Victoria Aircraft Leasing Ltd & Ors v United State & Ors

[2005] HCATrans 1041

[2005] HCATrans 1041

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M37 of 2005

B e t w e e n -

VICTORIA AIRCRAFT LEASING LIMITED

First Applicant

NAURU AIR CORPORATION

Second Applicant

REPUBLIC OF NAURU

Third Applicant

and

UNITED STATES

First Respondent

WELLS FARGO BANK NORTHWEST NATIONAL ASSOCIATION (IN ITS CAPACITY AS SECURITY TRUSTEE FOR THE EXPORT‑IMPORT BANK OF THE UNITED STATES)

Second Respondent

EXPORT-IMPORT BANK OF THE UNITED STATES

Third Respondent

Office of the Registry
  Melbourne  No M81 of 2005

B e t w e e n -

VICTORIA AIRCRAFT LEASING LIMITED

First Applicant

NAURU AIR CORPORATION

Second Applicant

REPUBLIC OF NAURU

Third Applicant

and

WELLS FARGO BANK NORTHWEST NATIONAL ASSOCIATION (IN ITS CAPACITY AS SECURITY TRUSTEE FOR THE EXPORT‑IMPORT BANK OF THE UNITED STATES)

First Respondent

EXPORT-IMPORT BANK OF THE UNITED STATES

Second Respondent

Applications for special leave to appeal

HAYNE J
HEYDON J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 16 DECEMBER 2005, AT 9.36 AM

Copyright in the High Court of Australia

__________________

MR C.L. PANNAM, QC:   If the Court pleases, I appear with my learned friend, MR J.P. MANETTA, on behalf of the applicants.  (instructed by Baker & McKenzie)

MR G. GRIFFITH, QC:   If the Court pleases, I appear with my learned friend, MS C.M. HARRIS, in the first matter for the United States.  (instructed by Kliger Partners)

MR R.A. BRETT, QC:   If it please the Court, I appear with my learned friends, MS P.A. NESKOVCIN and MR E.W. MOON, in both matters on behalf of the Export-Import Bank of the United States and the Wells Fargo Bank.  (instructed by Allens Arthur Robinson)

HAYNE J:   There is no reason why we should not hear the two matters together, is there?  Yes, Dr Pannam.

MR PANNAM:   If the Court pleases. Can I deal with the first matter and immediately identify the point of general public importance that we say would arise if leave was granted, and that is the relationship between the commercial transaction exception to the doctrine of sovereign immunity provided for in section 11 of the Foreign States Immunities Act 1985 and the pre‑existing common law doctrine of restricted sovereign immunity.

The Court will be aware that the Act of 1985 was enacted after a very detailed report from the Australian Law Reform Commission in 1984.  The pre‑existing law that had existed in relation to commercial transactions exceptions to foreign State immunity was the classic common law doctrine of restricted sovereign immunity that was laid down by Lord Wilberforce ultimately in the I Congresso Case and what it demanded was the drawing of a distinction between, on the one hand, actions taken by a government in its sovereign capacity and, on the other hand, transactions entered

into by States of a commercial nature.  What was required under that doctrine was a characterisation of particular transactions falling into one sphere or the other.

HAYNE J:   What is the transaction or what are the transactions that you say are arguably commercial?

MR PANNAM:   Well, the transactions here we say are commercial – let me put it again.  The transactions we relied on, the pleaded transaction is that in return for certain undertakings given by the Government of Nauru the United States Government would in the manner pleaded see to it that we were either putting funds or protected against the actions of the Export‑Import Bank of the United States in enforcing the commercial lease of the aircraft or in enforcing the mortgage.

HAYNE J:   The transaction alleged is one which hinged upon taking steps concerning passports, banking and certain political events concerned with Korea.

MR PANNAM:   Yes, but if one looks at the pleading, one can be distracted by the exotic nature of the facts, if I can put it that way.

HAYNE J:   But the exotic nature of the facts is the core of whether it is a commercial transaction, is it not, Dr Pannam?

