Wells Fargo Bank Northwest National Association v Victoria Aircraft Leasing Ltd

Do Not Send for Reporting
IN THE SUPREME COURT OF VICTORIA		Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST

No. 2035 of 2003
F5557

BETWEEN

WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION (IN ITS CAPACITY AS SECURITY TRUSTEE FOR THE EXPORT-IMPORT BANK OF THE UNITED STATES)	Plaintiff
and
VICTORIA AIRCRAFT LEASING LIMITED AND OTHERS (ACCORDING TO THE ATTACHED SCHEDULE)	Defendants
and
UNITED STATES	Third Party
AND BETWEEN
VICTORIA AIRCRAFT LEASING LIMITED AND OTHERS (ACCORDING TO THE SCHEDULE ATTACHED)	Plaintiffs by Counterclaim
and
WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION (IN ITS CAPACITY AS SECURITY TRUSTEE FOR THE EXPORT-IMPORT BANK OF THE UNITED STATES) AND EXPORT-IMPORT BANK OF THE UNITED STATES	Defendants by Counterclaim

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JUDGE:	DODDS-STREETON J.
WHERE HELD:	MELBOURNE
DATE OF HEARING:	19 July 2004
DATE OF JUDGMENT:	28 July 2004
CASE MAY BE CITED AS:	Wells Fargo Bank Northwest National Association v Victoria Aircraft Leasing Limited and Ors
MEDIUM NEUTRAL CITATION:	[2004] VSC 262

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FOREIGN IMMUNITY – Plaintiff as security trustee of mortgagee bank (an agency of the United States of America) seeks to exercise remedies in relation to aircraft owned and operated by the first and second defendants, agencies of the third defendant, the Republic of Nauru – The defendants, by defence and counterclaim, allege an agreement or arrangement between the United States and Nauru pursuant to which the United States represented that in return for Nauru’s co‑operation with a specified agenda, it would provide Nauru with funds or intervene to prevent mortgagee from exercising its strict legal rights in relation to aircraft (“the Transaction”) – Whether third party notice (containing the Transaction allegations) served by defendants on the United States liable to be set aside on ground that the United States is immune from jurisdiction pursuant to s.9 of Foreign States Immunity Act 1985 (Cth) (“the Act”) – Whether immunity lost pursuant to the “commercial transaction” exception in s.11(1) of the Act – Transaction not a commercial transaction; predominantly a political, governmental or diplomatic transaction. Transaction to be considered as a whole – the incorporation of a merely subsidiary commercial element including a “provision of finance” within terms of s.11(3)(b) (whether or not it is ipso facto “commercial”) did not render the Transaction a “commercial transaction” – If Transaction otherwise a “commercial transaction” within terms of s.11(1), immunity restored pursuant to s.11(2)(a)(i) of the Act, as the literal terms of that provision (when modified to accord with its purpose)preserve immunity where all parties to the transaction are foreign states.

Relevance of doctrines of non-justiciability and act of state considered- Foreign States Immunity Act 1985 (Cth); Australian Law Reform Commission Report No. 24 on Foreign State Immunity 1985; Alcom Ltd v Republic of Colombia [1984] 2 All ER 6; Attorney-General (United Kingdom) v Heinemann Publishers Australia Pty Ltd (1988) 165 CLR 30; I Congreso del Partido [1983] 1 AC 244; Re The Canadian Labour Code (1992) 91 DLR (4^th) 449; Controller and Auditor-General v Davison [1996] 2 NZLR 278; Mills v Meeking (1990) 91 ALR 16; Kingston v Keprose Pty Ltd (1987) 11 NSWLR 404.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr R. Brett Q.C.	Allens Arthur Robinson
For the Defendants	Dr C. Pannam Q.C. with Mr J. Manetta	Baker & McKenzie
For the Third Party	Dr G. Griffith Q.C. with Ms C.M. Harris	Kliger Partners

TABLE OF CONTENTS

INTRODUCTION.............................................................................................................................. 2

THE PLEADINGS.............................................................................................................................. 3

Amended Statement of Claim..................................................................................................... 3
Defence and Counterclaim.......................................................................................................... 6
The US Agenda.............................................................................................................................. 6
Third Party Notice...................................................................................................................... 11

THE PARTIES’ CONTENTIONS................................................................................................. 11

(a) The Subsidiary Argument – Non-Justiciability and Act of State................................... 12
(b) The Statutory Argument...................................................................................................... 16
(c) The Legislation....................................................................................................................... 16
(d) Section 11(1) of Act - Commercial Transaction................................................................ 18
(e) Section 11(2)(a)(i) of Act....................................................................................................... 35

RELATIONSHIP OF THIS APPLICATION TO THE RECOVERY PROCEEDING......... 39

CONCLUSION................................................................................................................................. 39

HER HONOUR:

INTRODUCTION

In this application made by summons dated 10 May 2004 in proceeding 2035 of 2003 (‘the recovery proceeding”) the United States (the Third Party) seeks inter alia, an order setting aside the Third Party Notice dated 5 September 2003 served upon it by the defendants on 20 February 2004 on the grounds that (a) the United States, as a foreign state, is immune from the jurisdiction of Australian courts in the proceeding pursuant to the Foreign States Immunities Act 1985 (Cth) (“the Act”) and, or alternatively: (b) the claims made against the United States in the Third Party Notice are not justiciable as they require adjudication of “acts of state” and “determination of matters bearing upon the validity of acts and transactions of foreign states”.

The determination of this application is a matter of urgency as the trial of the recovery proceeding is to commence shortly.

The plaintiff (“Wells Fargo”) is a corporation incorporated pursuant to the law of the State of Utah, United States of America. It is the security trustee for the Export Import Bank of the United States (“Eximbank”), the holder of the mortgage and security interests over a Boeing 737-400 aircraft together with its engines, manuals and technical records (“the aircraft”) which is the subject of the recovery proceeding.

Eximbank is a corporation and an agency of the United States, established pursuant to the Export Import Bank Act of 1945[1] which relevantly states that Eximbank “shall constitute an independent agency of the United States and neither the Bank nor its functions, powers or duties shall be transferred to or consolidated with any other department, agency or corporation of the Government unless the Congress shall otherwise by law provide”.
[1]12 USC s.635(a)(1).

Its charter states that Eximbank is “an agency of the United States of America”. Its objects and purposes include “to aid in financing and to facilitate exports of goods and services, imports, and the exchange of commodities and services between the United States or any of its territories…and any foreign country or the agencies or nationals of any such country…”[2]. All issued capital of Eximbank is held by the United States, through the office of the President. The president of Eximbank is appointed by the President of the United States by and with the advice and consent of the Senate. Its board consists of five directors, not more than three of which shall be members of any one political party. Eximbank is to act in accordance with the policy of the United States.
[2]Export Import Bank Act 1945, s.2(a)(i).

The first defendant (“VALL”) is a corporation incorporated under the laws of the Cayman Islands. VALL is the owner of the aircraft. The second defendant, Nauru Air Corporation (“NAC”) is incorporated under the laws of the Republic of Nauru and is registered as a foreign corporation in Australia. NAC carries on the business of an airline under the name “Air Nauru”. Since 1996 it has operated the aircraft in the course of that business. The aircraft is apparently NAC’s only aircraft.

The third defendant is the Republic of Nauru.

VALL, NAC and Nauru (collectively, “the defendants”) filed and served a defence and counterclaim dated 15 August 2003 to which Wells Fargo and Eximbank are the first and second defendants respectively.

THE PLEADINGS

Wells Fargo commenced the recovery proceeding by writ and statement of claim dated 27 June 2003 in its capacity as security trustee for Eximbank, seeking to enforce securities and to exercise mortgagee remedies, including foreclosure and possession, in relation to the aircraft. The aircraft was purchased in 1993 by VALL pursuant to funding provided by Eximbank pursuant to a ‘package’ of related credit and security agreements.

Amended Statement of Claim

An amended statement of claim dated 15 June 1004 was filed pursuant to the order of Habersberger J made 11 June 2004.

Pursuant to the amended statement of claim, the plaintiff alleges a credit agreement (“credit agreement”) made 4 June 1993 between VALL as borrower and Citibank NA as lender and security trustee for Eximbank, Citicorp as agent and Eximbank, whereby Citibank agreed to establish a credit facility of US $69 million to finance VALL’s purchase of two aircraft, including the aircraft, from Boeing.

