Alumina and Bauxite Company Ltd v Queensland Alumina Ltd
[2024] FCA 43
•1 February 2024
FEDERAL COURT OF AUSTRALIA
Alumina and Bauxite Company Ltd v Queensland Alumina Ltd [2024] FCA 43
File number(s): VID 297 of 2022 Judgment of: O’BRYAN J Date of judgment: 1 February 2024 Catchwords: CONTRACT – where applicants are subsidiaries of company registered in Russian Federation – where first respondent (QAL) operates alumina refinery in Gladstone under agreements with applicants and second to sixth respondents (Rio parties) – where pursuant to those agreements the Rio parties supply bauxite to the first applicant (ABC) and ship the bauxite to Gladstone on behalf of ABC, and QAL receives the bauxite and refines the bauxite into alumina on a toll basis on behalf of ABC and certain of the Rio parties and delivers the alumina to those parties – where Australian Government imposed sanctions against Russia and certain Russian business-people pursuant to the Autonomous Sanctions Regulations 2011 (Cth) (Russia Sanctions) as a result of Russia’s invasion of Ukraine – where QAL invoked provisions of agreements to cease receiving bauxite and producing alumina for ABC and delivering alumina to ABC – where the Rio parties invoked provisions of agreements and ceased supplying and shipping bauxite to ABC – whether the actions of QAL and the Rio parties are in breach of contracts with the applicants – whether imposition of Russia Sanctions rendered performance of the contracts by QAL illegal and was therefore a supervening illegality to excuse performance – whether imposition of Russia Sanctions was an event of force majeure for purposes of contractual provision to excuse performance
STATUTORY INTEPRETATION – Autonomous Sanctions Regulations 2011 (Cth) and Autonomous Sanctions Act 2011 (Cth) – whether delivery of alumina by QAL to ABC is a “sanctioned supply” within meaning of regs 4 and 12 of Autonomous Sanctions Regulations 2011 (Cth) – consideration of the definition of “sanctioned supply” in reg 4 of Autonomous Sanctions Regulations 2011 (Cth) – consideration of the elements of the definition and the time at which the elements must be satisfied – consideration of phrases “for use in” and “for the benefit of” – whether production of alumina by QAL for ABC and delivery of alumina by QAL to ABC involves indirectly making an asset available to, or for the benefit of, a designated person or entity within meaning of reg 14 of Autonomous Sanctions Regulations 2011 (Cth) – where designated persons have substantial indirect shareholding interests in ABC – consideration of the phrase “indirectly makes an asset available” and “for the benefit”
UNDERTAKING – whether undertaking to the Court proffered by applicants in respect of their future conduct should be accepted – whether declaratory and injunctive relief should be granted on the basis of an undertaking as to future conduct – whether Court has power to accept an undertaking as a foundation for granting declaratory and injunctive relief on a prospective basis – discretionary considerations – whether undertaking is sufficiently certain – whether compliance with undertaking removes risk of contravention of Russia Sanctions
Legislation: Acts Interpretation Act 1901 (Cth) s 15AA
Autonomous Sanctions Act 2011 (Cth) ss 4, 16
Charter of the United Nations Act 1945 (Cth)
Competition and Consumer Act 2010 (Cth) s 50
Corporations Act 2001 (Cth) s 50
Criminal Code Act 1995 (Cth) Sch 1, ss 6.1, 9.2
Evidence Act 1995 (Cth) s 79
Federal Court of Australia Act 1976 (Cth) ss 21, 23
Income Tax Assessment Act 1936 (Cth) s 260
Income Tax Assessment Act 1997 (Cth) s 328‑130
Judiciary Act 1903 (Cth) s 39B
Legislation Act 2003 (Cth) s 13
Trade Practices Act 1974 (Cth) s 4D
Autonomous Sanctions (Designated Persons and Entities and Declared Persons—Russia and Ukraine) Amendment (No 7) Instrument2022 (Cth)
Autonomous Sanctions (Designated Persons and Entities and Declared Persons – Russia and Ukraine) List 2014 (Cth)
Autonomous Sanctions (Export Sanctioned Goods—Russia) Designation2022 (Cth)
Autonomous Sanctions (Sanctions Law) Declaration 2012 (Cth) Sch 1
Autonomous Sanctions Bill 2010 (Cth)
Autonomous Sanctions Regulations 2011 (Cth) regs 3, 4, 6, 12, 13, 14, 15, 18
Charter of the United Nations (Sanctions — Afghanistan) Regulations 2008 (Cth)
Charter of the United Nations (Sanctions — Iran) Regulation 2016 (Cth) reg 16
Charter of the United Nations (Sanctions — Côte d’Ivoire) Regulations 2008 (Cth)
Charter of the United Nations (Sanctions — Democratic People’s Republic of Korea) Regulations 2008 (Cth)
Charter of the United Nations (Sanctions — Democratic Republic of the Congo) Regulations 2008 (Cth)
Charter of the United Nations (Sanctions — Liberia) Regulations 2008 (Cth)
Federal Court Rules 2011 (Cth) rr 1.32, 1.33
Executive Order 13661 of 16 March 2014 (Blocking Property of Additional Persons Contributing to the Situation in Ukraine)
Executive Order 13662 of 20 March 2014 (Blocking Property of Additional Persons Contributing to the Situation in Ukraine)
UN Security Council Resolution 1267 (1999)
Cheshire & Fifoot, Law of Contract (12th Aust Ed, 2023)
Chitty on Contracts (35th Ed, 2023)
Heydon on Contract (1st Ed, 2019)
JW Carter, Contract Law in Australia (8th Ed, 2023)
Paul B Stephan, ‘Taxation and Expropriation—The Destruction of the Yukos Oil Empire’ (2013) 35(1) Houston Journal of International Law 1
Cases cited: AB v Western Australia (2011) 244 CLR 390
ADCO Constructions Pty Ltd v Goudappel (2014) 254 CLR 1
Ainsworth v Criminal Justice Commission (1992) 175 CLR 564
Allina Pty Ltd v Federal Commissioner of Taxation (1991) 28 FCR 203
Australia Meat Holdings Pty Ltd v Trade Practices Commission (1989) ATPR 40-932
Australian Competition and Consumer Commission v Pacific National Pty Ltd (2020) 277 FCR 49
Australian Competition and Consumer Commission v Real Estate Institute of Western Australia Inc [1999] FCA 18; (1999) 161 ALR 79
Australian Consolidated Press Ltd v Morgan (1965) 112 CLR 483
Australian Gas Light Co v Australian Competition and Consumer Commission (No 2) [2003] FCA 1229; (2003) ATPR 41-962
Australian Gas Light Company v Australian Competition and Consumer Commission (No 3) (2003) 137 FCR 317
Australian Securities and Investments Commission v BHF Solutions Pty Ltd (2022) 293 FCR 330
Australian Telecommunications Commission v Krieg Enterprises Pty Ltd (1976) 14 SASR 303
Bass v Permanent Trustee Co Ltd (1999) 198 CLR 334
Beckwith v The Queen (1976) 135 CLR 569
BHP Billiton Iron Ore Pty Ltd v National Competition Council (2008) 236 CLR 145
Boughey v The Queen (1986) 161 CLR 10
Bulstrode v Trimble [1970] VR 840
Cardile v LED Builders Pty Ltd (1999) 198 CLR 380
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384
Coburn v Human Rights Commission [1994] 3 NZLR 323
Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337
Cody v JH Nelson Pty Ltd (1947) 74 CLR 629
Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389
Commissioner of State Revenue (Vic) v Politis [2004] VSC 126; (2004) 55 ATR 491
Commonwealth v Baume (1905) 2 CLR 405
Commonwealth v Sterling Nicholas Duty Free Pty Ltd (1972) 126 CLR 297
Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 75 ALJR 312
Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588
Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640
Eureka Funds Management Ltd v Freehills Services Pty Ltd (2008) 19 VR 676
Federal Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503
Federal Commissioner of Taxation v Gulland (1985) 160 CLR 55
Felton v Mulligan (1971) 124 CLR 367
Gerraty v McGavin (1914) 18 CLR 152; Cooper & Sons v Neilson and Maxwell Ltd [1919] VLR 66
Grain Elevators Board (Vic) v Dunmunkle Corporation (1946) 73 CLR 70
Griffiths v TUI (UK) Ltd [2023] UKSC 48
Hall v Bust (1960) 104 CLR 206
Hepples v Federal Commissioner of Taxation (1991) 173 CLR 492
HG v The Queen (1999) 197 CLR 414
Hunter Resources Ltd v Melville (1988) 164 CLR 234
ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 38 FCR 248
Independent Commission Against Corruption v Cunneen (2015) 256 CLR 1
International Litigation Partners Pty Ltd v Chameleon Mining NL (Receivers and Managers Appointed) (2012) 246 CLR 455
IW v City of Perth (1997) 191 CLR 1
Jackson v Sterling Industries Ltd (1987) 162 CLR 612
Lacey v Attorney-General (Qld) (2011) 242 CLR 573
Lancaster v The Queen (2014) 44 VR 820
Legal Services Board v Gillespie-Jones (2013) 249 CLR 493
LNC Industries Ltd v BMW (Australia) Ltd (1983) 151 CLR 575
M & E M Hull Pty Ltd v Thompson [2001] NSWCA 359
Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101
Mathews v Foggit Jones Ltd (1925) 37 CLR 455
Mersey Docks and Harbour Board v Henderson Bros (1888) 13 App Cas 595
Minister Administering the Crown Lands Act v Deerubbin Local Aboriginal Land Council (No 2) (2001) 50 NSWLR 665
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104
Neilson v Overseas Projects Corporations of Victoria Ltd (2005) 223 CLR 331
New South Wales Aboriginal Land Council v Minister Administering theCrown Lands Act (2016) 260 CLR 232
Newcastle City Council v GIO General Ltd (1997) 191 CLR 85
News Ltd v South Sydney District Rugby League Football Club Ltd (2003) 215 CLR 563
Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355
Public Transport Commission (NSW) v J Murray-More (NSW) Pty Ltd (1975) 132 CLR 336
R v Commonwealth Court of Conciliation and Arbitration; Ex parte Barrett (1945) 70 CLR 141
Registrar Of Titles (WA) v Franzon (1975) 132 CLR 611
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596
Sheen v Fields Pty Ltd (1984) 58 ALJR 93
Shepherd v Felt & Textiles of Australia Ltd (1931) 45 CLR 359
SZTAL v Minister for Immigration and Border Protection (2017) 262 CLR 362
Taylor v Oakes Roncoroni & Co (1922) 127 LT 267
Tempe Recreation (D500215 and D1000502) Reserve Trust v Sydney Water Corporation (2014) 88 NSWLR 449
Thomson Australian Holdings Pty Ltd v Trade Practices Commission (1981) 148 CLR 150
Tillmans Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union [1979] FCA 132; (1979) 42 FLR 331
Tjungarrayi v Western Australia (2019) 269 CLR 150
Trade Practices Commission v Australian Iron & Steel Pty Ltd (1990) 22 FCR 305
Trade Practices Commission v Gillette Company (No 1) (1993) 45 FCR 366
Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429
Waters v Public Transport Corporation (1991) 173 CLR 349
Waugh v Kippen (1986) 160 CLR 156
Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Number of paragraphs: 434 Date of hearing: 30-31 May 2023, 1 June 2023, 5-6 June 2023, 13-14 June 2023 Counsel for the Applicants: P D Crutchfield KC with J J Rudd and P G Turner Solicitor for the Applicants: Morris Mennilli Counsel for the First Respondent: D J Batt KC with K J D Anderson and M C Roberts Solicitor for the First Respondent: Corrs Chambers Westgarth Counsel for the Second, Third, Fourth, Fifth and Sixth Respondents: S Doyle KC with S Spottiswood Solicitor for the Second, Third, Fourth, Fifth and Sixth Respondents: Allens ORDERS
VID 297 of 2022 BETWEEN: ALUMINA AND BAUXITE COMPANY LTD
First Applicant
RUSAL LIMITED
Second Applicant
JSC RUSAL
Third Applicant
AND: QUEENSLAND ALUMINA LTD
First Respondent
RTA HOLDCO AUSTRALIA 5 PTY LTD (ACN 128 785 599)
Second Respondent
RIO TINTO ALUMINIUM (HOLDINGS) LIMITED (ACN 004 502 694) (and others named in the Schedule)
Third Respondent
ORDER MADE BY:
O’BRYAN J
DATE OF ORDER:
1 FEBRUARY 2024
THE COURT ORDERS THAT:
1.The Amended Originating Application dated 17 August 2022 be dismissed.