MR PANNAM:   No, your Honour, because the way it is pleaded is simply that there was passed, in accordance with directions given by an official of the United States Government, legislation that attended to all of those matters and an appointment made that attended to the first of the matters, the Korean matter.  In return for that, the promise was, fairly specific, that Eximbank and the problems that it created for the airline of Nauru would be attended to.  So that although the content of the transaction does involve matters that certainly impinge upon governmental fields of interest, if I can put it that way, it was a pure commercial transaction in the sense of it was in return for the promised economic benefit in relation to the airline that these actions were undertaken.  That is the pleaded case. 

HAYNE J:   The matter is put in two ways, either by third party claim or by defence.

MR PANNAM:   It is put both ways.  There is a third party claim we are concerned with at the moment and then there is a defence and a counterclaim against the ‑ ‑ ‑

HAYNE J:   Yes.  Well, you should deal ultimately with both, of course.

MR PANNAM:   Yes, I will.

HAYNE J:   Is it alleged or was it ever alleged in the courts below that Wells Fargo was to be treated as a separate entity under section 3?

MR PANNAM:   No, that was not argued.

HAYNE J:   Thus it is not said that section 22 was engaged in that way?

MR PANNAM:   No, that was not put below either.

HAYNE J:   But is that not in essence what you seek by another path to achieve?

MR PANNAM:   No, with respect, your Honour.  Can I put it this way.  If one approaches it with the pre‑existing common law before the Act, one would say, are these transactions predominantly sovereign matters or are they commercial matters?  After the Act – because that distinction was criticised in very stringent terms by the Australian Law Reform Commission.  I think the distinction was described as “incoherent”, “elusive and extremely difficult to apply” – I am selecting words from paragraphs 46 to 48 of the report – uncertain and there are many cases in which both aspects of the transaction were inextricably intermixed, and they are all summarised, if I can just briefly take the Court to the report at paragraph 58.  The criticisms are summarised:

·the absence of international consensus about the scope of “governmental” or “sovereign” acts ‑ ‑ ‑

HAYNE J:   Yes.  Now, understanding that the common law is seen as bad, the ultimate impression is one of construing the Act.

MR PANNAM:   That is so.

HAYNE J:   What is the point that arises?  I think you opened it as a point in the nature of an intersection between the old common law and the statute.

MR PANNAM:   Yes.

HAYNE J:   Why?  Why do you not begin with the Act?

MR PANNAM:   Because the courts below, in our respectful submission, both the Court of Appeal and her Honour, were too much influenced by the pre‑existing common law in interpreting section 11(1) and (3). They approached it as you do not go to the three heads that are set out in subsection (3) that give you specific identifications of particular commercial transactions because, as was pointed out in the Court of Appeal by Justice Callaway, even though you come within one or other of those limbs, (a), (b) or (c) – and this was the point that was also made by the trial judge – nevertheless there is an overriding principle that you ask which is the old principle: is it a transaction that falls within the sovereign side of the sovereign versus commercial dichotomy of the old common law?

Now, in our respectful submission, although the report of the Australian Law Reform Commission criticises severely that test and says, if your eye goes down to the bottom of that page, paragraph 58, what we want is a more flexible test, the flexibility was not achieved because, in our respectful submission, if the decisions below stand, all that the Act does is to codify the pre‑existing common law.  It does not make any change at all, in our respectful submission, on this particular point. 

So the point does arise as to whether or not in the interpretation of section 11(3) mistakes were made by the court below of several kinds. First of all, by a requirement that I just identified, but notwithstanding the transaction can be properly characterised as coming within (a), (b) or (c) of section 11(3), you still ask another question, notwithstanding that, is still the overriding characterisation of the transaction non‑commercial.