The plaintiff alleges a guarantee agreement dated June 1993 (“guarantee agreement”) executed by Eximbank, Citibank, NA and Citicorp (as lender and agent respectively under the credit agreement) which provided that if VALL defaulted in payment due under a promissory note issued under the credit agreement for more than 30 days, Citicorp, as agent for the noteholder, would made demand on Eximbank for payment and would assign to Eximbank all of noteholder’s right, title and interest in and to the promissory note and the credit agreement.

By agreement between Nauru and Eximbank dated 4 June 1993 (“the Nauru guarantee letter”) the Republic of Nauru guaranteed to Eximbank all of the obligations of VALL as borrower under the credit agreement. The Nauru guarantee letter provided that if an event of default within terms of clause 32 of the credit agreement occurred, by acceleration notice to Nauru the entire amount outstanding under the credit agreement, promissory notes issued under it, and interest, would become due and payable.

In June 1993 VALL as Mortgager and Citibank NA (as the then security trustee for Eximbank) entered a first priority aircraft mortgage (“the mortgage”) over the aircraft, whereby VALL, as owner, mortgaged it to Citibank NA as security for the secured obligations.

The rights to the loan were assigned by agreement made 15 November 1993 by Citibank NA to West LB. As at 20 June 1995, VALL was indebted to West LB in the sum of US$30 million, and West LB, in turn, issued a promissory note in its favour. On 22 March 2002 it assigned all rights under the credit agreement, promissory note and all security to Eximbank.

Wells Fargo became the security trustee on 18 June 2003 as successor to Citibank NA. Wells Fargo sues in its capacity as security trustee for Eximbank under the various agreements.

It is alleged that VALL first defaulted on payment of $892,999 due on 20 May 2002, which was an event of default under clause 32 of the credit agreement, although it subsequently paid all but US $17,000 (approximately) due on the instalment.

It is alleged that there were a number of subsequent defaults in the payment of monthly instalments of principal and interest due on 20 August 2002, 20 November 2002, 20 February 2003 and 20 May 2002, which also constituted events of default.

As at June 2003 the unpaid instalment amounts and interest totalled US$3,400,000. On 9 September 2002 Eximbank sent a letter of demand to NAC and Nauru demanding the outstanding amount of $13,000,000, which remains unpaid.

It is pleaded that due to the default and pursuant to the acceleration notice, the entire outstanding amount under the credit agreement became due and payable by Nauru to Eximbank. The amount remains unpaid.

It is alleged that on 22 June 2003 an engine was removed from the aircraft for a purpose other than for maintenance, in breach of the credit agreement, leaving the aircraft unserviceable. That constituted a default and Eximbank issued an acceleration notice to VALL.

In April 2004 a receiver was appointed to Nauru Phosphate Royalties Trust (an agency of Nauru). That constituted a further event of default by Nauru and a further acceleration notice was sent.

It is alleged that under the mortgage, the monies owed or guaranteed by VALL and Nauru constituted continuing secured obligations. The failure of Nauru and VALL to pay the outstanding amounts demanded are alleged to constitute events of default under the mortgage, rendering it enforceable.

The plaintiff seeks possession, foreclosure and the exercise of all its mortgagee’s powers and remedies in relation to the aircraft as security trustee for Eximbank.

Defence and Counterclaim

By defence and counterclaim against the plaintiff and Eximbank dated 15 August 2003 the defendants do not deny the plaintiff’s allegations concerning the execution of the loan, security agreements and mortgage in relation to the aircraft, nor the failure to make the relevant payments. Rather, they deny that VALL was required to pay instalments, that failure to pay was an event of default, that moneys are due and payable or that the security and mortgagee remedies may validly be exercised.

The basis for the defendants’ claim that the mortgage cannot be enforced is first, that Eximbank is an agency of the United States. Further, the defendants plead, as against the United States, Wells Fargo and Eximbank, causes of action based on contract and equitable estoppel. The defendants say that the United States made an agreement with Nauru (“the Agreement”) and/or made representations to Nauru (“the representations”) in relation to “the US agenda”, as defined below.

The defence and counterclaim allege that by October 2002 Nauru was in severe financial difficulties, experiencing critical cash shortages. The nation did not conform to international banking standards, in that it permitted off-shore banking and had been designated “uncooperative” by an international task force, Financial Action Task Force (“FATF”), a body on which the United States was represented. At the same time, the United States had resolved to seek Nauru’s cooperation in relation to a number of matters, collectively known as “the US agenda”.

The US Agenda

It is alleged that the US agenda consisted of the following:

(a)The Korean program.

[Pargraph 5 of the confidential affidavit of Kinza Clodumar sworn on 7 July 2003 sets out details of that allegation].
(b)Granting access to banking information
[described in paragraph 46(4) of the confidential affidavit of Aloysius Amwano sworn on 16 July 2003 and in paragraph 15 of the confidential affidavit of Vinci Niel Clodumar sworn on 134 July 2003].

(c) Reform of Nauru’s off-shore banking requirements.
(d) Reform of Nauru’s laws designed to combat money laundering.
(e)Reform of Nauru’s laws or practices designed to combat the abuse or falsification of Nauruan passports.

The defence and counterclaim allege that the agreement between Nauru and the United States, and the representations, were made in the course of meetings and conversations between representatives of Nauru and representatives of the United States between October 2002 and March 2003. Certain named individuals (Sanders, Ray and Horowitz) known “as deniable operatives” who had no apparent formal status, but were in fact acting on high executive authority from within the United States government, were authorised to treat with Nauru’s representatives and its agencies. A further person, Gagner, acted as a ‘conduit’. The deniable operatives made an agreement with or representations to the Nauruan representatives on behalf of the United States, in relation to the United Stages agenda.

The alleged agreement and representations (oral and to be implied) were to the effect that if Nauru cooperated with the US agenda in the manner stipulated by Messrs Ray and Sanders, 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.

The defence and counterclaim plead a number of meetings and conversations between the deniable operatives and the Nauruan representatives. I do not repeat the entire alleged substance of all such meetings and conversations, but the flavour of the allegations is conveyed by the following excerpts:

“(v)At a meeting on 12 October 2002 in Washington DC, Messrs Sanders, Ray and Pinder told Mr Gagner that the United States government wanted Mr Gagner to convey a message to Nauru, to the following effect:
A.FATF sanctions were about to be imposed on Nauru. The United States had significant evidence that certain lending organisations chartered in Nauru had been involved with the transfer of significant monetary assets which had to do with international terrorism targeted at the United States.
B.The impending FATF sanctions would be sufficient to shut down the economy of Nauru and to essentially eliminate all trade into and out of Nauru.
C.The United States wanted Nauru to cooperate with an investigation of the transfers in question.
D.The United States also wanted Nauru’s urgent cooperation in a matter of very great sensitivity, namely the Korean program.
E.The Korean program was of sufficient concern to the United States government that it would likely recommend removing Nauru from the FATF list of non-cooperative countries if Nauru assisted. The result would be that Nauru would avoid FATF sanctions.
F.In addition, the United States government would provide substantial assistance to Nauru, monetary and otherwise, to make the transition into a modern, international banking facility. This would be of enormous immediate benefit to Nauru.
G.The United States and the other OECD countries believed that Nauru had to reform its banking practices, and that they had to provide the resources for Nauru to do this. Therefore the quid pro quo for that reform would be economic projects that would significantly benefit Nauru, for example, a satellite research tracking station or other such projects”.

It is alleged that Nauruan representatives complained to one or more of the deniable operatives that Nauru was behind in aircraft lease payments, and needed time to pay. The following is also alleged:

(vii).
“(x) In the course of the same meeting, Mr Clodumar mentioned again, more than once, Eximbank and Nauru Air. At one point when Mr Clodumar did this, Mr Horowitz picked up the phone, rang someone, and said into the phone, ‘You need to help these people, get Eximbank to cooperate with them.’ Mr Horowitz described his extensive connections with the administration of President George W. Bush, and of former President Reagan. Mr Horowitz said that he would arrange a meeting with Eximbank officials. He said that it would probably be necessary for Nauru to design a plan for dealing with the loan on Air Nauru’s airplane, but that at that point all that would be necessary would be a pro forma plan. Mr Horowitz said that he would use his contacts in the administration to prevent any foreclosure on the airplane, as long as Nauru cooperated with Mr Sanders and Mr Ray in their operations regarding the Korean program. He said that Mr Ray would work with him and others to put together an aid package for Nauru, which would save Air Nauru.