2.The Applicants pay the Respondents’ costs of the proceeding.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
A. INTRODUCTION
[1]
B. OVERVIEW OF THE EVIDENCE
[28]
B.1 Evidence adduced by the applicants
[28]
Kirill Strunnikov
[29]
Aleksey Gordymov
[32]
Vladimir Runov
[33]
Dzianis Sidarkevich
[34]
Natalia Kuznetsova
[35]
B.2 Evidence adduced by QAL
[43]
Elizabeth Michel Baker
[45]
Gerhard Able Pienaar
[46]
Alan George Clark
[47]
Professor Paul Brooke Stephan
[50]
B.3 Evidence adduced by the Rio Parties
[55]
Alfred Patrick Grigg
[56]
Fraser Brian O’Donnell
[57]
C. FACTUAL BACKGROUND
[58]
C.1 Global trade in alumina
[58]
C.2 Russia’s aluminium industry and UC Rusal’s business operations
[68]
C.3 The Gladstone alumina joint venture
[76]
C.4 Domicile, ownership and governance of the Russian parties and UC Rusal
[86]
C.5 OFAC Sanctions
[98]
C.6 Suspension of Gladstone alumina joint venture following the imposition of the Russia Sanctions
[107]
C.7 ABC’s attempted shipment of alumina between 20 March and 4 April 2022
[122]
C.8 Effect of suspension of Gladstone alumina joint venture on the Rusal Group
[126]
C.9 Whether ABC alumina is likely to be exported to Russia
[129]
C.10 Whether ABC’s business activities would have generated tax revenues in Russia
[148]
Ms Kuznetsova’s first report
[158]
Prof Stephan’s report
[169]
Ms Kuznetsova’s supplementary report and cross-examination
[175]
Findings
[182]
D. THE RUSSIA SANCTIONS
[188]
D.1 The legislative framework
[188]
Autonomous Sanctions Act
[190]
The Autonomous Sanctions Regulations
[197]
Overview
[197]
Sanctioned supply (reg 12)
[202]
Dealings with designated persons (reg 14)
[207]
Authorisations (reg 18)
[211]
D.2 Relevant principles of statutory interpretation
[214]
D.3 Does the Export Sanction apply in respect of the delivery of alumina to ABC?
[218]
Questions of construction
[220]
The temporal issue
[221]
Supply, sell or transfer
[227]
Direct or indirect result
[228]
The resulting transfer
[229]
Transferred to that country
[230]
Transferred for use in that country or for the benefit of that country
[231]
Benefit
[235]
Application of the prohibition to the present case
[238]
D.4 Does the Designated Persons Sanction apply in respect of the delivery of alumina to ABC?
[254]
Questions of construction
[255]
Textual considerations
[256]
Contextual considerations
[266]
Purposive considerations
[278]
Conclusion on the questions of construction
[281]
Application of the prohibition to the present case
[283]
D.5 Summary of conclusions
[290]
E. THE RESPONDENTS’ DEFENCES
[292]
E.1 Overview
[292]
E.2 Art 14A of the Participants Agreement
[304]
Overview of Art 14A and Appendix E
[304]
Relevant surrounding circumstances
[311]
Are the Russia Sanctions imposed on UC Rusal, ABC or any of their affiliates?
[317]
Export Sanction
[318]
Designated Persons Sanction
[324]
Conclusion
[342]
Are the Russia Sanctions likely to prevent QAL from undertaking business activity with ABC?
[343]
Conclusion
[355]
E.3 Participants Agreement and the Tolling Contracts – supervening illegality and force majeure
[356]
Supervening illegality
[357]
Art 17 of the Tolling Contracts
[360]
Conclusion
[365]
E.4 Force majeure provisions in the Bauxite Supply Agreements and the Shipping Agreement
[366]
Article 21 of the Monohydrate Bauxite Supply Agreement
[367]
Article 18.1 of the Low Mono Bauxite Supply Agreement
[375]
Clause 11.1 of the Shipping Agreement
[380]
Conclusion
[381]
E.5 The sanctions provisions in the Bauxite Supply Agreements and the Shipping Agreement
[382]
Introductory matters
[382]
Article 26.2 of the Monohydrate Bauxite Supply Agreement
[386]
The contractual provisions
[386]
Are Messrs Deripaska and Vekselberg Restricted Parties?
[394]
Is ABC a Restricted Party?
[401]
Is UC Rusal a Restricted Party?
[402]
Conclusion
[410]
F. RELIEF AND THE RUSAL GROUP UNDERTAKING
[411]
O’BRYAN J:
A. INTRODUCTION
On 24 February 2022, Russia invaded Ukraine. As at the date of this judgment, the war in Ukraine is continuing. Thousands of lives have been lost to date. The Australian Government has condemned the invasion as illegal and unjustified and as a serious threat to the international rules-based order which underpins global security.
In mid-March 2022, and in response to the invasion, the Australian Government imposed sanctions (the Russia Sanctions) against Russia and certain Russian business-people pursuant to the Autonomous Sanctions Regulations 2011 (Cth) made under the Autonomous Sanctions Act 2011 (Cth). In general terms, the Russia Sanctions prohibit:
(a)supplying, selling or transferring alumina to a person where, as a direct or indirect result, the alumina is transferred to Russia, for use in Russia or for the benefit of Russia; and
(b)directly or indirectly making an asset available to or for the benefit of two Russian businessmen: Oleg Deripaska and Viktor Vekselberg.
The Russia Sanctions have impacted the operations of the alumina refinery conducted by Queensland Alumina Ltd (QAL) in Gladstone, Queensland (the Gladstone Plant). QAL operates the Gladstone Plant under an agreement (the Participants Agreement) with:
(a)three companies that are subsidiaries of United Company Rusal IPJSC (UC Rusal): Alumina and Bauxite Company Ltd (ABC), Rusal Limited and JSC Rusal (who are the applicants in this proceeding and who, in the context of the commercial arrangements concerning the Gladstone Plant, are referred to collectively as the Russian parties); and
(b)five companies that are part of the Rio Tinto Group: Rio Tinto Plc, Rio Tinto Limited, RTA Holdco Australia 5 Pty Ltd (RTA Holdco), Rio Tinto Aluminium (Holdings) Limited and Rio Tinto Aluminium Limited (RTA) (collectively, the Rio parties).
UC Rusal is registered as an international public joint stock company in the Russian Federation. UC Rusal and its subsidiaries (Rusal Group) engage in business activities involving bauxite and nepheline mining, alumina production, electrolytic production of primary aluminium, and the production of value-added aluminium products. UC Rusal conducts its business activities globally. Relevantly, the Rusal Group is Russia’s only primary aluminium producer and currently operates nine aluminium smelters in Russia. The parent company of UC Rusal is En+ Group IPJSC (En+), which is also a company registered as an international public joint stock company in the Russian Federation, and which holds approximately 56.88% of the shares in UC Rusal. Each of Messrs Deripaska and Vekselberg indirectly holds significant shareholdings in UC Rusal.
Under the Participants Agreement, QAL refines bauxite into alumina on a toll basis for ABC, RTA Holdco and RTA (collectively, the Participants). ABC holds 20% of the shares in QAL and RTA Holdco and RTA collectively hold 80%.
It is convenient to refer to the business venture between QAL, the Russian parties and the Rio parties as the Gladstone alumina joint venture. In using that expression, it is not intended to give the phrase “joint venture” any particular legal significance.
QAL, the Russian parties and the Rio parties are also parties to a series of Tolling Contracts, under which a percentage of the capacity of the Gladstone Plant is allocated to each Participant. There are five Tolling Contracts because new contracts were made at various times when the capacity of the Gladstone Plant was increased: the Initial Tolling Contract, the First Expansion Tolling Contract, the Second Expansion Tolling Contract, the Third Expansion Tolling Contract and the Fourth Expansion Tolling Contract. The contracts are in substantially the same terms.
The Rio parties have also entered into the following agreements with the Russian parties relating to the supply of bauxite to ABC and the shipment of the bauxite to the Gladstone Plant for processing into alumina:
(a)the Monohydrate Bauxite Supply Agreement and the Low Mono Bauxite Supply Agreement both dated 16 February 2022 (collectively, the Bauxite Supply Agreements) under which RTA supplies bauxite from its mines in Cape York, Queensland and Gove, Northern Territory, to ABC to be processed into alumina at the Gladstone Plant; and
(b)the Shipping Agreement dated 31 December 2021 under which RTA ships the bauxite that has been supplied to ABC to the Gladstone Plant.
QAL, ABC, RTA Holdco and RTA are also party to the Caustic Soda Supply Agreement dated 31 December 2020 under which each of ABC on the one hand, and RTA Holdco and RTA on the other hand, agree to supply their proportionate (equity) share of caustic soda to QAL for use in the production of alumina at the Gladstone Plant.
In late March 2022, following the implementation of the Russia Sanctions by the Australian Government, QAL corresponded with ABC with respect to the effect of the Russia Sanctions on the Gladstone alumina joint venture. On 24 March 2022, ABC responded to QAL and offered to give certain undertakings which, it claimed, would ensure that ABC’s continuing participation in the Gladstone alumina joint venture would not contravene the Russia Sanctions. The proposed undertakings included an undertaking that ABC would not provide any alumina received from QAL to Russia or to UC Rusal or any of its subsidiaries, with all alumina to be sold by ABC directly to third parties outside Russia and subject to contractual prohibitions against on-supply to Russia.
On 4 April 2022, QAL invoked Art 14A of the Participants Agreement and implemented the step-in arrangements pursuant to that Article in reliance upon the Russia Sanctions. The effect of the step-in arrangements was to reallocate ABC’s entitlement to refine bauxite into alumina at the Gladstone Plant to RTA and RTA Holdco, and thereby exclude ABC from participation in the Gladstone alumina joint venture for the duration of the Russia Sanctions. From midnight on 4 April 2022, QAL ceased to accept bauxite and caustic soda deliveries from ABC and ceased to refine and deliver alumina to ABC in accordance with the Participants Agreement and the Tolling Contracts.
On 8 April 2022, RTA invoked force majeure provisions in the Bauxite Supply Agreements and the Shipping Agreement in reliance upon the Russia Sanctions. Since then, RTA has ceased to supply bauxite or shipping services to ABC under those agreements.
On 17 August 2022, the applicants commenced this proceeding against QAL and the Rio parties (collectively, the respondents) seeking declaratory and injunctive relief and damages. The applicants allege that, in the circumstances that pertained on and since 18 March 2022, the acceptance of bauxite by QAL from ABC, the refining of alumina by QAL for ABC, and the delivery of alumina by QAL to ABC for sale to third parties outside Russia, did not amount, would not have amounted, and would not now amount, to a contravention by QAL of the Russia Sanctions and that Art 14A of the Participants Agreement was not applicable. The applicants allege that QAL has breached its contractual obligations under the Participants Agreement and the Tolling Contracts by ceasing to deliver alumina to ABC pursuant to those agreements. The applicants further allege that the Rio parties have breached their contractual obligations under the Bauxite Supply Agreements and the Shipping Agreement by ceasing to supply and ship bauxite to ABC at the Gladstone Plant pursuant to those agreements.
By their respective defences, the respondents contest the claims made by the applicants. The matters raised by QAL by way of defence are in a narrower compass than the matters raised by the Rio parties.
By its defence, QAL alleges that it is relieved of its obligations to deliver alumina to ABC by Art 14A of the Participants Agreement. Article 14A stipulates that the step-in arrangements in Appendix E apply if, relevantly, an Australian Government authority imposes sanctions on UC Rusal, ABC or any of their affiliates that are likely to prevent QAL from undertaking business activity with ABC and its affiliates. The issues in dispute between the parties concern the meaning and effect of Art 14A in the context of the Russia Sanctions, including the questions whether either of the Russia Sanctions:
(a)have been imposed on UC Rusal, ABC or any of their affiliates; and
(b)are likely to prevent QAL from undertaking business activity with ABC and its affiliates.