Now, if your Honours go to section 11(3) just for a moment, your Honours will see there that the concept of a “commercial transaction” was defined as meaning:

a commercial, trading, business, professional or industrial or like transaction into which the foreign State has entered or a like activity in which the State has engaged and, without limiting the generality of the foregoing, includes –

you can put to one side for present purposes –

(a)      a contract for the supply of goods or services –

and then, importantly –

(b)      an agreement for a loan or some other transaction for or in respect of the provision of finance –

Now, in our respectful submission, the pleaded case is a case involving a transaction for or in respect of the provision of finance in the relevant sense.  The last of the limbs is:

(c)      a guarantee or indemnity in respect of a financial obligation –

and we would say that what was being offered under the terms of the pleaded agreement, or the pleaded representations, was an indemnification against the claims of Eximbank in relation to the aircraft.  So that if I can identify the error below for which we would contend, it is this, it is that notwithstanding a transaction is capable of being characterised, for example, as one coming within (b), nevertheless, one asks another question.  What is that question?  It is the pre‑existing common law question.  It is the I Congresso question.  It is the doctrine of restricted sovereign immunity.  It comes back, notwithstanding the fact that the commission roundly criticised it and said it was going to have a piece of legislation or it drafted a piece of legislation for the consideration of the Parliament that was to have a degree of flexibility. 

Well, we would ask the rhetorical question, where is the flexibility in that, because (a), (b) and (c) simply come back to a general question, an overarching question, is the whole transaction looked at as a whole?  Does it savour of sovereign governmental elements or, on the other hand, is it a commercial transaction?  Now, our contention is, or would be if leave was granted, that a transaction can have many characterisations and in this case, merely because from the US Government’s point of view the transactions served a governmental purpose, is neither here nor there, we would say, because looked at from Nauru’s point of view there was a purely commercial transaction, that is, the exercise of governmental authority to be sure, but in return for a stipulated consideration. 

Now, your Honours, they are the points that are said to arise if leave was granted in relation to the first matter.  Is it convenient to go to the second of the two matters?

HAYNE J:   Yes.

MR PANNAM:   So far as the second matter is concerned, the Court has seen that the Court of Appeal held that the pleaded defence and counterclaim raise non‑justiciable issues because, in effect, there were no judicial or manageable standards by which to judge those issues.  In any event, the dispute was of a kind that could only be resolved on a State to State level because it arose out of a transaction between sovereign States. 

Now, in our respectful submission, those conclusions were curious, to say the least, because they were arrived at in a context where, so far as the pleadings between Eximbank and the applicants are concerned, the pleading was that the transaction was governed by – and I quote from their pleading, paragraph 7A of the pleading, the defence and counterclaim – “the laws of the United States of America”, whatever that may mean, but it certainly does not mean a reference to international law.  It is a reference to American domestic law. 

In the pleading in reply on behalf of the present applicants, in paragraph 1 of the reply, the law that was said to be applicable, or pleaded to be applicable, was “the law of Victoria” or “alternatively the law of Nauru”.  So that so far as the pleadings are concerned, there is no international element.  It is a transaction that is alleged, pleaded to be by both sides, subject to one municipal law system or another.  Further, there was no suggestion that Australia would be embarrassed in its conduct of any foreign relations if the court assumed jurisdiction over the dispute.  We refer the Court to the supplementary application book.  If you look at page 27, there was, in effect, a letter to that effect from the Public International Law Branch of the Australian Government’s Attorney‑General’s Department.  Furthermore, there was no suggestion that if the court assumed jurisdiction that it would be required to judge the lawfulness of the acts of a foreign State.

HAYNE J:   Can the decision below in this respect be seen as turning upon a characterisation of the arrangement that it was sought to rely on?

MR PANNAM:   Well, in our respectful submission, if one goes to the Court of Appeal, the relevant paragraphs of the Court of Appeal’s decision are simply incorrect.  If I can take the Court to paragraphs 26 to 38 of the Court of Appeal’s decision, page 189 – perhaps I should take your Honours to page 192, paragraph 34.  What the Court of Appeal said:

Whether Nauru and the United States had each carried out its side of the transaction involved questions which a municipal court of this country is not equipped to judge.

Well, with the greatest of respect, they were domestic law problems.  The pleaded case was a case in either unconscionability or a breach of contract.  They were straightforward domestic law concepts.

Counsel for the appellants contended that the proceeding ‑ ‑ ‑

HAYNE J:   Therein lies part of the difficulty, does it not, the application of straightforward domestic law concepts to dealings between State?  The dealings being, “If you clean up your banking system and your passport system and assist us in certain respects, we will go easy on enforcing”.