(xi) In the course of the same meeting, Mr Horowitz said that what the United States wanted for the moment was proper supervision of Nauru’s offshore banking, for monitoring purposes, so that certain individuals could be traced through Nauru’s registers. He said that, for the moment, it was not in the interests of the United States government to shut down Nauru’s offshore banking completely. He said that the United States had information that some of the banks on Nauru’s registers involved individuals with terrorist backgrounds, and that the United States wanted to use Nauru’s information to track that through.
(xii)In the course of the same meeting, Mr Horowitz said that Nauru had to cooperate completely with Mr Ray in his investigation of money laundering by possible terrorists, because, he said, Nauru’s financial crisis could not be solved until Nauru had worked out its problems with the US Treasury and with the FATF. He emphasized that the best way for Nauru to resolve its financial crisis was to work with Mr Ray. He said, ‘Nauru wouldn’t want to be part of Chicago getting blown up simply because it had offshore banking, and people were using those banks to fund terrorism. The US would never forgive Nauru for that. But you co-operate now, and all doors in the United States will be open to help you. I will make sure that it happens’”.

One deniable operative (Sanders) also allegedly requested that Nauru appoint Sanders its chargé d’affaires in Beijing, and appoint another nominated person as its honorary consul in the United States, stating that the embassy would be funded by the United States Government for the first two years. The following is also alleged:

“(xiii)In the course of the same meeting, Mr Horowitz said that it was a good thing that the Nauru delegation had come to Washington, because if Nauru cooperated, by giving the United States the information it wanted, and by helping with the Korean program, then the United States would give Nauru financial support. Mr Horowitz said that Nauru had problems with its airline, with its property financing and with its blacklisting by the FATF, and that the United States would fix these problems. .
(xx)In late October 2002, at the University Club in Washington DC, Mr Pinder spoke with Mr Amwano. Mr Amwano told Mr Pinder of the meeting the Naurauan delegation had had with Mr Horowitz. Mr Pinder said that Mr Horowitz was a very influential man with the United States government and that he (Mr Horowitz) could make a lot of things happen for Nauru, so long as Nauru co-operated in the way it had been asked, by providing information. Mr Amwano discussed with Mr Pinder the fact that Nauru had many problems, with Eximbank and Air Nauru, with its Marriott properties, with GE Finance and by being blacklisted with the FATF. Mr Pinder said that it was the United States government that had got Nauru black-listed in the first place, because of Nauru’s offshore banking, and because Nauru had not legislated in the way the US Treasury wanted; but that if Nauru were to start co-operating, all these problems would become minor problems. Mr Pinder said, ‘I know they will’. Mr Pinder said that once Nauru was co-operating, Eximbank, Marriott, all these problems would become little things, easily fixed”.

The defence and counterclaim allege that Nauru, induced by the representations and in consideration of the agreement, cooperated in the manner stipulated, appointed the stipulated operatives as chargé d’affaires and honorary consul, took steps to reform Nauru’s off-shore banking regime and introduced laws to combat money laundering and to combat the abuse and falsification of Nauruan passports.

Paragraph 19 of the defence further alleges:

“Further, or in the alternative, the failure by the United States to make good the representations alleged in paragraph 12 would make it unconscionable for the United States, through the agency of Eximbank, to take the benefit of Eximbank’s actions, by reason of the legitimate reliance which the defendants placed on the representations in acting as alleged in paragraph 13”.

The counterclaim claims the following relief:

“22. In the premises, the United States is obliged to take steps so as to:
(a) ensure that Eximbank gives 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) prevent Eximbank exercising any strict contractual rights which it might have to take possession of and sell the Aircraft.
23. Further, Eximbank and Wells Fargo are precluded from enforcing whatever strict legal rights Eximbank might have, arising out of any of the failures referred to in paragraph 20 of the Defence, until the United States has complied with its obligations as pleaded in paragraph 22 of this Counterclaim”.

Third Party Notice

The United States of America was served with a Third Party Notice dated 5 September 2003. It entered a conditional appearance by notice dated 3 May 2004.

The Third Party Notice makes identical allegations to those in the defence and counterclaim.

THE PARTIES’ CONTENTIONS

The United States makes its application to set aside the Third Party Notice on the basis of the pleadings alone. It does not concede the truth or accuracy of the facts pleaded, but makes it application on the basis of absence of jurisdiction, assuming for the purposes of the application that the defendants can prove what they have pleaded.

The defendants submitted that the proper law of the agreement is that of Victoria or alternatively, Nauru. In their written submissions the defendants also contended that it was common ground (on the pleadings filed to date) that the agreement and the representations (if they were made) are governed by municipal law; and the parties differed only on whether the municipal law was that of Victoria or Nauru (as the defendants contended) or that of the United States, as the United States (through its agency Eximbank) pleaded.

At the hearing of the application, Dr Griffith, senior counsel for the United States, made plain that the United States did not concede that municipal law applied. He submitted that the United States was not bound by the pleadings between the parties to the recovery proceeding. In particular, he emphasised that the United States and Eximbank were not the same entity in law and observed that the defendants did not allege that the United States was acting as Eximbank’s agent.

The United States argued that a foreign state was entitled to immunity from suit under the Act unless a statutory exception applied. The defendants, who have the burden of establishing that a case falls within a statutory exception, relied on s.11(1) of the Act, contending that the alleged arrangement between the United States and Nauru was a commercial transaction, which must be construed broadly. The United States argued that the arrangement was, according to any canon of construction, the antithesis of a commercial transaction. If, however, it were found to be a commercial transaction, the exception in s.11(2)(a)(i) to the commercial transaction exception in s.11(1) applied. Although in terms s. 11(2)(a)(i) applies to restore immunity only where all the parties “to the proceeding” are foreign states, the United States argued that that was the result of a drafting error, which should be corrected to reflect the clear intention to preserve immunity where all the parties “to the transaction” were foreign states, which was the case here.

(a) The Subsidiary Argument – Non-Justiciability and Act of State

Although its claim to immunity depended principally on its construction of the Act, the United States’ subsidiary argument was that the doctrines of act of state and non‑justiciability constituted an alternative basis for immunity.

The articulation, meaning and mutual relationship of the doctrines of “act of state” and “non justiciability” were the subject of fundamental disagreement between the parties. Dr Pannam, senior counsel for the defendants, argued that the United States’ submissions conflated and misconstrued both doctrines, confused their mutual relationship and stated them too widely on the basis of selective, out-of-context quotations from relevant authorities. He argued that the doctrine of act of state applied only to a sovereign state’s acts within its own territory. Further, he submitted that the transaction pleaded in the Third Party Notice did not require this Court to adjudicate on the validity of acts of the United States within its own territory.

He also contended that the doctrines did not constitute a valid basis for immunity from jurisdiction in respect of the defendants’ Third Party claim; rather, non-justiciability or act of state might operate, where appropriate, as a defence to particular claims made within a proceeding.

Dr Griffith argued that act of state and non-justiciability were not separate doctrines but different manifestations of the same fundamental doctrine. In the present case, even the narrow definition of act of state propounded by the defendants would apply to the alleged transaction, which occurred through dealings between high level representatives of two foreign states in the United States. Dr Griffith contended that there was no basis for the defendants’ allegation that the funds which might be provided by the United States to Nauru would be paid into an account in Australia. There was therefore no connection with Australia.

Further, irrespective of whether the connection could be established, the United States relied on the doctrine of non‑justiciability. Dr Griffith argued that by its nature and subject‑matter, the alleged agreement or arrangement was not appropriate for adjudication in the court of a third state. The defendants’ claim involved an alleged arrangement about international issues which were subject to international treaties and obligations, including intelligence, international security, national interest, anti‑corruption, anti‑money‑laundering and anti‑terrorism. As such, the United States contended that it constituted a much clearer case of non‑justiciability than Attorney‑General (United Kingdom) v Heinemann Publishers Australia Pty Ltd[3] (“the Spycatcher case”).
[3](1988) 165 CLR 30.

In that case, the Attorney‑General of the United Kingdom sought to restrain the publication of the memoirs of a former United Kingdom intelligence officer, on the ground that it breached confidential, fiduciary or contractual obligations.