By their defence, the Rio parties allege that QAL is relieved of its obligations to deliver alumina to ABC on three bases:
(c)first, by Art 14A of the Participants Agreement (in the same manner as alleged by QAL);
(d)second, because the imposition of the Russia Sanctions was such as to render the performance by QAL of the Participants Agreement and the Tolling Contracts illegal and was accordingly a supervening illegality that excused QAL from compliance with those obligations; and
(e)third, because the imposition of the Russia Sanctions was an event of force majeure for the purposes of Art 17 of each of the Tolling Contracts, which provides that QAL is not liable for failure to perform the Tolling Contracts if the failure was caused by force majeure.
The Rio parties further allege that, in circumstances where QAL is relieved of its obligations to deliver alumina to ABC, RTA is relieved of its obligations to supply and ship bauxite to ABC at the Gladstone Plant by the operation of:
(a)the consequential contractual rights arising under para 1(c) of Appendix E to the Participants Agreement;
(b)alternatively (if Art 14A did not apply), the force majeure provisions in Art 21 of the Monohydrate Bauxite Supply Agreement, Art 18.1 of the Low Mono Bauxite Supply Agreement and cl 11.1 of the Shipping Agreement.
The Rio parties also allege that, independently of QAL’s contractual rights and actions, RTA is relieved of its obligations to supply and ship bauxite to ABC at the Gladstone Plant by the operation of each of Art 26.2 of the Monohydrate Bauxite Supply Agreement, Art 19.3(b) of the Low Mono Bauxite Supply Agreement and cl 12.2 of the Shipping Agreement, which concern the imposition of sanctions.
Each of the above defences raise a large number of issues for determination. Most of the issues concern the proper construction of the Russia Sanctions and the contractual provisions relied upon by the respondents. However, one matter should be highlighted at the outset. There is a significant legal difference between the defence based on Art 14A of the Participants Agreement and the other defences advanced by the Rio parties. On its terms, Art 14A applies if the relevant sanctions are likely to prevent QAL from undertaking business activity with ABC and its affiliates. Each of the other defences, including the defence of supervening illegality, apply if the Russia Sanctions prevent QAL or the Rio parties from performing their contractual obligations.
Having regard to the range of defences raised by the respondents in the proceeding, it is convenient and efficient to consider the meaning and effect of the Russia Sanctions before considering each of the relevant contractual provisions, including Art 14A. The question that arises for determination is whether the production of alumina by QAL for ABC and the delivery of alumina to ABC pursuant to the contractual arrangements that govern the Gladstone alumina joint venture would be unlawful by reason of the imposition of the Russia Sanctions. Although a contravention of the Russia Sanctions would constitute a criminal offence, the question of illegality in this proceeding is to be determined on the civil standard of proof.
The provisions of the Autonomous Sanctions Regulations that are in dispute in this proceeding have not previously been the subject of judicial consideration. The provisions have been framed with an economy of language and raise difficult questions of construction as to the intended scope of the sanctions.
The factual background against which the issues in dispute must be determined is largely uncontroversial. There are three principal areas of factual dispute:
(a)first, there is a relatively narrow dispute with respect to the effective shareholding interest held by Mr Deripaska in UC Rusal;
(b)second, there is a more substantial dispute concerning the likelihood that alumina produced at the Gladstone Plant for ABC would be transferred to or for the benefit of Russia; and
(c)third, there is a dispute concerning the expected Russian tax treatment of revenue and profits generated from ABC’s business activities in connection with the Gladstone alumina joint venture.
In relation to the second area of factual dispute, the likelihood that alumina produced at the Gladstone Plant for ABC would be transferred to or for the benefit of Russia, the applicants proffered undertakings (the Rusal Group Undertaking or Undertaking) to the Court on the last day of the hearing which, they submitted, would remove any risk that ABC’s continuing participation in the Gladstone alumina joint venture would contravene the Russia Sanctions. The terms of the Rusal Group Undertaking are as follows:
Each of the Applicants, United Company Rusal IPJSC (UC Rusal), Libertatem Materials Limited, United Company Rusal Alumina Limited and RTI Limited, by their counsel, undertakes to the Court that until further order, whether by themselves, their servants, agents, associates or otherwise:
1.they will not supply any alumina that is supplied to the first applicant (ABC) by the first respondent (QAL):
a. to UC Rusal or any of its subsidiaries; or
b. to, for use in or for the benefit of Russia or part of Russia;
2.they will not enter into or perform any swap or other arrangement, the effect of which is to provide that upon any alumina supplied to ABC by QAL being supplied by ABC to the counterparty under that arrangement, the counterparty shall supply an equivalent quantity of alumina:
a. to UC Rusal or any of its subsidiaries; or
b. to, for use in, or for the benefit of Russia or part of Russia;
3.all alumina supplied to ABC by QAL will be sold by ABC directly to third parties located outside of Russia, on terms that:
a. prohibit the buyer of such alumina from transferring such alumina, and/or any resultant aluminium refined from such alumina, to, for use in, or for the benefit of Russia or part of Russia; and
b. require that the buyer of such alumina, in the event of on-sale by that person of such alumina and/or any resultant aluminium refined from such alumina, sell only on terms of sale containing the prohibition in paragraph 3(a) above;
4.they will not act on or otherwise seek to enforce or perform the contract of sale, being Contract No. ABC/RT/05 dated 15 September 2005 between ABC and Rual Trade Limited, and novated by deed of novation dated 5 December 2012 by between ABC (as Seller), Rual Trade Limited (as Buyer) and RTI Limited (as New Buyer); and
5.ABC will not declare and distribute any dividends.
Thus, it is also necessary to consider whether and in what manner the Rusal Group Undertaking affects the parties’ rights and liabilities, and any relief that might be granted by the Court in the proceeding.
While the area of factual dispute between the parties is relatively narrow, the parties disagree on the vast majority of issues concerning the interpretation of the Russia Sanctions and the relevant contractual provisions and their application to the facts of this case. Given the scope of the dispute, it has been necessary to make detailed factual findings and then traverse the issues in dispute at some length.
Although the causes of action alleged and the form of relief sought in the proceeding by the applicants are primarily based in contract law, I am satisfied that this Court has jurisdiction to hear and determine the claims made in the proceeding. The controversy between the parties arises under laws made by the Commonwealth Parliament within the meaning of s 39B(1A)(c) of the Judiciary Act 1903 (Cth). The dispute does not merely involve the interpretation of federal law (which is insufficient to found federal jurisdiction: Felton v Mulligan (1971) 124 CLR 367 at 374 (Barwick CJ), 382 (Menzies J), 396 (Owen J), 408 (Walsh J) and 416 (Gibbs J)). Rather, the rights in issue owe their existence to federal law: R v Commonwealth Court of Conciliation and Arbitration; Ex parte Barrett (1945) 70 CLR 141 at 154 (Latham CJ). That is because the contractual rights arise from the operation of federal law, being the Russia Sanctions imposed under the Autonomous Sanctions Regulations made under the Autonomous Sanctions Act: see by way of illustration LNC Industries Ltd v BMW (Australia) Ltd (1983) 151 CLR 575 at 581 (Gibbs CJ, Mason, Wilson, Brennan, Deane and Dawson JJ). Further, as submitted by QAL, the relief sought by the applicants includes declarations that ABC’s participation in the Gladstone alumina joint venture would not amount to a contravention of the Russia Sanctions. Although QAL submitted that declaratory relief in that form is misconceived, the relief sought is not colourable and is sufficient to found jurisdiction. Additionally, the Rio parties place direct reliance on the effect of the Russia Sanctions to plead supervening illegality as a defence to the contractual claims.
For the reasons that follow, the proceeding should be dismissed with costs. I find that:
(a)on the balance of probabilities, at all times since the Russia Sanctions were imposed, the production of alumina by QAL for ABC and the delivery of alumina to ABC pursuant to the Gladstone alumina joint venture would have been contrary to the Russia Sanctions;
(b)QAL is not relieved of its obligations to produce and deliver alumina to ABC by Art 14A of the Participants Agreement, but it is relieved of its obligations by the force majeure provisions in Art 17 of each of the Tolling Contracts (and would also have been relieved by the common law doctrine of supervening illegality);
(c)RTA is relieved of its obligations to supply and ship bauxite to ABC at the Gladstone Plant by the operation of:
(i)the force majeure provisions in Art 21 of the Monohydrate Bauxite Supply Agreement, Art 18.1 of the Low Mono Bauxite Supply Agreement and cl 11.1 of the Shipping Agreement; and
(ii)the “sanctions provisions” in Art 26.2 of the Monohydrate Bauxite Supply Agreement, Art 19.3(b) of the Low Mono Bauxite Supply Agreement and cl 12.2 of the Shipping Agreement; and
(d)without deciding the question of the Court’s power to accept the Rusal Group Undertaking, the Undertaking should not be accepted by the Court as a basis on which the Court would grant declaratory and injunctive relief on a prospective basis.
B. OVERVIEW OF THE EVIDENCE
B.1 Evidence adduced by the applicants
The applicants called four lay witnesses (Kirill Strunnikov, Aleksey Gordymov, Vladimir Runov and Dzianis Sidarkevich) and one expert witness (Natalia Kuznetsova), and tendered documents. Each of the witnesses was cross-examined. There was no serious challenge to the credit of any of the lay witnesses and I consider that each of the lay witnesses gave truthful evidence. As discussed below, the respondents were critical of some aspects of Ms Kuznetsova’s evidence. The following is an overview of the evidence given by each of those witnesses.
Kirill Strunnikov
Kirill Strunnikov is the Head of International Practice at the Legal Department of UC Rusal, a position he has held since 2018. Mr Strunnikov was educated at the Moscow State Law Academy, the Central European University in Budapest and the University of Connecticut School of Law. He has been employed by UC Rusal since its incorporation in 2007. Until 2018, he held several positions in UC Rusal’s Moscow headquarters with responsibilities mainly focused on overseas operations and international disputes. In his affidavits affirmed 3 November 2022 and 24 May 2023, Mr Strunnikov gave evidence concerning:
(a)the shareholding in UC Rusal, with a particular focus on the indirect shareholding interests of Messrs Deripaska and Vekselberg;
(b)UC Rusal’s compliance policy which sets out UC Rusal’s standards for compliance by it, its subsidiaries, and all employees, with (amongst other things) regulatory requirements of the jurisdictions in which it conducts business, including sanctions requirements; and
(c)the designation by the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) of Mr Deripaska and certain entities associated with Mr Deripaska, including En+ and UC Rusal, on the list of “Specially Designated Nationals and Blocked Persons” (SDN List), the subsequent restructuring of En+ and UC Rusal to “sever Mr Deripaska’s ownership and control of UC Rusal” and the removal of En+ and UC Rusal from the SDN List.
At the trial, I admitted the evidence concerning the OFAC designation (paras 18 to 28 of Mr Strunnikov’s affidavit) on a provisional basis subject to relevance. The respondents submitted that the only possible relevance of the evidence was as background circumstances that assisted in the construction of Art 14A of the Participants Agreement, but argued that it was not established that those circumstances were known to the respondents at the time that Art 14A was inserted into the Participants Agreement.
I have concluded that the evidence, other than para 20 of Mr Strunnikov’s affidavit, is relevant on two bases and should be admitted. First, I consider that the evidence is relevant to the construction of Art 14A which was inserted into the Participants Agreement after the events narrated in the evidence occurred. I infer that the insertion of Art 14A was prompted by those events. Further, and as discussed later in this judgment, I infer that the respondents were aware of the matters referred to in the evidence having regard to the public disclosures that were made about those matters and the commercial relationship between the parties by reason of the Gladstone alumina joint venture. I draw that inference more confidently in circumstances where the respondents chose not to give evidence about the extent of their knowledge of those matters. Second, the evidence explains the changes that have occurred in the indirect shareholding interests held by Messrs Deripaska and Vekselberg in UC Rusal, and the reasons for those changes, and is therefore has some general relevance to the question whether either of Mr Deripaska or Mr Vekselberg should be considered an affiliate of UC Rusal within the meaning of Art 14A. The matters referred to in para 20 of Mr Strunnikov’s affidavit are unlikely to have been known to the respondents and have no relevance to the issues to be determined.