MR PANNAM:   But that is the very – if I could just read on to identify where we contend the error is to be found, and it is just this paragraph:

Those may have been the causes of action invoked by the appellants, but their application to the subject matter of the negotiations between Nauru and the United States would take the Court into unchartered waters in that there are no judicial standards to judge questions such as whether Nauru adequately reformed its banking regime and appropriately co‑operated with the United States in detecting and dealing with the activities of terrorists and whether the United States’ plan to facilitate the defection of a North Korean scientist, possibly with the covert co‑operation of China, was in fact implemented.

Now, with the greatest of respect, that is quite incorrect.  If one goes to the pleadings, the pleadings are perfectly straightforward in terms of what is alleged.  Can I take the Court back to the pleaded defence and counterclaim, which starts at page 23, and just spend a couple of moments going through what the actual pleaded case was.  Can I first go to paragraph 7 on page 26:

By October 2002, Nauru faced severe financial difficulties.

Then in paragraphs 9 and following:

It was at all material times a policy or practice of the United States to conduct certain sensitive negotiations and business, in whole or in part, through the agency of individuals (“deniable operatives”) with no apparent formal status in the government of the United States.

That led to the United States Government:

making ostensibly credible denials that such individuals have acted as agents –

Then there is an allegation that certain persons were in fact deniable operatives, which was the phrase that was used.  Then if I can take the Court to paragraph 15 on page 30:

There were terms of the Agreement, and/or, it was represented to Nauru that if Nauru cooperated with the US agenda in the manner stipulated by Messrs Ray and Sanders –

they being two of the agents –

the United States would:

(a)      ensure that Eximbank would give Nauru additional time to pay its debts to Eximbank, sufficient to ensure the operational viability of Air Nauru;

(b)      provide funds to Nauru sufficient to eliminate any problems Nauru might have in relation to repayment of the Eximbank financing; and

(c)      would not permit Eximbank to exercise any strict contractual rights which it might have to take possession of and sell the Aircraft.

HAYNE J:   Now, the US agenda is paragraph 8, is it not, page 27?

MR PANNAM:   I am sorry, yes, I should have gone back to that. 

HAYNE J:   It is those matters upon which the Court of Appeal fastened?

MR PANNAM:   Yes, but, with respect, if one comes to look at the breach to see what the issue would be that fell for determination, it is a very different issue because, if one goes over to paragraph 16, which is at page 36, the way in which the case is put in the particulars is a very crisp and clear allegation.  So far as the North Korea episode is concerned, the only request that was made was for the appointment of an honorary consul, and that was done.  It either was or it was not.  The allegation is it was.  Secondly, the banking information was requested and it was provided.  Now, that is either right or wrong.  It provided all of the banking information that was requested.  At paragraph (iii):

There were meetings –

and throughout those meetings, in (iv), there was discussion of:

(A)     offshore banking regime;

(B)     laws to combat money‑laundering; and

(C)     practices to combat the abuse of falsification of Nauruan passports.

HAYNE J:   Now, these allegations are put in aid of an estoppel?

MR PANNAM:   They are put in support of an allegation, first of all, there was an agreement, secondly, if that was not right, there were representations made that were acted upon and that constituted unconscionability of conduct if the basis of the action is taken away, and they were the two principal ways in which it was put.  But if I can go on, because the important ‑ ‑ ‑

HAYNE J:   Would that not require consideration of whether what is said in paragraph 8 was given effect to in the manner described as “Nauru cooperating with”?

MR PANNAM:   But, your Honour, if one goes to the next two lines, because I stopped reading at the point where the Court of Appeal stopped its reasoning.  If one goes on to (v) and (vi):

The steps agreed were the passing of legislation, in a form to be settled with [a representative of the United States Government] regarding offshore banking and money‑laundering; and the making of an Executive Order, in a form agreed at the meeting –

and that that was done.  So that the issue that arises is not amorphous, there is certainly no lack of judicial or manageable standards.  We were asked to do something and we did it.  That allegation is either right or wrong.  It does not involve any concept of non‑justiciability, in our respectful submission.  So the lack of judicial or manageable standards as the basis of the reasoning, in our respectful submission, is simply denied by the nature of the issues that are raised by the pleadings.  Exotic though the factual background may be, the pleadings put it in a very crisp and straightforward domestic law fashion, in our respectful submission. 