While acknowledging uncertainty in identifying the distinct rules and the ambit of their application, Mason CJ, Wilson, Deane, Dawson, Toohey and Gaudron JJ, in their joint judgment, recognised as a rule of international law that a court will not have jurisdiction in relation to, or will not enforce, claims or interests of a foreign sovereign state outside its own territory, based on or related to the exercise of foreign governmental power[4]. Even where the validity or morality of the claim was not in issue, their Honours recognised that:

“… there are some claims in which the very subject-matter of the claims and the issues which they are likely to generate present a risk of embarrassment to the court and of prejudice to the relationship between its sovereign and the foreign sovereign. These risks are particularly acute when the claim which the foreign state seeks to enforce outside its territory is a claim arising out of acts of that state in the exercise of powers peculiar to government in the pursuit of its national security.”[5]

[4]Ibid, at 43.

[5]Ibid, at 44.

Their Honours further observed that the United Kingdom’s claim to enforce alleged obligations of confidence owed by its former intelligence officer involved balancing the local public interests inter se, and Australian against foreign interests, which would be an “invidious task”[6].
[6]Ibid, at 45.

Further, they recognised that although the United Kingdom claimed that the contractual and confidential obligations were private, not public, being sourced in equitable principles and common law, “for the purposes of the principle of enforceability under consideration the action is to be characterised by reference to the substance of the interest sought to be enforced, rather than the form of the action.”[7] They stated that the United Kingdom’s central interest in bringing the action –

“… is to ensure the continued secrecy of the operations of the British Security Service by enjoining disclosure of information relating to those operations and by discouraging revelations by others. As a security organization whose charter evidently includes clandestine counter‑espionage activities, the Service has a responsibility to protect the national security of the United Kingdom. These days the collection of intelligence is generally considered to be a vital element in the maintenance of national security and the continued co‑operation of intelligence sources is an essential feature of the collection of intelligence., Accordingly, the United Kingdom Government has a strong interest in preserving the secrecy of the Service’s operations and the appearance of confidentiality. … “

[7]Ibid, at 46.

Brennan J also recognised a governing principle that “in the absence of a contrary statutory provision an Australian court should refuse to enforce an obligation of confidence in an action brought for the purpose of protecting the intelligence secrets and confidential political information of a foreign government”[8]. The basis of that principle was public policy, which precludes an Australian court from enforcing a claim which could damage Australian security and foreign relations. Brennan J considered that a court was unfitted to undertake an assessment of how security and foreign relations would be served, and should therefore refuse to determine such claims.
[8]Ibid, at 48.

The defendants, however, contended that the Spycatcher case dealt only with the distinct principle that a court will not enforce within the forum a foreign state’s penal or public law beyond its own borders. The act of state doctrine, properly stated, would not prevent the court from adjudicating the validity of the acts of foreign states outside the forum. If it applied, it would only assist the defendants, by presuming the United States’ alleged authorisation of the “deniable operatives” to be valid.

The United States is not seeking to enforce any claim. Rather, Nauru, by its defence and counterclaim and Third Party Notice, seeks to enforce equitable obligations allegedly owed by Eximbank and the United States, arising from the acts of both the United States and Nauru in the exercise of their powers peculiar to government. The United States’ argument that adjudication of the claim (given its subject matter) could embarrass the court or prejudice the relationship between Australia and each of the foreign states, appears persuasive.

However, it is not necessary to determine that question. It was not disputed that if the United States has immunity under the Act, it would be unnecessary to determine the ambit and possible impact of the doctrines of non‑justiciability and act of state. As I have concluded (for reasons discussed below) that the United States is entitled to immunity under the Act, I do not express a concluded view on those complex issues, but note them in recognition of the submissions made by counsel for the parties to the application.

(b) The Statutory Argument
(c) The Legislation

The Act is not based on the single criterion dichotomy between sovereign acts and private acts which governed sovereign immunity under the common law doctrine of restrictive state immunity applicable prior to the introduction of the legislation. Rather, it states a fundamental general principle of state immunity in s.9, which is, however, subject to a series of discrete exceptions set out in Part 2. Those exceptions to immunity are in some instances, such as s.11, themselves subject to a qualification or an exception which, if applicable, will restore the immunity that was prima facie removed.

The Foreign States Immunity Act 1985 (the Act) relevantly provides:

Section “(9) General immunity from jurisdiction
Except as provided by or under this Act, a foreign State is immune from the jurisdiction of the courts of Australia in a proceeding.”
Section “(11)          Commercial transactions
(1)     A foreign State is not immune in a proceeding in so far as the proceeding concerns a commercial transaction.
(2)     Subsection (1) does not apply:
(a)if all the parties to the proceeding:
(i)are foreign States or are the Commonwealth and one or more foreign States; or
(ii)have otherwise agreed in writing; or (b) in so far as the proceeding concerns a payment in respect of a grant, a scholarship, a pension or a payment of a like kind.

(3) In this section, commercial transaction means 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:
(a)a contract for the supply of goods or services;
(b)an agreement for a loan or some other transaction for or in respect of the provision of finance; and
(c)a guarantee or indemnity in respect of a financial obligation; but does not include a contract of employment or a bill of exchange.”

Section “(13) Personal injury and damage to property

A foreign State is not immune in a proceeding in so far as the proceeding concerns:
(a)the death of, or personal injury to, a person; or
(b)loss of or damage to tangible property;

caused by an act or omission done or omitted to be done in Australia.”

Section “3(1) In this Act unless the contrary intention appears ‘agreement’ means an agreement in writing and includes –

(a)a treaty or other international agreement in writing; and
(b)a contract or other agreement in writing

“Proceeding” means:

“Proceeding” means a proceeding in a court but does not include a prosecution for an offence or an appeal or other proceeding in the nature of an appeal in relation to such a prosecution.”

“Separate Entity” means:

“For the purposes of the definition of separate entity in subsection (1), a natural person who is, or a body corporate or a corporation sole that is, an agency of more than one foreign State shall be taken to be a separate entity of each of the foreign States.
(3) Unless the contrary intention appears, a reference in this Act to a foreign State includes a reference to:
(a)a province, state, self-governing territory or other political subdivision (by whatever name known) of a foreign State;
(b)the head of a foreign State, or of a political subdivision of a foreign State, in his or her public capacity; and
(c)the executive government or part of the executive government of a foreign State or of a political subdivision of a foreign State, including a department or organ of the executive government of a foreign State or subdivision;

but does not include a reference to a separate entity of a foreign State.
(5) A reference in this Act to a commercial purpose includes a reference to a trading, a business, a professional and an industrial purpose.”

Section (22) The preceding provisions of this Part (other than sub-paragraph 11 (2) (a) (i), sub-section 16 (1) and sub-section 17 (3)) apply in relation to a separate entity of a foreign State as they apply in relation to the foreign State.

(d) Section 11(1) of Act - Commercial Transaction

Dr Griffith argued that the United States, as a foreign, sovereign independent state, was entitled to immunity pursuant to the general immunity conferred by s.9 of the Act because the case did not come within the ambit of any statutory exception.

The defendants argued that their Third Party claim against the United States came within the “commercial transaction” exception in s.11 of the Act.

At the hearing, Dr Pannam abandoned reliance on a further exception in s.13 of the Act, which had been foreshadowed in the defendant’s outline of argument. The United States contended that the exception in s.13 of the Act applies to tortious liability for personal injury or loss or damage to tangible property. That conclusion is supported by the Australian Law Reform Commission Report on Foreign State Immunity No. 24 (“ALRC”) Report[9] which states:

“Foreign states should have no privilege with respect to tortious personal injury or tangible property within the jurisdiction.[10]“

Therefore, s.13 does not apply to the assumed facts of this case.

[9]Australian Law Reform Commission Report No. 24 on Foreign State Immunity 1984, (“ALRC Report”).

[10]ALRC Report, paragraph 115. See also Summary, paragraph 27.

The burden of establishing that a claim comes within a statutory exception rests upon the party contending that the exception applies.[11]
[11]See Alcom Ltd v Republic of Colombia [1984] 2 All ER 6 at 13.

The United States’ primary argument on s.11 was that the proceeding (which it identified as the third party proceeding) did not concern a “commercial transaction” as defined in s.11(3). There was therefore no loss of immunity under the exception in s.11(1). (Although counsel raised the issue of whether the “proceeding” referred to in s.11(1) is, in this case, the recovery proceeding or the third party proceeding, it was not necessary to determine that question for the purposes of this application).

The researches of counsel have not revealed any decided case on s.11 or on other relevant provisions of the Act. Further, there are few decided cases on the provisions of comparable United Kingdom, Canadian, New Zealand and American legislation.

Although the absence of any decided case on s.11 may seem surprising, in Dr Griffith’s submission, it simply accorded with the established practice of sovereign states to use other avenues to resolve their differences, highlighting the unusual nature of this case.