Aleksey Gordymov
Aleksey Gordymov is the Head of Business Support (Head of Supply Chain) in UC Rusal, and is also a director of QAL. Mr Gordymov has never held a direct role or office in ABC, but part of his duties involves managing ABC’s procurement and shipment of alumina. Mr Gordymov has held senior management positions in alumina production since 2005. From September 2014 until November 2017, he was employed as Deputy Head of the Alumina Division of UC Rusal. In 2017, Mr Gordymov became the Head of Business Support (Head of Supply Chain) of UC Rusal. In that role, he is responsible for supervising the operations of UC Rusal and its subsidiaries, including the sale, logistics, transportation and delivery of raw materials and consumables. One of Mr Gordymov’s responsibilities is to manage UC Rusal’s alumina book effectively and ensure the uninterrupted supply of alumina to UC Rusal’s aluminium smelters. In 2021, UC Rusal produced approximately 8.4 million tonnes of its own alumina, purchased approximately 800,000 tonnes of alumina, sold approximately 600,000 tonnes of alumina and obtained approximately 1 million tonnes through swap deals in order to optimise logistics. In his affidavits affirmed 2 November 2022 and 15 March 2023, Mr Gordymov gave evidence concerning:
(a)the global trade in alumina, including the determination of contract prices;
(b)the business activities of the Rusal Group;
(c)the Gladstone alumina joint venture;
(d)the status of ABC’s business operations as at March 2022 and actions taken by Mr Gordymov with respect to shipments of alumina immediately following the imposition of the Russia Sanctions by the Australian Government;
(e)the correspondence between ABC and QAL in relation to the imposition of the Russia Sanctions; and
(f)swap agreements entered into by UC Rusal entities, including ABC, in respect of the supply of alumina.
Vladimir Runov
Vladimir Runov is the Head of Tax for the international business of UC Rusal and a legal advisor to the Chief Financial Officer of UC Rusal. Mr Runov graduated with honours in 1997 from the Moscow State Finance Academy in International Economics specialising in accounting and audit. He also studied law between 1997 to 2000 at the Institute of State and Law in Moscow. Mr Runov has worked in the field of tax for over 28 years, with a particular focus on international taxation, both in industry and in a professional advisory capacity in accountancy firms (including PwC and Ernst & Young) in Russia and Europe. In 2007, Mr Runov joined the Rusal Group as an overseas tax officer based in Dublin and, in 2010, Mr Runov relocated to Moscow as the Head of Tax Policy for all the Rusal Group and continued in that role for over 12 years. In his affidavit affirmed 12 October 2022, Mr Runov gave evidence concerning:
(a)UC Rusal’s corporate structure, shareholding, financial reports and tax returns; and
(b)ABC’s business operations and financial returns.
Dzianis Sidarkevich
Dzianis Sidarkevich is the sole director of Libertatem Materials Ltd (Libertatem), a company incorporated in the Republic of Cyprus and a wholly owned subsidiary of UC Rusal. Libertatem was incorporated to consolidate UC Rusal’s foreign assets (including ABC) which were previously held and managed in Cyprus directly by UC Rusal Plc. The incorporation was part of a restructure of the Rusal Group that took place between 2018 and 2020. The restructure involved the redomiciliation of UC Rusal Plc to the Russian Federation and the transfer of the Cyprus offices of UC Rusal, its employees and UC Rusal’s international assets to Libertatem, which restructure was finalised in December 2020. From about 2015 or 2016 until 1 May 2020, Mr Sidarkevich was a General Manager of UC Rusal Plc. On 1 May 2020, Mr Sidarkevich became the sole director of Libertatem and assisted in the redomiciliation of UC Rusal to Russia. In his affidavit dated 24 May 2023, Mr Sidarkevich gave evidence concerning Libertatem’s corporate structure, commercial activities and dividend policy.
Natalia Kuznetsova
Natalia Kuznetsova is a partner with the firm BST Consulting based in Moscow. Her curriculum vitae states that she was a partner in the Tax & Legal Department at Deloitte Russia until May 2022 and that her “experience in tax exceeds 20 years and includes a tax partner position (Head of International Tax for 10 years) with another Big Four firm in Russia and a tax directorship in a major private equity fund, focusing on investments in Russia and the CIS”.
Ms Kuznetsova prepared a primary report dated 7 October 2022, a supplementary report dated 3 May 2023 and a further supplementary report dated 3 June 2023. In her primary report, Ms Kuznetsova gave her opinions in respect of the following questions:
(a)What is the purpose and effect of the Russian Controlled Foreign Company Rules (CFC Rules)?
(b)What are the applicable exemptions to the CFC Rules?
(c)Whether ABC is exempt from the CFC Rules as an active business by virtue of Paragraphs 3 and 4, Article 25-13.1 of the Russian Tax Code?
(d)Whether UC Rusal is exempt from the CFC Rules until 2029 by reason of Paragraph 58, Section 1, Article 251 of the Russian Tax Code?
(e)Whether UC Rusal and/or ABC are subject to any other exemptions to the CFC Rules in respect of income derived from ABC’s business operations with QAL?
(f)Whether, if ABC pays tax on Australian business operations in Australia (i.e. tax paid to the Australian Taxation Office), any tax is payable in the Russian Federation on those Australian business operations?
(g)Whether dividends paid by Libertatem to UC Rusal directly or indirectly are taxable in the Russian Federation?
(h)Whether, if QAL supplied, sold or transferred alumina to ABC, such supply, sale or transfer could or would result in the taxation of ABC or related companies in the Russian Federation?
In her supplementary report, Ms Kuznetsova provided a response to the report of Professor Paul Brooke Stephan dated 25 April 2023 filed on behalf of QAL.
In her further supplementary report, Ms Kuznetsova considered whether further information concerning Mr Vekselberg’s shareholding interest in SUAL Partners ILLC affected any of the opinions previously expressed.
Throughout her written reports and during cross-examination, Ms Kuznetsova displayed extensive knowledge about the Russian Tax Code. I generally accept her evidence about the specific provisions of the Russian written law in that respect. However, there are limitations in Ms Kuznetsova’s evidence with respect to the application of the Russian tax law to the Rusal Group.
First, Ms Kuznetsova’s evidence was subject to significant caveats. She stated that, in preparing her report, she had not performed any verification of the information provided to her which included significant factual assumptions including the tax residence of the entities referred to in her report, whether UC Rusal or any other Russian companies mentioned in the report meet the conditions for being recognised as international holding companies under the Russian Tax Code, and the business activities of Libertatem.
Second, I accept QAL’s submission that, during cross-examination, it became clear that Ms Kuznetsova’s evidence was not entirely impartial and that she was at pains to downplay any risks attending the application of the written law in the case of UC Rusal. That is not to say that Ms Kuznetsova was an advocate for the applicants’ case. Rather, as submitted by QAL, Ms Kuznetsova wished to defend the integrity of the Russian tax system, even when that stance was difficult to maintain in the face of statements in UC Rusal’s own annual reports and other documents. On a number of occasions, rather than simply answer a question asked of her, she went on an excursus about the rules-based predictability of Russian tax law. The following evidence, which was given honestly, was revealing of that motivation:
Do you understand that your role is to independently assist the court, not argue the case for the applicants?---I do understand but, to a certain extent, I feel a little bit upset about what Dr Stephan or Professor Stephan wrote about Russian tax system because, in a way, what he presented in his report, it was like as if there were no 20 years of development and there was. And I am a tax professional and, basically, this environment it is not easy but it has certain rules of the game and there is a person who says that this is all sort of like doesn’t matter because somebody can come and throw it away. Well, I do not agree with this. I think there are still certain principles and certain bases that have to be followed in order to put a case against any company. There should be substance and, in most cases, the substance is [missing word] by the authorities. ...
Let’s break this down. So what he has said has upset you as a professional in Russian taxation?---Yes.
I take it the manner and the content of your evidence today has, in part, been because you have wanted to defend and stand up for that system?---Because I think there is certain fairness in the system and there are certain rules in the system and there is law and there is tax case and there are developments around that and that basically we have to respect and I, as a tax professional, have to respect it. So that’s why I am like, yes – I mean, there are certain things that basically we have to – you just cannot say that this – the law can be applied arbitrary. No, there are certain rules that have to be followed.
The principal issue on which Ms Kuznetsova was cross-examined was the risk of the Russian tax authorities applying an interpretation of Russian tax laws that is selective for particular taxpayers and different to previous interpretations and practices. While Ms Kuznetsova was reluctant to agree with that proposition, she ultimately conceded that there is some risk of selective application of Russian tax laws to particular taxpayers.
B.2 Evidence adduced by QAL
QAL called two lay witnesses (Elizabeth Baker and Gerhard Pienaar) and two expert witness (Alan Clark and Prof Paul Stephan), and tendered documents. None of those witnesses were required for cross-examination. In respect of Ms Baker and Mr Pienaar, I accept their evidence given by affidavit. In respect of the expert reports of Mr Clark and Prof Stephan, I accept the opinions expressed by them subject to some relatively minor qualifications referred to later in these reasons. In that regard, I observe that, while the rule in Browne v Dunn is applicable to expert evidence, the failure to challenge the opinions of an expert witness (by cross‑examination) does not require the Court to accept the expert’s evidence over other contrary evidence: Bulstrode v Trimble [1970] VR 840 at 848 (Newton J). As stated by the New South Wales Court of Appeal in M & E M Hull Pty Ltd v Thompson [2001] NSWCA 359 at [21] (Rolfe AJA, Sheller JA and Davies AJA agreeing):
Prima facie if there is no cross-examination of an expert, (and indeed most witnesses), there is no basis for a Judge not to accept the unchallenged evidence. I say “prima facie” because there are circumstances in which evidence in a report may be rejected or subject to criticism or doubt. This may occur where, for example, the report is ex facie illogical or inherently inconsistent; or where it is based on an incorrect or incomplete history; or where the assumptions on which it is founded are not established. However, in the absence of such matters, there is no rational reason to not accept unchallenged evidence.
Similarly, in Griffiths v TUI (UK) Ltd [2023] UKSC 48 at [61]-[70] (Lord Hodge, Lords Lloyd‑Jones, Briggs, Burrows and Stephens agreeing), the Supreme Court of the United Kingdom reiterated the application of the rule in Browne v Dunn in the context of expert evidence, but explained that there are a number of circumstances in which the rule will not apply, including where an expert opinion is unsupported by reasoning or the factual assumptions on which the expert opinion is based are not established.
Elizabeth Michel Baker
Elizabeth Michel Baker is the Company Secretary and Legal Counsel of QAL. She has held the position of Company Secretary since June 2020 and the position of Legal Counsel since July 2000. In her affidavit sworn 20 December 2022, Ms Baker gave evidence concerning:
(a)the corporate structure of QAL and the agreements governing the Gladstone alumina joint venture;
(b)the imposition of the Russia Sanctions by the Australian Government;
(c)correspondence between QAL and ABC concerning the effect of the sanctions with respect to QAL’s business dealings with ABC; and
(d)the decision taken by QAL to invoke Art 14A of the Participants Agreement and the step-in arrangements.
Gerhard Able Pienaar
Gerhard Able Pienaar has been the General Manager of QAL since 18 September 2019. Prior to that, Mr Pienaar held the position of Manager-Utilities at QAL from 21 November 2017 until 30 May 2019, and the position of Acting General Manager of QAL from 31 May 2019 to 17 September 2019. In his affidavits sworn 19 and 21 December 2022, Mr Pienaar gave evidence concerning:
(a)QAL’s business operations, including the delivery of alumina to the joint venture participants;
(b)ABC’s bauxite, alumina and caustic soda balances from March 2022; and
(c)the status of ABC’s scheduled shipments after the imposition of the Russia Sanctions.
