School sues foreign donor government in Australian court – sovereign immunity – what is a commercial transaction?

Questions of public international law do not, alas, arise regularly in the daily legal practice of most Australian lawyers. One must join the Government or an international organisation to get a sustaining diet of international law. International arbitration for investor – State disputes might be one exception, but the case load in Australia or involving Australian counsel and solicitors is still developing.

Any public international law is worth noting, all the more so when it reaches the High Court of Australia, as did Australian International Islamic College Board Inc v Kingdom of Saudi Arabia [2014] 2 Qd R 1; (2013) 298 ALR 655; [2013] QCA 129 .

The case involves the most commonly occurring of this uncommon species: a question of sovereign immunity. The case started when a school sued a foreign government to enforce a promise of funding for its operations.

Australians are used to suing their own Government in the Government’s courts, however this right is a departure from the historical and widespread position that a sovereign is immune from suit in its own court, unless the sovereign willingly submits. Australia (Queensland, no less) led the common law world in removing this immunity: Professor Paul Finn has traced its history. It was the initiative of a newly-elected backbencher from Maryborough in 1865 who introduced the first Claims Against the Government Act 1866. This was the progenitor of ss 56-58 and 64 of the Judiciary Act 1903 (Cth) and of the Crown Proceedings Act 1958 (Vic) and similar State laws: Finn, “Claims Against the Government Legislation” in Finn ed Essays on Law and Government vol 2 (1996).

At the domestic level, there are three inter-linked immunities which have been abolished or curtailed by this legislation

  • the exposure of the Government to substantive claims (so permitting it to be sued in tort or contract etc); procedural immunities (so requiring discovery etc);
  • immunity from execution. In addition there are related principles of statutory interpretation – whether the Government is bound by statute (see Bropho v Western Australia (1990) 171 CLR 1; [1990] HCA 24 and subsequent cases); and
  • the separate question of whether a statute evinces an intention of exposing the Government to criminal prosecution and punishment (see Cain v Doyle (1946) 72 CLR 409; Wurridjal v The Commonwealth (2009) 237 CLR 309 at 380-381 [164]).

At the international level, by analogy with domestic immunity, Courts extended to foreign sovereigns immunity from jurisdiction and from execution as an act of comity or mutual respect. This was an example of customary international law, based on widespread practice of States, not on any multilateral treaty (although the International Law Association prepared the Montreal Draft Convention on State Immunity in 1982 and the Institute of International Law and UN International Law Commission worked on proposals for a treaty in the 1990s).

In the common law, classical statements of the original doctrine (the absolute theory of sovereign immunity) were expounded in The Cristina [1938] AC 485 and Rahimtoola v Nizam of Hyderabad [1958] AC 379, and in the US Supreme Court in The Schooner Exchange v McFaddon 7 Cranch 116 (1812).

With increasing involvement of States, both directly and through state-owned instrumentalities and organisations, in international trade and activity, the rule of absolute immunity became increasingly questioned during the second half of the twentieth century, commencing in the US and then in the UK (see Trendtex Trading Corporation v Central Bank of Nigeria [1977] QB 529 (EWCA)).

National legislatures then intervened to establish a restrictive doctrine of sovereign immunity, under which there is no immunity for commercial activities of a foreign State, except as particularly specified. The legislation is broadly similar: Foreign Sovereign Immunities Act 1976 of US, State Immunities Act 1978 (UK), and other parts of the common law world, including Singapore (1979), Canada, South Africa and Pakistan (1981).

Australia followed suit with the Foreign States Immunities Act 1985 (Cth), adopting the recommendations of Australian Law Reform Commission Report No. 24 (ALRC Report 24) prepared by Professor James Crawford. It was this Act, aided by reference to the ALRC Report, which fell to be construed in the International Islamic College case.

As with many such cases, the outcome turns on a nice question of characterisation of the underlying transaction: was it a commercial transaction, for which there is no immunity, or was it one of the exceptions for which immunity is preserved.

