Pt Garuda Indonesia Ltd and Anor v ACCC  FCAFC 52
The Full Federal Court of Australia recently considered the extent of sovereign immunity for foreign stateowned enterprises. The decision has particular relevance to corporations doing business in Australia and the rights they may have in relation to transactions with overseas companies.
The general principle under Australian law is that a foreign state is immune to any claims brought in Australian courts, subject to a number of important exceptions (section 9 of the Foreign States Immunities Act 1985). That immunity extends to so-called “separate entities”, which is any individual or corporation acting as an “agent or instrumentality” of a foreign state. An army major, for example, can contract on behalf of a foreign state without being liable for a civil suit.
In this case, the ACCC alleged that two airlines, Garuda Indonesia (100% owned by the Indonesian government) and Malaysia Airlines (majority-owned by the Malaysian government), were engaged in price-fixing, market sharing and formed anti-competitive cartels that materially increased the freight rates for air cargo along various routes. The ACCC sought to impose penalties of up to $250,000 on each airline. Both airlines defended the prosecutions, asserting that by virtue of their state ownership, they fell within the definition of a “separate entity” and were immune from liability.
At first instance, the Court held that the test of whether a company is a “separate entity” is whether the foreign state had ownership and exerted day-to-day management control. The test was rejected by the Full Federal Court on a number of grounds, notably that:
- as a “separate entity” can be an individual incapable of being owned, ownership cannot be determinative
- as a “separate entity” can act for multiple states e.g. the United Nations, and occasionally act against the interests of one particular state, control is also not determinative.
Rather, the Court stated that the test is whether the corporation or individual is, on the whole of the evidence (recognising the vast cultural differences between states), being used to achieve some purpose or end for that state.
Garuda fell within the definition. There could be no other reason, the Court held, why the Indonesian government would acquire 100% of Garuda Airlines if not for the purpose of having an airline acting in the state interest. Importantly, it was bound by Indonesian state-ownership laws and had a stated purpose to “benefit the public by providing high-quality and satisfactory … services fulfilling the needs of the people”. The Indonesian government also had ultimate control over Garuda’s board of directors, which it exercised.
Malaysia Airlines fell outside the definition. Despite a majority shareholding by the Malaysian government, and exercise of complete control by government officials through weekly post-Cabinet meetings with senior management, the airline was not a “separate entity”. It was not unusual in the commercial world for a majority shareholder to exert such a direct influence on the company in which they held a controlling stake. Additionally, in cases where there are third party investors who have acquired their shares in a public company on a stock exchange, the Court will only extend the immunity in exceptional cases.
Ultimately, Garuda was nonetheless found to be liable as their activities fell within one of the important exemptions to the sovereign immunity. Specifically, the pricefixing related to a for profit commercial transaction. Special leave has been granted to Garuda to appeal to the High Court on this aspect of the case only.