Now, if that is right, then there is one other strand that stands in the way of success and that is the general proposition that was stated by Lord Wilberforce in Buttes’ Case, namely that the court will not assume jurisdiction involving disputes between foreign States relating to any particular transaction, that broad sweeping general proposition.  In our respectful submission, if leave was granted to appeal from the Court of Appeal, that proposition would be tested to see if it ever represented the law, because we would want to contend on the appeal that that general proposition stated by Lord Wilberforce in Buttes was not the law at the time that it was stated.  We would want to refer to a series of Privy Council decisions in the 19th century where ‑ ‑ ‑

HAYNE J:   Well, maybe, but would you not be beginning with the Act and section 9 of the Act?

MR PANNAM:   No, this is on the non‑justiciability point.

HAYNE J:   But this aspect is as against the United States, is it not?

MR PANNAM:   No, this is not against the United States; this is against Eximbank.

HAYNE J:   Which you do not equate with the United States for this purpose?

MR PANNAM:   Certainly not, no, and we do not equate with the United States for any purpose.  What we say is it is an independent agency of the United States, as is the State Department.  It is controlled as a matter of fact in relation to this proceeding, we would say, by the State Department, and your Honours have seen there are telexes that are annexed to the affidavit in the supplementary court book that show, in our respectful submission, that this action would never have been commenced and certainly would not have been continued to judgment without the express approval of the State Department, and that is a point we wanted to raise because we wanted to amend the pleading to say just that.

HAYNE J:   But this leads to the tension, does it not, that you say Eximbank is not relevantly a separate entity, Wells Fargo is not relevantly a separate entity when it sues as trustee for Eximbank and yet you wish to plead in answer to it agreements made with the United States?

MR PANNAM:   Yes, because it goes nowhere to contend that the statute that governs Eximbank creates it an independent agency of the United States.  That is conceded.  That cannot be gainsaid.  What we seek to prove as a fact is that, irrespective of what is in that statute, Eximbank in relation to this particular proceeding would never have commenced it or continued it without the express approval of the United States State Department.  That is not imaginitis.  There is a series of emails that are annexed to the affidavits that show just that and, in fact, I will take the Court to them, if I may, just briefly.  If one goes to page 9 of the supplementary application book, you have the reference in the last line of the State Department having:

no objection to the Bank proceeding along these lines.

You have on page 14 of the application book even clearer references.  You have ‑ ‑ ‑

HAYNE J:   But you wish to plead in answer to claims made by an entity which you say is not the United States something that the United States has done or agreed to or represented?

MR PANNAM:   Can I take you to page 47 of the supplementary application book to see what the amendment was for which we contended.  It might answer your Honour’s question.  In paragraph 18A the allegation is that:

Eximbank’s actions would not have occurred without the advance approval and consent of the United States.

Now, that is an allegation that is either right or wrong and if it is right, in our respectful submission, what it shows is that there is a direct link relevantly to this litigation as a matter of fact between the United States Government acting through the State Department in relation to the kinds of promises that were made and then having taken the advantage of those promises then allows, when it has the possibility of control or the reality of control, this proceeding to be commenced in defiance of those promises.  We would submit that in those circumstances what would be revealed would be an abuse of the process of the court.  That was the way in which it was put. 

But, your Honour, if I can come back to the general point that arises on the second limb of the argument about non‑justiciability before coming to the link.  It is that the point that would be debated on the appeal would be whether Lord Wilberforce’s broad proposition in Buttes represents the law.  As to that, we are so bold as to submit that that proposition has never been accepted as the basis of a defence of non‑justiciability in any Commonwealth case of which we are aware.

HAYNE J:   It seems to me at least arguable that non‑justiciability is a nice tag to apply to what in truth is a question of statutory construction.  The relevant question is the construction of the federal Act, the Foreign States Immunity Act.