A commercial transaction is defined in s 11(3) to mean “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.” Without limitation, it expressly includes a contract for the supply of goods or services; 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. On the other hand, a commercial transaction does not include a contract of employment (dealt with in s 12) or a bill of exchange (dealt with in s 19) and, critically, immunity is not waived “in so far as the proceeding concerns a payment in respect of a grant, a scholarship, a pension or a payment of a like kind”: s 11(2)(b).

The critical question framed by the parties was whether the transactions concerned a payment “in respect of a scholarship”.

The College alleged that Saudi Arabia entered into two agreements with the College: first to pay it the fees of recipients of Saudi scholarships; and secondly, to provide the school with funds necessary to repay the Australian Government for grants wrongly received.

Saudi Arabia brought an application for orders that, for want of jurisdiction, the proceeding had not been properly started by reason of the Act, or alternatively, that the plaintiff’s claim had not been properly served in accordance with the requirements of the Act. Martin J ([2012] QSC 259) upheld this for the first alleged agreement on the ground that the pleaded contact was that Saudi Arabia would be responsible for paying a sum of money for the education of children of Saudi scholarship recipients. That was, he said, within the exclusion, as “a payment in respect of a grant, a scholarship or a payment of a like kind”.

With respect to the second alleged agreement, Saudi Arabia disputed whether it was an agreement at all and argued that, if made, it was not commercial in character but was to avoid diplomatic embarrassment. After considering the High Court’s discussion of “commercial transaction” in P T Garuda Indonesia Ltd v Australian Competition and Consumer Commission (2012) 247 CLR 240, [2012] HCA 33 at [37] – [42], Martin J could not exclude the arrangement or agreement from being a commercial transaction, but again he found the transaction to be immune because it was related to scholarships (relying on the breadth of the introductory words of the exclusion “in respect of”).

The Queensland Court of Appeal (Holmes, White JJA and Atkinson J) reversed the decision: [2013] QCA 129. In her leading judgment, Holmes JA limited the scholarship exception to cases between the foreign state as grantor and individual award recipients. She characterised the first transaction as a payment in respect of the provision of a service by the College to Saudi Arabia (the service being the education of scholarship holders), not a payment in respect of a scholarship or grant to a selected scholar: at [13].

By a notice of contention, Saudi Arabia brought forward additional grounds to uphold Martin J’s decision – the first transaction as pleaded was vague (which, to this writer, may be accepted) and was too vague to be commercial; and the second transaction (to refund the Australian Government) was a policy decision in which there was no commercial element. (This is a tension inherent in the test of the “nature” of a transaction that goes back to the first great English case on restrictive immunity, the 1° [Primero] Congresso del Partido [1983] 1 AC 244. In that case, after a coup in Chile removed the friendly Allende government in 1975, the Cuban government diverted a ship load of sugar from Chile to Vietnam – the issue which divided the House of Lords was whether that diversion was an immune diplomatic decision or an actionable breach of commercial contract). Saudi Arabia argued, secondly, there was no agreement; thirdly, all that was needed to attract immunity was an arguable case. It would destroy the immunity if the foreign sovereign had to come into Court to argue it out fully in order to sustain it.

These are neat arguments, but they found no favour with the Court: as to the first contentions, the vagueness of the pleaded agreement was not relevant to its character while the commercial ‘nature’ of the second alleged transaction trumped the motivation for it (as in the House of Lords, by majority, in the 1° Congresso); on the last, authority requires that the claimant of immunity must produce sufficient evidence to show that its claim is not merely illusory, without proving the case. Nothing crossed that line here.

The High Court dismissed Saudi Arabia’s application for special leave to appeal on the papers ([2014] HCASL 37, Kiefel and Keane JJ) on the conventional grounds that the case did not raise a question of law of general importance sufficient to require consideration by the High Court and enjoyed insufficient prospects of success: at [4].