It was common ground that the court was entitled to have recourse to the ALRC Report in order to ascertain the purpose of the Act or particular provisions thereof. Further, a construction which promoted the identified goals of the legislation should be adopted.

Section 15AA of the Acts Interpretation Act 1901 (Cth) provides:

“(1) In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.”

Section 15AB provides:

““(1) Subject to subsection (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material:
(a)to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or
(b)to determine the meaning of the provision when:
(i)the provision is ambiguous or obscure; or
(ii) the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable.

(2)Without limiting the generality of subsection (1), the material that may be considered in accordance with that subsection in the interpretation of a provision of an Act includes:
…

(b)any relevant report of a Royal Commission, Law Reform Commission, committee of inquiry or other similar body that was laid before either House of the Parliament before the time when the provision was enacted;
…

(e)any explanatory memorandum relating to the Bill containing the provision, or any other relevant document, that was laid before, or furnished to the members of, either House of the Parliament by a Minister before the time when the provision was enacted;
… “

The ALRC Report, prepared under the charge of the eminent international jurist Professor J. R. Crawford, provided useful guidance on the construction of s.11, particularly in the absence of specific authority. The ALRC Report included draft legislation, which appears to be substantially identical to the legislation as enacted[12].
[12]ALRC Report, Schedule A.

Although the ALRC Report was central to the arguments of both the United States and the defendants, they advanced fundamentally different interpretations of its import, which, in turn, dictated diametrically opposed approaches to authorities decided on the common law doctrine of restrictive immunity which applied prior to the enactment of legislation in Australia, the United Kingdom, the United States and other jurisdictions.

Dr Griffith contended that analysis of the ALRC Report showed that the Act was not intended to be a revolution, but an evolution, which preserved (with necessary modifications) many fundamental tests, principles and approaches to construction developed under the common law doctrine of restrictive immunity. Hence, in his submission, authorities on that doctrine, which supported the United States’ construction of “commercial transaction” in s.11(1), remained relevant under the Act.

The United States also contended that the ALRC Report assumed that the proposed legislation would be consistent with the principles of international law.

The United States relied particularly upon the decision of the House of Lords in I Congreso del Partido[13] in which Lord Wilberforce stated:
[13][1983] 1 AC 244 at 262.

“The relevant exception, or limitation, which has been engrafted upon the principle of immunity of states, under the so called ‘restrictive theory’ arises from the willingness of states to enter into commercial, or other private law, transactions with individuals. It appears to have two main foundations: (a) it is necessary in the interests of justice to individuals having such transactions with states to allow them to bring such transactions before the courts. (b) To require a state to answer a claim based upon such transactions does not involve a challenge to or inquiry into any act of sovereignty or governmental act of that state. It is, in accepted phrases, neither a threat to the dignity of that state not any interference with its sovereign functions”.
Lord Wilberforce further stated[14]:
“When therefore a claim is brought against a state … and state immunity is claimed, it is necessary to consider what the relevant act is which forms the basis of the claim: is this, under the old terminology, an act ‘jure gestionis’ or an act ‘jure imperii’; is it (to adopt the translation of these catchwords used in the Tate letter) a ‘private act’ or is it a ‘sovereign or public act’, a private act meaning in this context an act of a private law character such as a private citizen might have entered into?
….

The question arises, therefore, what is the position where the act upon which the claim is founded is quite outside the commercial, or private law, activity in which the state has engaged, and has the character of an act done jure imperii. The ‘restrictive’ theory does not and could not deny capability of a state to resort to sovereign or governmental action: it merely asserts that acts done within the commercial or trading activity are not immune. The inquiry still has to be made whether they were within or outside that activity.”

[14]Ibid, at 262-263.

In relation to the significance of the purpose of the act, Lord Wilberforce held[15] that while the purpose “is not decisive”, it may “throw some light upon the nature of what was done”[16].
[15]Ibid, at 272.
[16]Ibid.

The analysis of Lord Wilberforce was echoed by Professor Brownlie[17] as follows:

“The basic criterion appears to be whether the key transaction was accomplished on the basis of a private law relationship, such as a contract. Another form of this approach is to state that the act is jure gestionis, and therefore not immune, if the transaction can be made by an individual.”

[17]Principles of Public International Law, 5^th ed. 1998 at 335.

In Re the Canadian Labour Code[18], La Forest J (with whom L’Hevreux Dube and Gonthier concurred) construed Lord Wilberforce’s approach in I Congressio as a contextual one, adopted in order to side-step the probably insurmountable conceptual difficulties of formulating a precise test to distinguish acts jure imperii and acts jure gestionis.[19]
[18](1992), 91 DLR (4^th)449.
[19]Ibid, at 463.

His Honour stated[20]:

“….the proper approach to characterizing state activity is to view it in its entire context. This approach requires an examination predominantly of the nature of the activity, but its purpose can be relevant. “

[20]Ibid, at 463.

La Forest J considered that the “entire context” included both the nature and purpose of the act, although the latter should be neither decisive nor predominant, as otherwise all acts by a commercial agent of the state would be an act jure imperii. He acknowledged, however, that the converse is also true, and “rigid adherence to the ‘nature’ of an act, to the exclusion of purpose, would render innumerable government activities jure gestionis”.[21]
[21]Ibid, at 463.

The United States also relied on Cicippio v Islamic Republic of Iran[22], a decision in which the plaintiffs alleged that they had been kidnapped and held for ransom by persons hired by the Republic of Iran. They unsuccessfully sought to bring an action against Iran under the commercial activity exception in the Foreign Sovereigns Immunities Act 1976 (“FSIA”) arguing that the acts had been directed at obtaining the unfreezing of Iranian assets in the United States. The FSIA definition of “commercial activity”[23] expressly required that the commercial character of an activity be determined by reference to its nature, rather than by reference to the ‘purpose’. The Court, in reliance on the decision of the United States Supreme Court in, Republic of Argentina v Weltover[24] stated that[25]:

“Putting aside for now the relationship between purpose and context, we take from Weltover the key proposition that in determining whether a given government activity is commercial under the act, we must ask whether the activity is one in which commercial actors typically engage.”

[22]30 F. 3d. 164 (DC Cir 1994).

[23]In s.1603(d).

[24]504 U.S. 607 (1992).

[25]30 F. 3d 164 at 166 (DC CIR 1994).

The United States also invoked the New Zealand decision in Controller and Auditor–General v Davison[26], which held that activity by the government of the Cook Islands (which, in effect, amounted to the sale of foreign tax credits to private companies) was commercial. Cooke P stated that the acts’:

“… commercial aspect is so significant that one can have no doubt that the doctrine of sovereign immunity must be excluded in relation to the whole inquiry. A government which descends to this extent into the market place cannot fairly expect total immunity”.[27]

[26][1996] 2 NZLR 278 at 289.

[27]Ibid, at 289.

Dr Pannam, in contrast, argued that the ALRC Report demonstrated that the legislation was intended to effect a revolution and a radical break with tests and principles developed under the common law restrictive immunity doctrine.

He contended that the above decisions were irrelevant to the determination of the present application. He pointed out that the United States legislation was simply a codification of the restrictive immunity doctrine and that Lord Wilberforce’s authoritative statement also related to the common law doctrine.

Dr Pannam contended that the ALRC Report, in recommending the replacement of the restrictive immunity doctrine by legislation, discarded the distinction between governmental acts and commercial transactions which had developed under the doctrine. In so doing, it necessarily ruled out the continuing relevance of tests and principles propounded in the earlier cases.

The doctrine of restrictive immunity was an ameliorating retreat from traditionally absolute state immunity which historically prevailed in common law countries. It was developed by the courts of common law countries during the 1970’s, largely in response to the unjust impact of absolute state immunity on private and local litigants. It approximated the already more flexible civil law approach to sovereign immunity.