Alan George Clark
Alan George Clark is the founder and Managing Director of the CM Group, which is an independent research advisory group specialising in the analysis of global base and minor metals industries. Mr Clark holds a Bachelor of Applied Science (Metallurgy) from the University of South Australia and a Master of Business Administration (Management of Technology) from the University of Melbourne. He has over 25 years’ industry experience in base metals, specialising in supply-side analysis, cost assessment, primary production, technology development and process improvement. Mr Clark began his career as a research engineer with Rio Tinto Aluminium (formerly Comalco), followed by several roles in research, process improvement and marketing, before establishing Clark & Marron in 1999 which became the CM Group in 2011. Mr Clark’s experience covers many of the world’s base, minor metals and minerals industries, including bauxite, alumina, aluminium, nickel, magnesium, scandium, tungsten, tin, mineral sands, molybdenum and manganese. He has particular expertise on the global aluminium value-chain, particularly bauxite and alumina. Through the CM Group, Mr Clark advises the world’s largest aluminium producers, investment banks, fund managers, traders, industry bodies and research houses as well as governments and major industry groups, such as the International Aluminium Institute, the Australian Aluminium Council and the Aluminum Association.
In his report dated 28 March 2023 and his supplementary report dated 28 April 2023, Mr Clark expressed his opinion on the following questions:
Question 1: Please give a brief overview of how smelter grade alumina is produced and what it is used for.
Question 2: Is smelter grade alumina fungible? To any extent to which it has classes or variations or the like, what are these and what implications do they have for smelting?
Question 3: Can smelter grade alumina be stockpiled indefinitely or does it need to be used within some period, and if so why and what is that period?
Question 4: Please give an overview of the global alumina market as at the start of 2022, including addressing:
(a) major centres of production and consumption;
(b) any particular drivers or features of supply and demand;
(c) how alumina is or can be traded;
(d) to what if any extent swap arrangements are used, and how they operate;
(e) how prices are determined and expressed; and (f) the market price of alumina between January 2019 and April 2022.
Question 5: As at the start of 2022, what were the major aluminium smelting companies in Russia, where were their smelters, what was their approximate annual consumption of alumina and what were their major sources of supply of alumina?
Question 6: What are the consequences for an aluminium smelter of a shortage or lack of alumina supply?
Question 7: Approximately how long is required for the construction of an alumina refinery and what is the approximate capital cost of such construction?
Question 8: Having regard to your answers to questions 1-7 above, if and as you consider those answers of relevance, and to any other relevant considerations, please describe the state of the Russian smelters’ demand for, and ability to obtain, alumina in April 2022.
Question 9: If ABC obtained from QAL the tonnage of alumina referred to in section 2 of this letter and sold it to third parties in China or otherwise outside Russia, as referred to in section 2 of this letter, what effect, if any, would this have on the availability of alumina to Russian smelters? In answering this question, please refer to the following, if and as you consider relevant:
(a) your answers to questions 1-8 above;
(b) the tonnage of China’s annual alumina requirements;
(c) the use (if any) of swap arrangements; and (d) whether such sale of alumina by ABC would free up other sources of alumina for supply into Russia and, if so, where those sources would come from.
Question 10: If ABC obtained from QAL the tonnage of alumina referred to in section 2 of this letter and sold it to third parties in China or otherwise outside Russia on contractual terms prohibiting the buyers from on-selling that alumina to Russia, as referred to in section 2 of this letter:
(a)would there remain a possibility that the alumina would end up in Russia, and, if so, how likely would that be and how would it occur?; and
(b) would there be any way of ensuring or monitoring compliance with the contractual prohibitions referred to?
I accept the opinions expressed by Mr Clark subject to a relatively minor qualification referred to below.
Professor Paul Brooke Stephan
Paul Brooke Stephan is a Professor of Law at the University of Virgina in the United States of America. He was awarded the degrees of Bachelor of Arts (History) in 1973 and Master of Arts (Russian Studies) in 1974 from Yale University, and a Juris Doctor in 1977 from the University of Virginia. Prof Stephan’s areas of specialisation include international law, foreign relations law, post-Soviet law, international business transactions, contract law, federal taxation, and US constitutional law.
In his report dated 17 March 2023, Prof Stephan expressed his opinion on the following questions:
Question 1: Please provide a brief overview of whether – and, if so, how – Russian tax is imposed on or in relation to:
(a)business profits;
(b)dividends;
(c)increase in the value of shares; and
(d)capital gains made by reason of the sale of shares.
In answering this question, please identify the basis on which natural persons and companies are subject to tax (e.g. residence, citizenship, place of incorporation, place of business).
Question 2: What are the sources of tax law in Russia? In answering this question, please explain:
(a)the extent to which the imposition of tax follows the written law; and
(b)if the imposition of tax ever departs from the written law:
(i)how and why that happens; and
(ii)how often that happens.
Question 3: Please provide an overview of the Russian controlled foreign company (CFC) rules. In answering this question, please identify and explain any exceptions to the CFC rules relevant to the activities and ownership structure of ABC as known to you.
Question 4: Having regard to your answer to Question 3, what is your opinion as to whether it is likely that ABC is exempt from the CFC rules.
Question 5: If ABC were to make a profit by reason of QAL supplying alumina to ABC, what would the likely tax consequences be for the natural and legal persons with direct or indirect interests in ABC (including but not limited to the companies referred to above under the heading ‘Corporate structure’)? In answering this question, please address (without limitation) the various scenarios in which dividends are or are not paid up the corporate chain.
Question 6: To the extent not otherwise addressed in your answers to Question 1 to 5 above, please set out whether you agree with the opinions stated in Ms Kuznetsova’s report. In answering this question, please:
(a)identify any areas of disagreement and explain why you disagree; and
(b)identify any matters not addressed in the report which you consider are of relevance for the issues the subject of the report.
As an American law professor, it is not immediately obvious that Prof Stephan would have the expertise to express opinions on those questions. However, in his report, Prof Stephan described his training, study and experience relevant to the questions, which includes the following:
(a)From the start of his academic career, Prof Stephan has concentrated on Soviet and Russian law, politics and economics, in addition to tax law, international law and the organization and regulation of international business transactions. Prof Stephan has taught a course related to Soviet or Russian law in virtually every one of the 44 years he has worked as a law professor. He reads Russian and has substantial facility with Russian legal terminology. Prof Stephan has taught tax law since the beginning of his career. He has worked on various projects on behalf of the US Tax Court and has practised before it. Prof Stephan has published scholarly articles on both US tax law and comparative tax law, as well as Russian tax law.
(b)After the dissolution of the Soviet Union, Prof Stephan took part in the law reform process in the former republics of the Soviet Union, with the bulk of his activities involving the Russian Federation. From 1992 to 1993, legal specialists working on behalf of the Russian Government solicited his advice concerning the framing of the Russian Federation’s new Constitution, which was ratified at the end of 1993. During this period, Prof Stephan also advised members of the State and Law Administration of the Office of the President of the Russian Federation concerning organization of the judicial system and the conditions for promoting judicial independence. Prof Stephan played a central role in establishing the presence of the American Bar Association’s Central and East European Law Initiative in Russia.
(c)From 1993 to 1998, Prof Stephan was employed by a number of government and international bodies in connection with law reform projects in the region, including the International Monetary Fund, the World Bank, the Organization for Economic Cooperation and Development, the US Department of the Treasury, and the US Federal Bureau of Investigation. The lion’s share of the work performed on behalf of the US Department of Treasury involved the drafting of the Russian Tax Code. Prof Stephan also organised or directed programs to train Russian lawyers and judges, which were funded by the US Agency for International Development.
(d)For the last 25 years, Prof Stephan has appeared as an expert on Russian law in numerous cases in US and foreign courts as well as various international arbitrations.
(e)Since the inception of the Russian invasion of Ukraine, Prof Stephan has published articles, advised the general counsels of stakeholders, and conducted workshops for the Office of the Legal Adviser and congressional staff on the legal issues surrounding the imposition of sanctions on Russia.
In a number of instances, Prof Stephan’s report did not reveal or explain the primary facts or source materials on which his opinions were based. As such, it was not possible to be satisfied that those opinions expressed by Prof Stephan were “wholly or substantially based on” specialised knowledge as the reasoning process leading to the formation of the opinion was not exposed. In those instances, the opinions were ruled inadmissible on the basis that the opinions did not satisfy the requirements of s 79 of the Evidence Act 1995 (Cth) as explained in HG v The Queen (1999) 197 CLR 414 at [39]-[44] (Gleeson CJ) and Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588 at [42] (French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ).
There was substantial agreement in the opinions of Ms Kuznetsova and Prof Stephan with respect to the provisions of the Russian Tax Code. The primary area of disagreement concerned the administration and enforcement of the Russian tax law by the relevant authorities, and the likelihood of arbitrary rulings being made. The applicants elected not to cross-examine Prof Stephan and accordingly did not challenge the opinions expressed by him with respect to the likelihood of arbitrary rulings. Despite choosing not to cross-examine Prof Stephan, the applicants submitted that Prof Stephan’s opinions carry little weight given his reliance on “an outdated account of Russian case law” (which was focused on the 2005 Yukos decision – Presidium of the High Arbitrazh Court of Russia, No. 8665/04, 4 October 2005) and without due regard to contemporary developments in both case law and legislation. As discussed further below, while there is some force in that criticism of Prof Stephan’s report, the difference in the opinions of Ms Kuznetsova and Prof Stephan proved to be relatively narrow. As noted above, Ms Kuznetsova ultimately conceded a risk of arbitrary rulings during cross-examination.
B.3 Evidence adduced by the Rio Parties
The Rio parties called two lay witnesses (Alfred Patrick Grigg and Fraser Brian O’Donnell), and tendered documents. Neither of those witnesses were required for cross-examination and I accept their evidence given by affidavit.
Alfred Patrick Grigg
Alfred Patrick Grigg is the Chief Counsel, Minerals at Rio Tinto. Mr Grigg graduated with a Bachelor of Laws (Hons) and a Bachelor of Business (Management) from Monash University in 1999 and was admitted to practice as a Solicitor in the Supreme Court of Victoria and the High Court of Australia in 2000. After working as a solicitor in private practice and then as in-house counsel, in 2007 Mr Grigg joined Rio Tinto as a Corporate Counsel and has undertaken several legal roles in support of Rio Tinto’s aluminium product group. At the time of his first affidavit affirmed 12 December 2022, he was acting General Manager, Energy & Joint Ventures, Pacific Operations, Aluminium at Rio Tinto Services Limited (the Rio Tinto entity which employs corporate personnel), and his substantive role was Chief Counsel, Aluminium and Strategic Partnerships at Rio Tinto. In his affidavits affirmed 12 December 2022 and 23 May 2023, Mr Grigg gave evidence concerning:
(a)the Gladstone alumina joint venture and the contractual arrangements under which the venture operates;
(b)the imposition of the Russia Sanctions by the Australian Government; and
(c)the notices given by RTA to the Russian parties under Appendix E of the Participants Agreement and under the force majeure provisions of the Bauxite Supply Agreements and the Shipping Agreement.
Fraser Brian O’Donnell
Fraser Brian O’Donnell is a solicitor employed by Allens, the solicitors for the Rio parties. In his affidavit affirmed 23 May 2023, Mr O’Donnell gave evidence concerning the steps he took to compile a bundle of legislation, regulations and instruments imposing sanctions in respect of a number of countries (including Russia, Syria, Iran, North Korea and the Crimea Region of Ukraine) by the following countries and intergovernmental organisations: Australia, the United Kingdom, Canada, the United States of America, the European Union and the United Nations.
C. FACTUAL BACKGROUND
C.1 Global trade in alumina
The following description of the global trade in alumina is drawn from the expert report prepared by Mr Clark.
Alumina is aluminium oxide (chemical formula Al2O3) and is usually produced as a white crystalline powder. Approximately 95% of all alumina produced in the world is used to smelt primary aluminium metal in electrolytic aluminium smelters. The remaining alumina is used in a variety of other applications with significantly smaller markets, including refractories, abrasives, chemicals, batteries, lighting, fillers and cosmetics.