MR PANNAM:   In our respectful submission, on this part of the case that Act would not apply.  On this part of the case the pure question is whether the dispute as between the airline and Nauru and Eximbank is non‑justiciable in the courts of this country.  I think we have demonstrated, first of all, that the assigned reasons of the Court of Appeal are wrong because they ignore the pleadings and, secondly, the general proposition that therefore must be relied upon similarly is incorrect, or at least it has never been the subject of any defence of non-justiciability in any British Commonwealth court that we have been able to find and was rejected, in our respectful submission, in the Kuwait Airlines’ Case.  In Kuwait, both the Court of Appeal and the House of Lords were taxed with the proposition, the broad general proposition, and both courts rejected the argument. 

So the only other alternative on this non‑justiciability point then, in our respectful submission, would be – I will put it another way.  The broad principle that can provide the only foundation, in our respectful submission, for the Full Court’s decision, or the Court of Appeal’s decision, is a principle that does not represent the law and has been repudiated in England, was not followed in the Federal Court in the Petrotimor Case, because that was not a case that depended on Lord Wilberforce’s proposition.  It was a lack of judicial standards case. 

So that, in our respectful submission, this is not a case where the defence and counterclaim should be held to be non‑justiciable, but if it is – and our final point is this –then the case should have been stayed on the basis that its continuance would have constituted an abuse of process for the reasons that I have already briefly foreshadowed, namely that it would be fundamentally unfair in the circumstances if the only defence and the only claim that Nauru had is shut out in two ways.  First of all, it cannot sue the United States because it claims immunity, and that is right.  Secondly, the defence and counterclaim was non‑justiciable.  So you strip away all of the defences and you say in those circumstances Eximbank can then proceed with its collection procedure. 

Now, in our respectful submission, what the trial judge did was to adopt the test that said, “Before I will come to that conclusion, you must show a sufficient link between the claim that you make in the non‑justiciable case and the claim of Eximbank”, and what her Honour said, you have to show two things.  First of all, you have to show a clear link and, secondly, you have to show separately strong prospects of success.  So far as the latter is concerned – and, with the greatest of respect, that cannot be right because the court would have to go into an assessment of the non‑justiciable transaction in order to assess the strength of the case; that does not seem to be correct. 

So far as the link is concerned, we attempted in that proposed amendment and our request for further discovery to establish the link, namely that the action would not have been commenced nor proceeded with unless the State Department gave its approval.  Now, that was the link that the Court of Appeal just did not deal with.  It was dismissed in a footnote towards the end of the reasons and her Honour froze the pleadings at the point of time when the matter was before her and refused to entertain an application for further discovery or for an amendment of the defence and counterclaim, to raise the link.  So on this aspect of the case, Nauru was shut out of attempting to demonstrate the very link that was said to be the weakness of its case. 

Now, there was a foreshadowed application for amendment before her Honour.  There was an application for discovery.  Her Honour refused to entertain either for the reasons that she gave.  If the Court looks at page 165 of the application book, the Court will there see a statement in open court her Honour made on 24 September of last year explaining, if one goes over to 166 at the top:

I could not grant an application for leave to amend the amended defence and counter claim insofar as the amendment related to or fortified those non justiciable issues.

Well, we would ask the question, why not?

It would therefore be a futility to hear the defendants’ application for leave to amend and the plaintiff’s proposed opposition to it would also be a futility. 

Now, in our respectful submission, to shut a party out of the further discovery that was sought, not on a flight of imagination, but by reference to the email, some of which I have read to the Court or shown to the Court, and then to say not only will we refuse leave to amend, but also you cannot get any further discovery to strengthen the link case, created the very situation for which we were contending, namely that to allow the case to go forward in those circumstances and on that basis constituted an abuse of process.  They are the arguments.

HAYNE J:   Thank you, Dr Pannam.  We need not trouble you, Dr Griffith or Mr Brett.

The decisions of the courts below turned principally upon the characterisation of the agreement, arrangement or representation which the applicants allege was made.  We are not persuaded that an appeal would enjoy sufficient prospects of success to warrant a grant of special leave.  Accordingly, special leave in each matter is refused and refused with costs.

The Court will adjourn to reconstitute.

AT 10.10 AM THE MATTERS WERE CONCLUDED