Further to our competition quarterly update in September 2010, the Full Federal Court has re-examined the potential for companies to resist prosecutions for civil penalties on the basis of foreign states immunity.

The Court’s judgment was handed down on 19 April 2011 in relation to two appeals brought by Garuda P.T. Airlines (Garuda) and Malaysian Airlines System Berhad (MAS).  The Court has clarified the test to be applied for determining whether a company is a separate entity of a foreign state, and has determined that companies cannot claim immunity from proceedings relating to cartel prosecutions.

The proceedings for which immunity was claimed were commenced by the ACCC in relation to allegations that Garuda and MAS were parties to various price fixing, market sharing and other anti-competitive arrangements with other airlines which had the effect of increasing the price of air cargo on various routes in and out of Australia.  The ACCC sought injunctions and declaratory relief on the basis that Garuda and MAS had breached section 45 of the Trade Practices Act 1974 (Cth) (TPA) (now the Competition and Consumer Act 2010 (Cth) (CCA)).

Overview of the Foreign States Immunity regime

Both appeals centred around the Foreign States Immunity Act 1985 (Cth) (the FSI Act) which confers a general immunity on a foreign state from the jurisdiction of Australian Courts, subject to certain exceptions.  This immunity extends to a ‘separate entity’ of a foreign state, defined as an agency or instrumentality of the foreign state.

For a respondent to benefit from the immunity it is necessary for it to show that:

  1. iit was in effect part of the state by demonstrating it is a ‘separate entity’; and
  2. no relevant exception applied.

The exception put forward by the ACCC is set out in section 11 of the FSI Act which provides that foreign states are not immune in so far as proceedings before a court concern a commercial transaction.

A new approach

At first instance, the primary judge decided first, neither Garuda nor MAS were separate entities, and secondly, foreign states and separate entities could claim foreign states immunity since it was considered that cartel proceedings did not concern a commercial transaction.

On appeal, the Court reached a different view and held first that Garuda is a separate entity but MAS is not.  Secondly, the Court departed from the view of the primary judge and held that cartel proceedings do concern a commercial transaction with the consequence that foreign states immunity cannot be claimed in relation to proceedings alleging cartel conduct.

Separate entity?

The Court’s view on how to determine whether a corporation is a separate entity of a foreign state was to consider, on the whole of the evidence, whether the corporation is acting for, or being used by, the foreign state as its means to achieve some purpose or end of that state in the relevant circumstances.  Accordingly, any claim that a corporation is a separate entity has to be approached on a case by case basis to determine whether the corporation is an agency or instrumentality of a foreign state.  Factors to consider include ownership, control, the functions which are being performed, the foreign state’s purpose in supporting the corporation and the manner in which the corporation conducts its business.

In concluding that Garuda was an agency/instrumentality of the foreign state, regard was had to the fact that Indonesia directly owned 95.5% of the shares, Indonesia had ultimate control over the boards of directors and the airline was a state owned airline.  Garuda was held to be the means by which Indonesia carried on the business of an airline and that was the end or purpose for which Indonesia used Garuda.

MAS on the other hand did not satisfy the separate entity test. MAS is a public listed company (with the majority of shares held by Malaysia) but is not solely accountable to Malaysia and has a number of third party shareholders.  The Court ultimately held that insufficient evidence had been raised to demonstrate that MAS was an agency or instrumentality of the state.  It was held that the power and influence wielded by a majority shareholder does not make a partly owned company an agent of its majority shareholder, even though the company’s management conforms with the majority shareholder’s wishes, or requirements.

The commercial transaction exception and anti-competitive conduct

The Court focussed on the purpose of this exception which is to subject a foreign state to the jurisdiction of the courts in respect of not only commercial and like contracts, but also activities that are sufficiently connected to those contracts.  The Court viewed the prohibitions in section 45 of the TPA as striking at arrangements or understandings that have the purpose, or have or are likely to have the effect, of substantially lessening competition.  Competition is quintessentially a commercial, trading or business activity that occurs in a market involving trading, commercial or business dealings.

The Court held that the present case concerned allegations that each airline provided and offered to provide its cargo freight services at prices that had been arrived at by the airline giving effect to an antecedent arrangement or understanding with other airline members of a price fixing cartel.  Such alleged conduct was part and parcel of the airline’s ordinary commercial transactions with consumers.  But the alleged conduct was also an activity of a commercial or trading kind, namely anti-competitive behaviour, designed to increase or maximise the cartel participant’s profits at the expense of the other participants in the market.  The view taken was that the alleged conduct, if proved, would be very much a commercial transaction within section 11.

What are the implications of this decision?

It is now clear that foreign state-owned companies will be subject to the jurisdiction of Australian courts for proceedings relating to anti-competitive conduct under the CCA.  Even if a corporation can demonstrate that it is a separate entity of a foreign state, it will not be able to claim immunity from cartel proceedings before an Australian court and slip under the radar of Australian competition law enforcement.  The Court has made it clear that cartel conduct concerns a commercial transaction and therefore will not benefit from foreign states immunity.