Aluminium smelters require a continuous supply of alumina. The primary aluminium smelting process is a high-temperature, fully continuous process that takes place in large electrolytic cells. Each cell is connected in series through an electrical circuit to a number of other cells, collectively known as a potline. The operation of each electrolytic cell relies on the steady, uninterrupted supply of alumina and electricity to maintain operational stability. Any interruption to the supply of either into an electrolytic cell, no matter how small, will impact the performance and the stable operation of the cell. Small interruptions to alumina supply can be tolerated, although they would unavoidably impact the stability and integrity of the operation, as well as reducing output and increasing costs. Lengthier interruptions to alumina supply will lead to serious process and operational instability, in particular, the risk that the electrolytic cells will undergo what are referred to in the industry as “anode effects”. When anode effects occur, the voltage in the electrolytic cell increases dramatically and the electrolysis process becomes unstable and uncontrollable. The cell can then quickly lose its heat balance, leading to a complete loss of control of the process. If this happens to multiple cells in a potline, it would result in the potline being forcibly shut down, which is a catastrophic event for an aluminium smelter. This is because every electrolytic cell not receiving alumina would need to be cooled from a temperature of around 900oC to ambient temperature, resulting in the freezing of its entire contents. This freezing event not only causes irreversible and irreparable damage to the cells, it also results in months of outage. For an aluminium smelter to forcibly shut down an entire potline, the losses incurred are substantial. For that reason, smelters hold sufficient alumina inventory to avoid short-term disruptions.
Approximately 139 million tonnes of alumina (chemical and metallurgical grade) were produced globally in 2021, from an estimated world alumina capacity of 153 million tonnes per annum. China was the largest alumina-producing country in 2021, at approximately 75.3 million tonnes, accounting for 54% of the world total. Australia was the second largest, producing approximately 20 million tonnes, with the third largest being Brazil at over 10 million tonnes. Together, these three countries accounted for 77% of the world’s 2021 production.
Over the past decade, China consolidated its dominant position as the world’s largest alumina producer, by steadily growing its domestic capacity. In 2014, China’s total refining capacity accounted for over half the world’s total for the first time, and its proportion has been increasing ever since, reaching 54% in 2021. China became a significant net exporter of alumina in 2018, before swinging back to a net importer in 2019.
Australia’s 2021 alumina production was 20.4 million tonnes, of which an estimated 89% was exported.
Mr Clark expressed the opinion that alumina can be considered as fungible, meaning it is interchangeable or replaceable with identical material, and that this is the basis on which global alumina is traded, contracts are swapped and material interchanged in different parts of the world. Mr Clark explained that, while alumina is considered to be fungible, different alumina refineries do produce alumina of different qualities, different levels (and types) of impurities and alumina of different crystalline structure.
Mr Clark also explained that, in theory, alumina has an unlimited shelf life, although it must be stored in conditions which minimise exposure to moisture. In practice, the longer alumina is stored, the higher the likelihood it may come into contact with moisture, typically natural moisture in the atmosphere. It could also be exposed to fluctuations in temperature, which may affect its properties, as well as other potential contaminants, such as carbon, which can affect the performance of the alumina in the smelting process. Storage periods for alumina vary widely depending on the location of the refinery, the means of transport of alumina from the refinery (eg rail vs shipping), the frequency of despatch, transport distances and the storage facilities and inventory management systems in place at the destination smelter. Alumina is regularly stored in bonded warehouses prior to completing customs clearance requirements or waiting to be on-sold. Storage times in bonded warehouses are often measured in weeks and months depending on market conditions at the time.
As China began to emerge as the world’s largest producer and consumer of alumina, global trade patterns began adjusting to accommodate a new global supply/demand balance. The result is in effect a dual market, whereby China’s domestic alumina production generally met the requirements of its domestic smelting sector, and alumina supply in the rest of the world (ROW) met ROW smelting demand. The ROW market can be further divided between the Atlantic and Pacific markets, with the difference in prices reflecting supply/demand and freight differentials between the two regions. Mr Clark reported that, heading into 2022, under what he considers as “steady-state” global alumina market conditions, China’s market was absorbing surplus alumina from the ROW market under favourable economic conditions. In other words, the Chinese alumina market was acting as a “sponge” for surplus alumina produced in the ROW market.
Mr Clark reported that swap arrangements are a common instrument used in the global alumina market. They can be broadly categorised into two groups: planned and unplanned. Planned swaps are usually between two alumina suppliers, which can include refining companies, traders or other groups, and involve swapping of alumina in different geographical regions to save on transport costs and are agreed in advance of production. Unplanned swaps are between suppliers typically on a short-term basis to cover some unforeseen set of circumstances that have led to either a shortage or oversupply of alumina emerging in a specific location.
C.2 Russia’s aluminium industry and UC Rusal’s business operations
Mr Gordymov deposed that the Rusal Group engages in business activities involving bauxite and nepheline mining, alumina production, electrolytic production of primary aluminium, and the production of value-added aluminium products (eg aluminium billets, ingots and foil). UC Rusal conducts its business activities globally, including in Armenia, Australia, Germany, Guinea, Guyana, the Republic of Ireland, Italy, Jamaica, Kazakhstan, Nigeria, Russia, Sweden and Ukraine.
UC Rusal owns eleven aluminium smelters, of which nine are in Russia, one is in Sweden, and one is in Nigeria (which is currently idle). A tenth Russian smelter commenced operations at the end of 2021, but is only running at a very low production rate because of market conditions (making aluminium production unprofitable). In the financial year ending 31 December 2022, UC Rusal’s Russian smelters had a requirement for 7.9 million tonnes of alumina. Mr Clark reported that UC Rusal is Russia’s only primary aluminium producing company.
UC Rusal owns ten alumina refineries, of which four are in Russia, two are in Jamaica, one is in Ireland, one is in Ukraine, one is in Italy, and one is in Guinea. The Mykolaiv refinery in Ukraine ceased operating on 26 February 2022 following Russia’s invasion of Ukraine. Prior to that, it produced approximately 1.75 million tonnes of alumina per annum of which about 98% was supplied to UC Rusal’s aluminium smelters in Russia. The Ukrainian city of Mykolaiv is transliterated as Nikolaev in Russian, and the latter name is used alternatively in UC Rusal’s annual reports when referring to the alumina refinery.
Through ABC, UC Rusal also has an interest in the Gladstone Plant operated by QAL. Immediately prior to April 2022, ABC received an annual entitlement of 760,000 tonnes of alumina from the Gladstone alumina joint venture. QAL ceased the delivery of alumina to ABC at midnight on 4 April 2022.
Pursuant to a contract of sale entered into on 15 September 2005, ABC sold all of the alumina produced at the Gladstone Plant to which it was entitled to another subsidiary of UC Rusal, Rual Trade Limited. Under that contract, the purchaser obtained title to the alumina once it passed the ship’s rail at QAL’s wharf. On 5 December 2012, the purchase obligations under the contract of sale were novated to a different subsidiary of UC Rusal, RTI Limited (RTI), by a deed of novation. On 23 November 2018, the term of the contract of sale (now with RTI) was extended to 31 December 2025.
Mr Gordymov gave evidence that, prior to the imposition of the Russia Sanctions, UC Rusal also acquired a further 750,000 tonnes of alumina from Australia under swap agreements with Rio Tinto, Glencore International AG and Norsk Hydro. The purpose of those arrangements was to optimise the logistics of alumina supply to UC Rusal’s subsidiaries in Russia. The swap arrangement with Rio Tinto involved the swap of alumina produced at UC Rusal’s Aughinish refinery in Ireland for alumina produced by Rio Tinto in Australia. The swap was suspended on 21 March 2022. The swap arrangement with Norsk Hydro involved a swap of alumina produced at different locations in Australia. That arrangement was suspended on 18 March 2022.
Mr Gordymov agreed in cross-examination that, following Russia’s invasion of Ukraine, UC Rusal lost the supply of approximately 3.4 million tonnes per annum of alumina in aggregate from the Mykolaiv refinery and from Australia, which equated to approximately 40% of UC Rusal’s Russian requirements. At that time, UC Rusal became a net purchaser of alumina, rather than a seller of alumina. It acquired alumina from traders, including alumina sourced in China, as well as through its own subsidiary based in China. Alumina acquired in China is able to be transported to Russia by truck or barge.
Mr Clark reported that, according to China Customs data, Russia has imported approximately 1.1 million tonnes of alumina from China over the 14-month period ending February 2023.
C.3 The Gladstone alumina joint venture
QAL is the owner and operator of an alumina refinery in Gladstone, Queensland. QAL’s facilities include the refinery, two storage sheds and a wharf known as South Trees.
The shares in QAL are owned by ABC (as to 20%) and by RTA Holdco and RTA (as to 80%). From March 2022 until the date of trial, the Board of QAL has comprised:
(a)Mr Gordymov;
(b)Mr Geoffrey Ian Blatch (alternate director for Mr Gordymov);
(c)Mr Daniel John van der Westhuizen (until 26 July 2022);
(d)Mr Mudiwa Gwisai; and
(e)Mr Armando Antonio de Oliveira Torres (alternate director for Messrs Westhuizen and Gwisai from 4 April 2022 to 26 July 2022, and director from 26 July 2022).
QAL receives bauxite from ABC and the Rio Tinto companies, RTA Holdco and RTA, and processes that bauxite into alumina on a toll basis for those companies. QAL’s operations are governed by the Participants Agreement and the Tolling Contracts. The parties to those agreements are QAL, the Russian parties and the Rio parties. The Participants Agreement has been amended and restated a number of times. The Tolling Contracts have also each been restated and extended a number of times.
Article 2 of the Participants Agreement states the purpose of the Gladstone alumina joint venture in the following terms:
ARTICLE 2. The Project. The Participants (or their predecessors in interest) formed QAL for the sole purpose of constructing the Gladstone Plant at Gladstone, Queensland, Australia, and thereafter operating it for the conversion into alumina, on a toll basis, of bauxite owned by the Participants. Title to the bauxite furnished by a Participant, the material in process and the alumina into which it is converted shall at all times remain in that Participant. Where materials are commingled in transportation, storage or processing, a Participant shall have an undivided interest in such materials.
The Participants Agreement was most recently amended and restated pursuant to a Deed of Amendment and Restatement entered into on 31 December 2019. Relevantly, that Deed introduced Art 14A and the accompanying Appendix E which alters the parties rights and obligations in the event that the Australian Government imposes sanctions on UC Rusal, ABC or any of their affiliates that are likely to prevent QAL from undertaking business activity with ABC and its affiliates. The application of Art 14A and Appendix E are central to the issues in dispute between the parties and are considered in detail below.
Bauxite is supplied to QAL on board vessels which are unloaded at the western end of QAL’s wharf known as South Trees West. The bauxite is obtained from Rio Tinto’s bauxite mines at Weipa in North Queensland and Gove in the Northern Territory. ABC purchases its bauxite from RTA pursuant to the Bauxite Supply Agreements, and the purchased bauxite is then shipped to Gladstone by RTA pursuant to the Shipping Agreement. When delivered, ABC’s bauxite is comingled with Rio Tinto’s bauxite. During the period from 2005 to 2021, QAL received an average of approximately 8.4 million tonnes of bauxite per year.
QAL is also supplied with caustic soda, which it uses in the refinery process, by ABC, RTA Holdco and RTA. The caustic soda is delivered on board vessels at South Trees West. Prior to 31 May 2021, QAL procured caustic soda on behalf of the Participants. However, other than purchases already committed by QAL, from that point onwards the Participants agreed to assume responsibility for the purchase and supply of caustic soda in their own right pursuant to the Caustic Soda Supply Agreement.
QAL refines approximately 3.65 million tonnes of alumina per year. QAL delivers and loads the processed alumina on board vessels chartered or owned by the Participants at the eastern end of its wharf which is known as South Trees East. As part of its operations, QAL prepares an Annual Shipping Schedule for shipments of alumina from QAL’s wharf, based on the expected balances of alumina to the Participants and input from the Participants. The Annual Shipping Schedule contains details of, among things, the country of destination for the alumina.
As noted above, Art 2 of the Participants Agreement stipulates that the Participants retain title to the bauxite, the material in process and the alumina into which it is converted. Where materials are commingled in transportation, storage or processing, the Participants have an undivided interest in those materials in proportion to their interests in QAL. QAL charges the Participants for the conversion of bauxite to alumina in the form of a tolling charge, expressed as a cost per tonne of alumina produced. The tolling charge is based on the cost of operations and maintenance of the refinery, inclusive of labour, materials and utilities, determined on a tax basis. The tolling charge also includes a capital recovery component, based on tax depreciation.
The evidence shows that, prior to the imposition of the Russia Sanctions in March 2022, the vast majority of alumina produced for ABC at the Gladstone Plant was shipped to Russia.
