judgment. In that sense, this decision ensures Australia's attractiveness as a place to do business.

Firebird did however ultimately lose on whether it could garnishee Nauru's bank accounts. The High Court's decision on what sovereign assets are available to satisfy a judgment debt does not set any hard and fast rules, and requires careful scrutiny of each asset and that sovereign's particular circumstances to determine if it is commercial property or not. Investors will therefore have to look beyond the balance sheet before they can be sure that there will be enough assets available.