In Alcom Ltd v Republic of Colombia[28] Lord Diplock described the genesis of the restrictive immunity doctrine as follows[29]:

“The distinction between the jurisdiction of national courts to decide, and to authorise the execution of remedies for the enforcement of, claims made against foreign states arising out of the exercise of jus imperii and those arising out of transactions entered into in the exercise of jus gestionis obtained growing recognition in European countries as sovereign states began increasingly to engage, either directly or through separate entities that were emanations of the executive government of the state, in commercial and trading transactions with private citizens of other states. Under what came to be termed the ‘restrictive’ theory of sovereign immunity the jurisdiction of national courts was exercised over foreign states in claims against them that arose out of commercial or trading transactions into which they had entered with private individuals. The United States of America had clung longer than several European states to the ‘absolute’ theory of sovereign immunity, under which its courts declined to entertain any claims against foreign states even where these arose out of commercial or trading transactions. Following a change of policy by the executive branch of government this practice was abandoned in 1952 by the United States courts which then adopted the ‘restrictive’ theory; and the matter has since 1976 been regulated in the United States by an Act of Congress, the Foreign Sovereign Immunities Act.
In England the jurisdiction of its courts of justice over claims against foreign sovereign states was governed by the common law. Although the courts’ refusal to exercise jurisdiction over foreign sovereigns was originally attributed in the eighteenth century to the acceptance of the law of nations as part of the common law of England, the English courts during the twentieth century were slow to recognise and give effect to the change that had been taking place in public international law over the last 50 years, whereby, among the great majority of trading nations, the restrictive theory of sovereign immunity had replaced the absolute theory. That recognition first occurred in a judgment of the Privy Council in Philippine Admiral (owners) v Wallem Shipping (Hong Kong) Ltd, The Philippine Admiral [1976] 1 All ER 78, [1977 AC 373 delivered in November 1975, though this in its terms was limited to actions in rem. It was the seminal judgment of Lord Denning MR in Trendtex Trading Corp v Central Bank of Nigeria [1977] 1 All ER 881, [1977] 1 QB 529 that marked the definitive absorption by the common law of the restrictive theory of sovereign immunity.”

[28][1984] 2 All ER 6.

[29]Ibid, at 8.

In its examination of the underlying principles of sovereign immunity, the ALRC Report stated:
“Conclusions. There can be no question of eliminating entirely the immunity of foreign states and their organs from the jurisdiction of Australian courts. At the same time there are good reasons for restricting that immunity within proper limits. The difficulty is that international law, while allowing such a restriction does not itself prescribe the criteria to be applied, at least in any specific or detailed way. It is therefore necessary to examine in more detail how the distinction is to be drawn between immune and non-immune transactions, to assist both in assessing the adequacy of the common law and in formulating (if necessary or desirable) a legislative alternative.”
The ALRC Report recognised two broad approaches to distinguishing immune from non‑immune transactions. It stated[30]:
“Two Broad Approaches. In distinguishing immune from non-immune transactions, and once tests based on reciprocity and assimilation are rejected, there remains two broad approaches: these coincide with, on the one hand, the present common law test and on the other hand, the approach adopted by the recent overseas legislation on state immunity. The first approach involves a single distinction between ‘public’ and ‘private’ transactions of foreign states; the second, a more complex set of distinctions, based on multiple criteria not reducible to any formula. These will be discussed in turn.”
[30]ALRC Report, paragraph 45.
The ALRC Report noted the problems associated with the single criterion approach under the restrictive immunity doctrine, whereby transactions were classified as either ‘public’ (sovereign or governmental) or ‘private’ (commercial or other private law transactions). It noted that there was no consensus on the scope of governmental (or sovereign) acts, on the one hand, and, on the other hand, trading or commercial activities. It recognised that this had led to incoherence. Further, where commercial and governmental elements were inextricably mixed, an overly narrow exception for immunity could result. The distinction was question‑begging and subject to manipulation. The nature/purpose distinction was also unhelpful, because purpose must inevitably affect the classification of human activity.

The ALRC Report stated[31]:
“Multiple Criteria for Restrictions of Immunity: A Legislative Solution? The alternative approach is to deal with the specific categories or classes of case that have arisen in practice and to fashion specific rules for each such category taking into account the reasons for according immunity or for asserting jurisdiction in that specific context. This is essentially the approach adopted in the United Kingdom Act and its counterparts, in the European Convention and (though to a rather lesser extent) in the United States and Canadian Acts. These texts do not codify or encapsulate any single or simple distinction between acts iure imperii and iure gestionis. This is not surprising, since as we have seen that distinction has long been recognised as elusive and extremely difficult to apply. The considerations favouring local jurisdiction (or immunity from it) are based on a variety of rules, principles and policies: on the one hand, the forum’s nexus with the dispute, its interest in applying its own rule, the likelihood that the dispute will be susceptible to local judicial determination, the principle of consent, and forum conveniens: on the other hand, notions of comity and reciprocity, respect for other sovereignties and for established principles of international law (such as the immunity of foreign public ships), assessment of the risk to the foreign relations of the forum of excessive claims to jurisdiction, and so on. The question is whether the balancing of these various considerations is best performed by the courts on a case-by-case basis or by the legislature. In other words, the question is whether legislation is necessary or desirable. This will be discussed in the next Chapter.”
[31]ALRC Report, paragraph 46.
The ALRC Report rejected the common law approach based on the single criterion dichotomy in favour of a legislative solution. It recommended legislation based “in substance” on the United Kingdom model, employing multiple criteria. The authors of the ALRC Report considered that legislation would provide a more refined and better-balanced approach which would “draw the line” more effectively. At the same time it recognised that “this is not to say that the lines drawn by the various [domestic and international texts] are unreasonable, although … in many respects they are capable of improvement.”[32]
[32]ALRC Report, paragraph 58.

In its detailed discussion of a “commercial transaction,” at paragraph 90 the ALRC Report stated[33]:
“The Basic Principle. The basic principle upon which the commercial transaction exception to immunity rests is that when a foreign state acts in a ‘commercial’ matter within the ordinary jurisdiction of local courts it should be subject to that jurisdiction. This is of course the central argument behind the shift from absolute to restrictive immunity during the last century. Notoriously, the principle is easy to state at this high level of generality but often difficult to apply to particular facts in a way that would command general assent. Legislation which explicitly distinguishes the nature of the foreign state’s act from its motive or purpose in performing the act cannot be regarded as a suitable model for Australia, in view of the incoherence of any nature/purpose dichotomy. Paragraphs (a) and (b) of s.3(3) of the English Act avoid this dichotomy in defining ‘commercial transaction’. Referring as it does to any loan, any contract for goods etc, it is difficult to argue that the provision is limited in its removal of immunity for those transactions. Nor can it be argued that the provision is difficult to apply, operating as it does by simple objective criteria. In these respects the provision satisfies the interests of private parties dealing with foreign states. The more difficult question is whether such a provision is acceptable to foreign states. The English Court of Appeal has recently emphasised that these paragraphs of the Act make no allowance for considering the state’s motive in entering into the commercial transaction, or even whether the specified transactions were entered into ‘in the exercise of sovereign authority’. As a result a foreign consul’s assistance to a distressed national would be a ‘commercial transaction’, where the assistance took the form of a loan to the individual or a purchase of an air ticket to enable the person to return home. Purchases of military equipment would also be commercial transactions. But some countries have expressed concern that under this sort of approach such things as open market purchases of foodstuffs to avert domestic famine and public borrowings for public purposes would also be denied immunity. The International Law Commission’s present draft definition of ‘commercial contract’ closely follows the wording of the State Immunity Act 1978 (UK), s.3(3). However the Special Rapporteur to the Commission has noted the disquiet of a number of states, and the Commission has sought to develop a test which pays greater regard to the motive or ultimate purpose that the foreign state seeks to achieve by entering into the transaction. The choice for Australia is whether to adhere to the ‘objective’ or formal test or to attempt a more elaborate model which gives a degree of weight to the foreign state’s motive. it is recommended that Australia follow the substance of the United Kingdom model. It is clear, easy to apply and has been followed in a number of countries. To attempt to take into account the motive of the foreign state would lead to uncertainty, thereby disadvantaging the private party dealing with the foreign state. It is difficult to justify putting the private party to the trouble of finding out, for example, why the foreign state wants to buy its foodstuffs, or whether there is a famine in the foreign state with which it is dealing.”
[33]ALRC Report, paragraph 52.
In the defendants’ submission, the ALRC Report’s approach ruled out any dichotomous distinction between sovereign (or governmental) acts when characterising a transaction as “commercial” in the context of s.11(1) of the Act. The single criterion dichotomy was the very thing the legislation was to avoid. It was no longer necessary, or indeed permissible, to categorise a transaction as “commercial” or alternatively “governmental”.

Dr Pannam contended that the term “commercial transaction” in s.11(1) of the Act was defined objectively and meant exactly what it said. In his submission the transaction pleaded in the Third Party Notice was “some other transaction for or in respect of the provision of finance” which was included as a specific example of “commercial transaction” in s.11(3)(b). The pleaded obligations of the United States for Nauru’s co-operation included the possible provision of funds to Nauru.