C.4 Domicile, ownership and governance of the Russian parties and UC Rusal
Assessing the material that was put before me by the Rio parties as best I can, I am not persuaded that the Rio parties have established, on the balance of probabilities, that Russia is a country that is the target of comprehensive sanctions within the meaning of the definition of “Sanctions Restricted Territory” in Art 1.1 of the Monohydrate Bauxite Supply Agreement. The burden of establishing that conclusion lay with the Rio parties. The failure of the evidence to examine all relevant sanctions and to subject all relevant sanctions to detailed and rigorous analysis has the result that I am not affirmatively satisfied of the conclusion for which the Rio parties contend.
For completeness, I note that the applicants placed reliance on certain documents published by the United Nations, OFAC and the European Union which explained the nature of sanctions imposed by those bodies or governments against countries or individuals. In some instances, particularly in publications of OFAC, the relevant authority described the sanctions imposed by the authority as “comprehensive” or “not comprehensive”. By way of illustration, the published documents relied upon by the applicants contained the following statements:
(a)In a document titled “2023 Fact Sheets – Subsidiary Organs of the United Nations Security Council” and published by the UN Security Council on 3 April 2023, the following statements appeared:
Over the past five decades, sanctions regimes have changed in focus and scale. One of the most significant changes has been the shift away from use of comprehensive sanctions. Since 2004, all new sanctions regimes have been targeted, meaning that they are intended to have limited, strategic focus on certain individuals, entities, groups or undertakings. The most common sanctions measures are travel bans, asset freezes and arms embargos.
(b)In a document titled “Basic Information on OFAC and Sanctions” and published by OFAC on 21 May 2018, the following statement appeared:
OFAC administers a number of U.S. economic sanctions and embargoes that target geographic regions and governments. Some programs are comprehensive in nature and block the government and include broad-based trade restrictions, while others target specific individuals and entities. … It is important to note that in non-comprehensive programs, there may be broad prohibitions on dealings with countries, and also against specific named individuals and entities.
(c)In a document concerning Afghanistan first published by OFAC on 22 December 2021 and updated on 25 February 2022, the following statement appeared:
In contrast to sanctions programs administered and enforced by OFAC with regard to North Korea, Cuba, Iran, Syria, and the Crimea and so-called Donetsk People’s Republic and Luhansk People’s Republic regions of Ukraine, there are no comprehensive sanctions on Afghanistan.
(d)In a document concerning Russia published by OFAC on 24 February 2022, the following statement appeared:
While certain Russian financial institutions are subject to sanctions under E.O. 14024, the financial services sector of the Russian Federation economy is not comprehensively sanctioned …
(e)In a document concerning the Russian oil industry first published by OFAC on 4 March 2022 and updated on 14 June 2022, the following statement appeared:
The energy sector of the Russian Federation economy itself is not subject to comprehensive sanctions. However, prohibitions or restrictions may apply to certain energy-related transactions under several sanctions authorities …
As also submitted by the applicants, the autonomous sanctions implemented by the Australian Government in respect of Russia and Russian citizens in response to the invasion of Ukraine are described in the Explanatory Statements as “targeted”.
I accept the submission of the Rio parties that the documents relied upon by the applicants do not assist either the construction of the definition of “Sanctions Restricted Territory” or the application of the definition to Russia as at 8 April 2022. With respect to construction, the evidence did not establish that the documents relied upon by the applicants were known to the parties prior to the date that the Monohydrate Bauxite Supply Agreement was entered into (16 February 2022). Indeed, most of the above documents post-dated the making of the agreement. It is accordingly impermissible to use the documents as an aid to the construction of the agreement. With respect to the application of the definition, the documents are no more than statements of characterisation, and therefore opinion, expressed by the relevant bodies about the sanctions they have imposed. It cannot be assumed that the relevant bodies used the word “comprehensive” in the same sense in which it is used in the agreement. It follows that those opinions cannot assist the Court.
Conclusion
In conclusion, I accept the Rio parties’ defence to the applicants’ claim of breach of contract based on the “sanctions provisions” in the Bauxite Supply Agreements and the Shipping Agreement on the basis that Messrs Deripaska and Vekselberg are Restricted Parties who will indirectly benefit from the agreements. Further, RTA was entitled to cease supplying and shipping bauxite to ABC in reliance on those provisions regardless of whether the effect of the Russia Sanctions was to prevent QAL from producing alumina for ABC and delivering alumina to ABC.
F. RELIEF AND THE RUSAL GROUP UNDERTAKING
It follows from the findings I have made and the conclusions I have reached that, in respect of the period to the date of this judgment, the applicants are not entitled to any declaratory or injunctive relief or an award of damages on the grounds of breach of contract. Their application in that respect should be dismissed with costs.
The only question that remains to be determined is whether the Court should accept the Rusal Group Undertaking and give declaratory and/or injunctive relief on the basis of the prospective effect of the Undertaking. It is convenient to reproduce the terms of the Undertaking:
Each of the Applicants, United Company Rusal IPJSC (UC Rusal), Libertatem Materials Limited, United Company Rusal Alumina Limited and RTI Limited, by their counsel, undertakes to the Court that until further order, whether by themselves, their servants, agents, associates or otherwise:
1.they will not supply any alumina that is supplied to the first applicant (ABC) by the first respondent (QAL):
a. to UC Rusal or any of its subsidiaries; or
b. to, for use in or for the benefit of Russia or part of Russia;
2.they will not enter into or perform any swap or other arrangement, the effect of which is to provide that upon any alumina supplied to ABC by QAL being supplied by ABC to the counterparty under that arrangement, the counterparty shall supply an equivalent quantity of alumina:
a. to UC Rusal or any of its subsidiaries; or
b. to, for use in, or for the benefit of Russia or part of Russia;
3.all alumina supplied to ABC by QAL will be sold by ABC directly to third parties located outside of Russia, on terms that:
a.prohibit the buyer of such alumina from transferring such alumina, and/or any resultant aluminium refined from such alumina, to, for use in, or for the benefit of Russia or part of Russia; and
b.require that the buyer of such alumina, in the event of on-sale by that person of such alumina and/or any resultant aluminium refined from such alumina, sell only on terms of sale containing the prohibition in paragraph 3(a) above;
4.they will not act on or otherwise seek to enforce or perform the contract of sale, being Contract No. ABC/RT/05 dated 15 September 2005 between ABC and Rual Trade Limited, and novated by deed of novation dated 5 December 2012 by between ABC (as Seller), Rual Trade Limited (as Buyer) and RTI Limited (as New Buyer); and
5.ABC will not declare and distribute any dividends.
In so far as it concerns the Rusal Group Undertaking, I understand that the applicants seek that the Court grant prospective declaratory relief, conditional on the Undertaking having been given, to the following effect: that the acceptance of bauxite by QAL from ABC, the refining of alumina by QAL for ABC, and the delivery of alumina by QAL to ABC for sale to third parties outside Russia, would not amount to a contravention by QAL of the Russia Sanctions. The applicants also seek injunctions restraining QAL and RTA from relying on the contractual rights previously asserted, which have been considered in these reasons.
The parties advanced only brief submissions concerning the power of the Court to grant relief of that kind conditional upon the acceptance of the Rusal Group Undertaking. The focus of the submissions largely concerned the terms of the Undertaking and the exercise of the Court’s discretion to accept it. Nevertheless, it is appropriate to give some consideration to the question of power as this aspect of the relief sought by the applicants is unusual. It is a declaration as to future rights the factual basis for which is largely founded on an undertaking being offered to the Court.
Sections 21 and 23 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) confer broad powers on the Court to make orders and grant relief of various kinds. Section 21 empowers the Court to make binding declarations of right. Section 23 empowers the Court, in relation to matters in which it has jurisdiction, to make such orders as the Court thinks appropriate. Although the conferral of power is broad, the Court’s power is nevertheless restricted to making the kinds of orders which are capable of being seen as “appropriate” to be made by the Court in the exercise of its jurisdiction: Jackson v Sterling Industries Ltd (1987) 162 CLR 612 at 622 (Deane J); Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1 at [35] (Brennan CJ, McHugh, Gummow, Kirby and Hayne JJ); Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at [27] (Gaudron, McHugh, Gummow and Callinan JJ). The broad powers conferred by ss 21 and 23 of the FCA Act are supported by rr 1.32 and 1.33 of the Federal Court Rules 2011 (Cth). Rule 1.32 states that the Court may make any order that the Court considers appropriate in the interests of justice. Rule 1.33 states that the Court may make an order subject to any conditions the Court considers appropriate.
In Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 581-82, the plurality (Mason CJ, Dawson, Toohey and Gaudron JJ) summarised the principles concerning the power to grant declaratory relief in the following terms (references omitted):
It is a discretionary power which “[i]t is neither possible nor desirable to fetter ... by laying down rules as to the manner of its exercise.” However, it is confined by the considerations which mark out the boundaries of judicial power. Hence, declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions. The person seeking relief must have “a real interest” and relief will not be granted if the question “is purely hypothetical”, if relief is “claimed in relation to circumstances that [have] not occurred and might never happen” or if “the Court’s declaration will produce no foreseeable consequences for the parties”.
The distinction between a declaratory judgment and a hypothetical or advisory opinion was explained by the majority (Gleeson CJ, Gaudron, McHugh, Gummow, Hayne and Callinan JJ) in Bass v Permanent Trustee Co Ltd (1999) 198 CLR 334 (Bass) at [45] and [47]-[49] as follows (citations omitted):
45 The purpose of a judicial determination has been described in varying ways. But central to those descriptions is the notion that such a determination includes a conclusive or final decision based on a concrete and established or agreed situation which aims to quell a controversy. In R v Trade Practices Tribunal; Ex parte Tasmanian Breweries Pty Ltd, Kitto J said:
“[J]udicial power involves, as a general rule, a decision settling for the future, as between defined persons or classes of persons, a question as to the existence of a right or obligation, so that an exercise of the power creates a new charter by reference to which that question is in future to be decided as between those persons or classes of persons ... [T]he process to be followed must generally be an inquiry concerning the law as it is and the facts as they are, followed by an application of the law as determined to the facts as determined; and the end to be reached must be an act which ... entitles and obliges the persons between whom it intervenes, to observance of the rights and obligations that the application of law to facts has shown to exist.”
…
47Because the object of the judicial process is the final determination of the rights of the parties to an action, courts have traditionally refused to provide answers to hypothetical questions or to give advisory opinions. The jurisdiction with respect to declaratory relief has developed with an awareness of that traditional attitude. In In re F (Mental Patient: Sterilisation), Lord Goff of Chieveley said that:
“a declaration will not be granted where the question under consideration is not a real question, nor where the person seeking the declaration has no real interest in it, nor where the declaration is sought without proper argument, eg in default of defence or on admissions or by consent.”
By “not a real question”, his Lordship was identifying what he called the “hypothetical or academic”. The jurisdiction includes the power to declare that conduct which has not yet taken place will not be in breach of a contract or a law and such a declaration will not be hypothetical in the relevant sense. Barwick CJ pointed this out in The Commonwealth v Sterling Nicholas Duty Free Pty Ltd. However, that is not the present case.
48It is true that some have seen the use of the declaratory judgment as little more than the giving of an advisory opinion. However, one crucial difference between an advisory opinion and a declaratory judgment is the fact that an advisory opinion is not based on a concrete situation and does not amount to a binding decision raising a res judicata between parties. Thus, the authors of one recent text on declaratory judgments emphasise that, where the dispute is divorced from the facts, it is considered hypothetical and not suitable for judicial resolution by way of declaration or otherwise. They say:
“If ... the dispute is not attached to specific facts, and the question is only whether the plaintiff is generally entitled to act in a certain way, the issue will still be considered theoretical. The main reason for this is that there may be no certainty that such a general declaration will settle the dispute finally. Subsequent to that declaration a person (the defendant himself or someone else) may be adversely affected by a particular act of the plaintiff. It may then be doubtful whether this act is covered by the declaration. In such a case the affected person will probably be entitled to raise the issue again on its special facts. Indeed, such a declaration will in effect be a mere advisory opinion.”
