The Full Federal Court recently considered the extent of sovereign immunity for foreign state-owned enterprises.(1) The decision has particular relevance to corporations doing business in Australia and the rights they may have in relation to transactions with overseas companies.
Under Australian law, a foreign state is immune to claims brought in Australian courts, subject to a number of important exceptions (Section 9 of the Foreign States Immunities Act 1985). Such immunity extends to so-called 'separate entities' - that is, any individual or corporation acting as an "agent or instrumentality" of a foreign state. For example, an army major can contract on behalf of a foreign state without being liable for a civil suit.
The Australian Competition and Consumer Commission (ACCC) alleged that two airlines - Garuda Indonesia (which is 100% owned by the Indonesian government) and Malaysia Airlines (which is majority-owned by the Malaysian government) - were engaged in price fixing, market sharing and the formation of anti-competitive cartels that materially increased the freight rates for air cargo along various routes. The ACCC sought to impose penalties of up to A$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 thus immune from liability.
At first instance, the court held that the test of whether a company is a separate entity should be whether the foreign state has ownership and exerts day-to-day management control. This 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; and
- as a separate entity can act for multiple states (eg, the United Nations) and occasionally act against the interests of one particular state, control is also not determinative.
The court instead stated that the test should be whether the corporation or individual is, on the entirety of the evidence (and recognising the vast cultural differences between states), being used to achieve some purpose or end for that state.
On assessment, Garuda was deemed to fall within this definition. The court held that the Indonesian government had no reason to acquire 100% of Garuda Airlines, if not for the purpose of having an airline that could act in the state's interest. Importantly, it was bound by Indonesian state-ownership laws and its stated purpose was to "benefit the public by providing high-quality and satisfactory… services fulfilling the needs of the people". The Indonesian government also held (and exercised) ultimate control over Garuda's board of directors.
Malaysia Airlines was deemed to fall outside the definition. Despite a majority shareholding by the Malaysian government and the exercise of complete control by government officials through weekly post-Cabinet meetings with senior management, the airline was not deemed to be a separate entity. It is not unusual in the commercial world for a majority shareholder to exert such a direct influence on the company in which it holds a controlling stake. Furthermore, in cases where third-party investors have acquired shares in a public company on a stock exchange, the court will extend immunity only in exceptional cases.
However, Garuda was nonetheless ultimately found to be liable, as its activities fell within one of the important exemptions to sovereign immunity - specifically, price fixing relating 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.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.