The alleged transaction thus fell within s.11(1) and, as the Act replaced, rather than replicated, the single criterion dichotomy under the restrictive immunity doctrine, it was not permissible to rely on tests such as whether the transaction was actuated by political objectives, was characteristic of “the market place” or was not such as a private person may have entered. In Dr Pannam’s submission, such considerations had been “swept away” and were irrelevant to immunity from jurisdiction under the Act, although they might remain relevant as a defence where jurisdiction was established.

The defendants contend, on the basis of paragraph 90, that the ALRC Report effectively recommended an even broader “commercial transaction” exception than the analogous United Kingdom exception.

The authors of the ALRC Report recommended the adoption of the United Kingdom legislative model “in substance”[34]. While accepting the United Kingdom approach of subdivisions of “commercial activity”, with statutory provisions for each category[35] the ALRC Report considered that improvement could be made in matters of detail in the definition of commercial transactions. The ALRC Report also recognised that “an exhaustive definition of “commercial” is difficult, if not impossible to achieve…[36]“
[34]ALRC Report, paragraph 90.
[35]ALRC Report, paragraph 88.
[36]ALRC Report, paragraph 88.

The State Immunity Act 1978 UK, s.3 provides:

“Section 3Commercial transactions and contracts to be performed in United Kingdom.
(1)A State is not immune as respects proceedings relating to –
(a)a commercial transaction entered into by the State; or
(b)an obligation of the State which by virtue of a contract (whether a commercial transaction or not) falls to be performed wholly or partly in the United Kingdom.

(2)This section does not apply if the parties to the dispute are States or have otherwise agreed in writing; and subsection (1)(b) above does not apply if the contract (not being a commercial transaction) was made in the territory of the State concerned and the obligation in question is governed by its administrative law.
(3)In this section “commercial transaction” means –
(a)any contract for the supply of goods or services;
(b)any loan or other transaction for the provision of finance and any guarantee or indemnity in respect of any such transaction or of any other financial obligation; and
(c)any other transaction or activity (whether of a commercial, industrial, financial, professional or other similar character) into which a State enters or in which it engages otherwise than in the exercise of sovereign authority;

but neither paragraph of subsection (1) above applies to a contract of employment between a State and an individual.”

In Alcom Ltd v Republic of Colombia[37] the supplier of goods to the diplomatic mission of a foreign friendly state (having obtained judgment in respect of goods sold and delivered to the mission) sought to levy execution on its bank accounts. The supplier obtained judgment on the basis of both s.3 and s.13 (an execution provision) of the United Kingdom Act. Section 13 did not confer immunity from execution on property used for “commercial purposes”. (The execution provision used the same definition of “commercial” as the jurisdiction provision in s. 3). The Court of Appeal considered that the bank account was to be used for the purposes of the specified transactions in subparagraphs (a) and (b) which, unlike subparagraphs (c), were unqualified by any reference to sovereign authority.
[37][1984] 2 All ER 6.

The House of Lords allowed the foreign state’s appeal. Lord Diplock recognised that sub‑paragraphs 3(a) and (b), unlike paragraph 3(c), made no exception for contracts entered into for the purposes of acts done in the exercise of its sovereign authority. However, he stated that “the prima facie breadth of the definition of “commercial transaction” in s.3(3) … is, however, considerably narrowed not only by the express exclusion from that definition of contracts of employment, which is to be found in s.3(3) itself, but also by the fact that separate provision is made by other sections of Part 1 of the Act to remove, subject to detailed and sometimes convoluted exceptions, the immunity of foreign states from adjudicative jurisdiction as respects liability incurred in relation to other transactions and activities”[38]. His Lordship referred to the specific exceptions, which are largely replicated in the Australian legislation.
[38]Ibid, at 12.

Lord Diplock noted that public international law would render a bank account for running a diplomatic mission immune from attachment. Although that circumstance did not mean that it was immune under the legislation, it was “highly unlikely that Parliament intended to require United Kingdom courts to act contrary to international law unless the clear language of the statute compels such a conclusion …”[39] Ultimately, however, the question was to be determined by the construction of the legislation.
[39]Ibid, at 10.

Section 11 of the Act assumed a different form from s.3 of the United Kingdom Act. Under the definition in s.3(3) of the United Kingdom State Immunity Act, the examples of “any contract for the supply of goods and services”, or “any loan or other transaction for the provision of finance and any guarantee or indemnity in respect of any such transaction … “, would be a commercial transaction.

As Mr Brett, counsel for the plaintiff, pointed out in the course of argument, s.11(3) of the Act is differently structured. It first defines “commercial transaction” as a “commercial, trading, professional or industrial or like transaction into which the foreign state has entered or a like activity in which the state has engaged. “ … “ It then, “without limiting the generality of the foregoing”, gives three examples of transactions which would be included in the generality:

(a)a contract for the supply of goods or services;
(b)an agreement for a loan or some other transaction for or in respect of the provision of finance;
(c)a guarantee or indemnity in respect of a financial obligation.

On one view, to which I incline, the specified transactions in s.11(3) (a) to (c), although illustrative of the generality, are qualified by it. The specific transactions in s.11(3)(a)-(c) would be commercial transactions only if they have the necessary quality of a “commercial, trading, business professional or industrial or like transaction”. The form of s.11, in contrast to s.3 of the United Kingdom Act, makes that a tenable argument.

The ALRC Report clearly rejected the single criterion dichotomy between sovereign and commercial acts as a basis for immunity, in favour of a general principle of immunity subject to a number of carefully tailored statutory exceptions. It does not follow that a contextual approach to the construction of s.11 is precluded merely because such an approach was employed in decisions made under the restrictive immunity doctrine or under legislation which may be considered to codify it.

The majority in Re the Canadian Labour Code[40] considered that Lord Wilberforce’s contextual approach had continuing relevance to construing terms under the Canadian legislation, which replaced the common law doctrine. Although the Canadian and American statutes may “codify” the common law doctrine, the authors of the ALRC Report regarded them as proceeding on the same broad principle as its recommended legislation – that is, they also dealt with specific categories where immunity would not apply, rather than codifying any single or simple distinction between acts iure imperii and iure gestionis[41] although “to a rather lesser extent” than the United Kingdom Act and its counterparts in the European Convention. Further, the ALRC Report recognised that it would be undesirable to have ‘Australia stepping out of line with other common law countries similarly situated” [42].
[40](1992) 91 DLR (4^th)449.
[41]ALRC Report, paragraph 52.
[42]ALRC Report, paragraph 55.

I am not persuaded that the ALRC Report proposed severance from all pre‑existing principles or a legislative approach so radically different from that introduced by the United States and other common law countries as to exclude the relevance of decisions under it.

The term “commercial transaction” is widely defined in s.11 to bear a meaning beyond “commercial” proper, as it expressly includes not only a “commercial” transaction but extends to a “trading, business, professional or industrial or like” transaction. The ALRC Report stated that “the object of the definition of “commercial” in the context of jurisdiction was to focus on the nature of a specific transaction”[43].
[43]ALRC Report, paragraph 125.

The term “commercial”, is used in distinction from “non‑commercial”, and must be given content. The group of defining qualities in the “generality” of s.11(3) significantly omit criteria such as “political”, “diplomatic”, “governmental”, “intelligence” “foreign policy” or “domestic”. No doubt other significant fields of human activity are omitted.

In my opinion, if a transaction is substantially, essentially or predominantly of a political, diplomatic, governmental or intelligence or like character, it is not a “commercial transaction” despite the fact that it incorporates, or possibly incorporates, some elements of the specified transactions in s.11(3)(a)-(c).

Whether or not the transactions in s.11(3)(a)-(b) are ipso facto commercial, the incorporation of only subsidiary or minor “commercial, trading, business, professional, industrial or like” elements in a transaction which is predominantly one of a political, diplomatic, governmental or intelligence character, or an admixture of those elements, in my view will not render it a “commercial transaction”. Immunity would not be lost pursuant to s.11 of the Act.

Dr Pannam contended that in the present case, there is an inextricable admixture of commercial and governmental elements. In my opinion, however, the nature or character of the alleged transaction between Nauru and the United States appears overwhelmingly non-commercial. As Dr Griffith and Mr Brett contended, it involved high level dealings about the issues of terrorism, intelligence, and reform of banking and passport abuse, to achieve conformity with international conventions.