49 As the answers given by the Full Court and the declaration it made were not based on facts, found or agreed, they were purely hypothetical. At best, the answers do no more than declare that the law dictates a particular result when certain facts in the material or pleadings are established. What those facts are is not stated, nor can they be identified with any precision. They may be all or some only of the facts. What facts are determinative of the legal issue involved in the question asked is left open. Such a result cannot assist the efficient administration of justice. It does not finally resolve the dispute or quell the controversy. Nor does it constitute a step that will in the course of the proceedings necessarily dictate the result of those proceedings. Since the relevant facts are not identified and the existence of some of them is apparently in dispute, the answers given by the Full Court may be of no use at all to the parties and may even mislead them as to their rights. Courts have traditionally declined to state — let alone answer — preliminary questions when the answers will neither determine the rights of the parties nor necessarily lead to the final determination of their rights. The efficient administration of the business of courts is incompatible with answering hypothetical questions which frequently require considerable time and cause considerable expense to the parties, expense which may eventually be seen to be unnecessarily incurred.
As the majority expressly recognised in Bass (at [47]), the jurisdiction to make a declaratory judgment includes the power to declare that conduct which has not yet taken place will not be in breach of a contract or a law and such a declaration will not be hypothetical in the relevant sense. In Commonwealth v Sterling Nicholas Duty Free Pty Ltd (1972) 126 CLR 297 (Sterling Nicholas) at 305, Barwick CJ observed:
The jurisdiction to make a declaratory order without consequential relief is a large and most useful jurisdiction. In my opinion, the present was an apt case for its exercise. The respondent undoubtedly desired and intended to do as he asked the Court to declare he lawfully could do. The matter, in my opinion, was in no sense hypothetical, but in any case not hypothetical in a sense relevant to the exercise of this jurisdiction. Of its nature, the jurisdiction includes the power to declare that conduct which has not yet taken place will not be in breach of a contract or a law. Indeed, it is that capacity which contributes enormously to the utility of the jurisdiction.
Similarly, in Australian Gas Light Co v Australian Competition and Consumer Commission (No 2) [2003] FCA 1229; (2003) ATPR 41-962 (AGL (No 2)) at [40], French J said:
The making of a declaration as to the lawfulness of future conduct has long been accepted as an exercise of judicial power. The fact that declaratory relief relates to future conduct does not place it outside the bounds of federal jurisdiction. If the claim for the declaration arises out of a contemporary controversy in which a party’s freedom of action is challenged in some way, that controversy can constitute a matter for the purposes of the exercise of federal jurisdiction. Whether or not there is a real controversy is a question of judgment. In the present case, in my opinion, there is a real controversy about the right or freedom of AGL to proceed with the proposed acquisition in relation to the Loy Yang A power station and the coal mine. Its freedom to do so has been challenged in a very practical way by the regulator in correspondence and most explicitly in its defence where it denies that the proposed acquisitions would not contravene s 50 of the Trade Practices Act. Reservations about or opposition to a proposed acquisition expressed by the regulator can have very concrete commercial consequences and may in some, if not most, cases effectively prevent an acquisition from proceeding.
In many contexts, the Court may decline to give declaratory or injunctive relief sought under ss 21 and 23 of the FCA Act on acceptance of an undertaking by a respondent if the undertaking is appropriate. The present case involves the opposite: the applicant is seeking declaratory (and injunctive) relief with respect to the lawfulness of future conduct on the basis of an undertaking with respect to that future conduct. The factual foundation on which the declaration is sought is the assumed future compliance with the terms of the Rusal Group Undertaking by the applicants and the other bodies corporate referred to in the Undertaking.
The grant of declaratory relief on the basis of an undertaking given to the Court by an applicant is not without some precedent. For example, in Australian Gas Light Company v Australian Competition and Consumer Commission (No 3) (2003) 137 FCR 317, French J accepted an undertaking from an applicant as a condition of declaring that a proposed acquisition would not contravene s 50 of the Competition and Consumer Act 2010 (Cth). In that case, however, his Honour concluded that the proposed acquisition would not contravene s 50 and that it was appropriate to make a declaration to that effect. His Honour also found (at [10]) that that “conclusion is reinforced by the structural arrangements which are the subject of the undertaking offered by AGL to the ACCC and which AGL has in turn offered to the Court. The declaration which I make is subject to that undertaking …” and (at [614]) that “the undertaking is … an appropriate condition for the grant of the declarations”. Thus, it was apparent from his Honour’s reasons that the undertaking was accepted as a condition of making the declaration under s 21 of the FCA Act. No argument appears to have been raised that the Court lacked power to accept the undertaking.
The respondents did not advance a submission that the Court lacked power to accept the Rusal Group Undertaking. The respondents argued that the Court should refuse to accept the Undertaking as a basis for granting declaratory relief in the exercise of the Court’s discretion. For the reasons that follow, I agree with that submission. Accordingly, it is unnecessary to reach a concluded view about the Court’s power to grant declaratory relief on the basis of the Undertaking.
The foregoing discussion highlights, however, a significant difficulty with this aspect of the relief sought by the applicants. The applicants request the Court to declare that the future delivery of alumina by QAL to ABC would not contravene the Russia Sanctions in circumstances where, in the future, the Rusal Group complies with the Rusal Group Undertaking. In order for the Court to make such a declaration, at the very least the Court must be satisfied that:
(a)first, that the obligations assumed under the Rusal Group Undertaking are clear and certain; and
(b)second, that compliance with those obligations removes any risk of a contravention of the Russia Sanctions.
For the following reasons, I am not satisfied in respect of either of those matters.
As to the first matter, an undertaking to the court is treated as the equivalent of an injunctive order of the court and may be enforced by proceedings for contempt. As such, the principles which govern the grant of an injunction by a court must guide the court in deciding whether it should accept an undertaking: Thomson Australian Holdings Pty Ltd v Trade Practices Commission (1981) 148 CLR 150 at 165 (Gibbs CJ, Stephen, Mason and Wilson JJ). A finding of contempt will not be made where an injunction is ambiguous or lacks precision: Australian Consolidated Press Ltd v Morgan (1965) 112 CLR 483 at 515-16 (Owen J). An undertaking, as for an injunction, must therefore be drafted in clear and unambiguous terms which leave no room for the persons to whom they are directed to wonder whether or not their future conduct falls within the scope or boundaries of the undertaking: ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 38 FCR 248 at 259 (Lockhart J). In Australian Competition and Consumer Commission v Real Estate Institute of Western Australia Inc [1999] FCA 18; (1999) 161 ALR 79 at [26], French J observed:
Once an undertaking is accepted by the court or a consent order made, their breach is enforceable by proceedings for contempt. The undertakings and orders must therefore be formulated with precision so that they are capable of being readily obeyed. Undertakings or orders which are likely to involve vague evaluative judgments or significant debates on their interpretation are not likely to be given the court’s sanction. Similarly, undertakings or orders which are likely to require the court to be concerned with the ongoing supervision of the conduct of the parties to them will also raise serious questions as to their appropriateness.
There are a number of aspects of the Rusal Group Undertaking that lack sufficient certainty. Most significantly, each of paras 1, 2 and 3 are framed in the language of the prohibition against sanctioned supplies in regs 4(1) and 12(1) of the Autonomous Sanctions Regulations. Specifically, those paragraphs of the Undertaking prohibit various forms of transaction if and to the extent the transactions result in alumina being supplied to Russia, for use in Russia or for the benefit of Russia. As these reasons demonstrate, the meaning and effect of those prohibitions can give rise to substantial debate. In effect, those paragraphs are little more than an undertaking to comply with the Export Sanction, but they are given in circumstances where the parties are in conflict with respect to the reach of the Export Sanction, particularly the prohibition of the transfer of alumina for the benefit of Russia. In the exercise of discretion, I would not accept an undertaking in that form.
As to the second matter, the Rusal Group Undertaking does not address the Designated Person Sanction, save perhaps in para 5 by which ABC promises not to declare and distribute any dividends. I have found that the production of alumina by QAL for ABC and the delivery of the alumina to ABC would have been contrary to the Designated Persons Sanction because, by operating the Gladstone Plant pursuant to the contractual arrangements governing the Gladstone alumina joint venture, QAL indirectly makes the Gladstone Plant available for the benefit of Messrs Deripaska and Vekselberg. The benefits are not merely trading benefits to ABC which flow through to the ultimate shareholders of the Rusal Group. The benefits include the improved trading conditions for UC Rusal’s aluminium smelters in Russia, as explained earlier in these reasons. Even in the case of trading benefits to ABC, the retention of profits by ABC does not remove the financial benefit obtained by UC Rusal and its ultimate shareholders; the retention of profits results in an increase in value in ABC which is a benefit to UC Rusal and its ultimate shareholders. It follows that compliance with the terms of the Rusal Group Undertaking does not remove the risk of a contravention of the Russia Sanctions.
There are two further factors that weigh against the acceptance of the Rusal Group Undertaking.
The first factor is the difficulty of framing undertakings that successfully remove the risk that the delivery of alumina by QAL to ABC would in the future contravene the Russia Sanctions. The evidence of Mr Clark, which I have largely accepted, is that alumina delivered by QAL to ABC could arrive in Russia through several different means, including:
(a)a series of subsequent on-selling transactions following the original purchase;
(b)through a swap arrangement;
(c)through blending the QAL alumina with alumina from another source; and
(d)following long-term storage in a bonded warehouse (ie a warehouse located in a jurisdiction that has not cleared any customs).
Mr Clark expressed the opinion that monitoring or ensuring compliance with contractual prohibitions on supply to Russia would not be possible. While monitoring and ensuring compliance with such contractual restrictions (or undertakings) may not be impossible, I accept that it would be very difficult. There is nothing in the Rusal Group Undertaking that seeks to address such problems. In my view, it would be inappropriate for the Court to declare, on the basis of the Rusal Group Undertaking, that the future delivery of alumina by QAL to ABC would not contravene the Russia Sanctions when the Undertaking contains no mechanism for monitoring and ensuring compliance.
The second factor, which is related to the first, is that the Rusal Group Undertaking has been offered to the Court by the applicants and the following members of the Rusal Group that are not parties to this proceeding: UC Rusal, Libertatem, United Company Rusal Alumina Limited and RTI. All are foreign companies and, as far as the evidence establishes, only ABC has a business presence in Australia. The respondents did not submit that the Court is unable to accept an undertaking from a foreign company. Nevertheless, the fact that the Rusal Group Undertaking is offered (and is necessarily offered) by foreign companies which have no business presence in Australia increases the Court’s concern with respect to monitoring or ensuring compliance with the terms of the Undertaking, and therefore the appropriateness of granting declaratory relief on the basis of the Undertaking.
For those reasons, I refuse to accept the Rusal Group Undertaking. It follows that I refuse the prospective declaratory and injunctive relief sought by the applicants.
As a final observation, reference has been made earlier in these reasons to reg 18 of the Autonomous Sanctions Regulations which empowers the Minister to grant to a person a permit authorising the making of a sanctioned supply that would otherwise contravene reg 12(1) and the making of an asset available to a designated person or entity that would otherwise contravene reg 14(1). The Minister is expressly empowered by reg 18(4) to grant permits subject to conditions. By s 16(6) of the Autonomous Sanctions Act, it is a criminal offence if a body corporate contravenes a condition of an authorisation. As far as the evidence revealed, the applicants have not applied for a permit in respect of the acquisition of alumina by ABC from QAL pursuant to the Gladstone alumina joint venture. It would be open to the applicants to make such an application on the basis of conditions that satisfied the Minister that it would be in the national interest to grant the permit. The formulation of detailed undertakings to prevent the delivery of alumina by QAL to ABC contravening the Russia Sanctions, including with respect to monitoring and ensuring compliance, is more readily achieved through the exercise of executive power granted by legislation than by the exercise of judicial power in proceedings such as the present.
In conclusion, I dismiss the applicants’ amended originating application with costs.
I certify that the preceding four hundred and thirty-four (434) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Bryan. Associate:
Dated: 1 February 2024
SCHEDULE OF PARTIES
VID 297 of 2022 Respondents
Fourth Respondent:
RIO TINTO LIMITED (ACN 004 458 404)
Fifth Respondent:
RIO TINTO PLC
Sixth Respondent:
RIO TINTO ALUMINIUM LIMITED
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