Although the reciprocal obligations of the United States included the possible payment of funds, which is “a provision of finance” in terms of s.11(3)(b), the alleged transaction, taken in its entirety, is of a diplomatic, governmental, intelligence and national security character. It could not be aptly or naturally described as commercial. Although the provision of finance is potentially involved, it is a subsidiary (and uncertain) element of the alleged transaction. The transaction should be considered as a totality, rather than characterised by reference to a constituent factor which does not represent its nature as a whole.

As Dr Griffith contended, the ALRC Report, in eschewing a single distinction, did not direct a total divorce from the principles of construction applied under the common law doctrine. The ALRC Report advocated a flexible set of “multiple criteria” which would permit the various relevant considerations to be balanced.

In characterising a transaction under s.11 of the Act, an ambulatory range of factors would seem relevant, including the status and role of the participants and the nature of the subject‑matter, dealings, acts and obligations. Purpose, although not decisive, might be relevant in so far as it throws light on the nature of the transaction.

Dr Pannam advanced an impressive argument in favour of the defendants’ construction, which although open on a reading of s.11, does not accord with a purposive approach to the legislation. Further, I do not consider that the rejection of “commercial” as one side of a dichotomous distinction on which immunity depended requires a concomitant rejection of a flexible, contextual approach to the construction of the term “commercial transaction” in s.11 of the Act.

(e) Section 11(2)(a)(i) of Act

As an alternative to its argument based on s.11(1), the United States argued that if the proceeding were found to concern a commercial transaction, then the case came within s.11(2)(a)(i) which excludes the application of the s.11(1) exception:

“if all the parties to the proceeding –
(i) are foreign states or are the Commonwealth and one or more foreign states;”

The United States asserted the application of s.11(2)(a)(i) on two bases.

First, Dr Griffith contended that “all the parties to the proceeding” should read “all the parties to the transaction” (being the transaction alleged in the Third Party Notice). He pointed, in this context, to the express terms of the ALRC Report at paragraph 93 which states:
“Inter-governmental Transactions”
Exclusion Provisions. In considering possible exclusions from this general definition of ‘commercial transactions’, several issues arise.
…
•Contracting Out. It is recommended that the general approach taken by the proposed legislation should be one of allowing freedom of contract into or out of the jurisdiction. Therefore it should be stated that the commercial transaction provision applies subject to any agreement to the contrary by the parties to the transaction[44].
…”
[44]ALRC Report, paragraph 93

The ALRC Report also stated that “states should be free to contract out of the jurisdiction, which should not, in any event, apply to inter-governmental transactions (ie, those to which only foreign states, or foreign states and Australia, are parties).[45]“
[45]ALRC Report, paragraph 17. (Summary)

Likewise, in respect of clause 11 of the Bill, the Explanatory Memorandum states:

“The clause does not apply (and the Foreign State remains immune) –
If the commercial transaction is one to which only foreign States and/or Australia are parties; …”
(Emphasis added).

The terms of s.11(2)(a)(i), as stated in the ALRC draft legislation and as enacted, do not reflect the express terms of paragraph 93 of the ALRC Report or the Explanatory Memorandum.

Further, as enacted, s.11(2)(a)(i) does not achieve the clearly stated object of paragraph 93 of the ALRC Report, because it exposes a consensual transaction between governments or states to Australian jurisdiction if (by happenstance or design) that transaction becomes, or is included as, subject matter of a “proceeding” (whether defined as a third party or a principal proceeding) to which non-states are also parties, even though in relation to an entirely different transaction. That result would not advance the primary goal of securing justice for a private person who deals with a state, which underpins exceptions to sovereign immunity[46].
[46]ALRC Report, paragraph 54.

The Explanatory Memorandum replicates rather than qualifies the statement of purpose contained in paragraph 93 of the ALRC Report. It would appear likely that the process of translation from recommendation to enactment “misfired” both in the draft legislation in the ALRC Report and in the Act itself. In this context, as Dr Griffith contended, the principle expressed by Dawson J in Mills v Meeking[47] applies, namely[48]:

“Reference to the purposes may reveal that the draftsman has inadvertently overlooked something which he would have dealt with had his attention been drawn to it and it if is possible as a matter of construction to repair the defect, then this must be done. However, if the literal meaning of a provision is to be modified by reference to the purposes of the Act, the modification must be precisely identifiable as that which is necessary to effectuate those purposes and it must be consistent with wording otherwise adopted by the draftsman”.

[47](1990) 91 ALR 16.

[48]Ibid, at 30-31.

McHugh JA also stated in Kingston v Keprose Pty Ltd[49]:

“Once the object or purpose of the legislation is delineated, the duty of the Court is to give effect to it in so far as, by addition or omission or clarification, the relevant provision is capable of achieving that purpose or object. Where the court can see the purpose of a provision from an examination of its terms, little difficulty should be met in giving effect to that purpose. The days are gone when judges, having identified the purpose of a particular statutory provision, can legitimately say, as Lord Macmillan said in Inland Revenue Commissioners v Ayrshire Employers Mutual Insurance Association Ltd [1946] 1 All ER 637 at 641, of the means used to achieve the purpose: “The legislature has plainly missed fire”. Lord Diplock, in an extra-judicial comment on that decision has said, that “if… the Courts can identify the target of Parliamentary legislation their proper function is to see that it is hit: not merely to record that it has been missed”: “The Courts as Legislators”, The Lawyer and Justice (Sweet & Maxwell) (1978) at 274”.

[49](1987) 11 NSWLR 404 at 424.

Dr Pannam pointed out that the United Kingdom legislation refers to the parties to the “dispute” and argued that that was consistent with a uniform “international approach” that only where all parties to the proceeding are states, should immunity be conferred in relation to a commercial transaction.

Section 3(3) differs from s.11 of the Act in significant respects. It refers to both a “proceeding” and a “commercial transaction”, but also refers to a “party to the dispute” which is not clearly equivalent to a “party to a proceeding”. In my opinion, the United Kingdom comparison does not advance the matter.

In this case the literal meaning of s. 11(2)(a)(i) does not reflect the purpose of the provision and the required modification is precisely identifiable. I therefore accept that s.11(2)(i) should read as the United States contends.

The United States’ two “fall-back” arguments were that in s.11(2)(a)(i), for the purposes of this proceeding only, “foreign states” should include both Nauru and its separate entities, (VALL and NAC) although they were separate entities within terms of s.3(1) of the Act, because, in their pleadings, the defendants treated all the entities as a single entity. They therefore should not be permitted to “approbate and reprobate”.

Secondly, the United States contended that (although s.3(3) of the Act provides “unless the contrary intention appears, a reference in this Act to a foreign state does not include a reference to a separate entity of a foreign state”), the contrary intention did appear in s.11(2)(a)(i).

That conclusion appears to be excluded by s.22 of the Act, which provides:

“The preceding provisions of this Part (other than subparagraph 11(2)(a)(i), paragraph 16(1)(a) and subsection 17(3)) apply in relation to a separate entity of a foreign State as they apply in relation to the foreign State“.

Further, it is in conflict with the statement in paragraph 93 of the ALRC Report (in relation to the proposed s.11(2)(a) provision) that “there is no reason to treat state trading and other separate entities of foreign states as foreign states in this particular context. The exclusion should be limited to foreign states as distinct from separate entities”.

RELATIONSHIP OF THIS APPLICATION TO THE RECOVERY PROCEEDING

Dr Pannam argued that a finding of immunity for the United States could produce an odd result, as the same matters were pleaded in the defence and counter claim. If the plaintiff made a similar application in the recovery proceeding, it would “shoot itself in the foot” as it would be contrary to public policy to deprive a defendant of its only defence, yet allow the plaintiff (representing an agency of the United States) to proceed with its claim.

I accept, however, that the present application by the United States must be determined independently of its potential implications (if any) for the claims in the recovery proceeding.

CONCLUSION

In my opinion, the transaction alleged in the Third Party Notice is not a commercial transaction within terms of s.11 of the Act and the immunity conferred by s.9 therefore applies to the United States. Alternatively, if immunity were lost under s.11(1), in my view it would be restored pursuant to s.11(2)(a)(i) when, in accordance with intention, the literal meaning of that provision is modified to reflect its purpose.

It follows that in my opinion, the United States’ application should be granted. The Third Party Notice should be set aside on the basis that it has immunity from jurisdiction pursuant to the Foreign States Immunities Act (Cth).

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[2004] VSC 262

28 July 2004