Authors: Frank Main, Jay Leary
In response to Russia's invasion of Ukraine, in March 2022, the Australian Government imposed sanctions against Russia and certain Russian business-people pursuant to the Autonomous Sanctions Regulations 2011 (Cth) made under the Autonomous Sanctions Act 2011 (Cth). The sanctions directly impacted Queensland Alumina Ltd, which is jointly owned by Rio Tinto, and Rusal, a Russian-owned company.
In this case note, we explore the events that followed in Alumina and Bauxite Company Ltd v Queensland Alumina Ltd [2024] FCA 43.
Background
On 24 February 2022, Russia invaded Ukraine. In mid-March 2022, in response to the invasion, the Australian Government imposed sanctions against Russia and certain Russian business-people pursuant to the Autonomous Sanctions Regulations 2011 (Cth) made under the Autonomous Sanctions Act 2011 (Cth) (Sanctions).
The Sanctions impacted the operations of one of the larger alumina refineries in the world located in Gladstone, Queensland, with a capacity to produce over 4 million tonnes of alumina annually from Australian bauxite. The refinery is owned and operated by Queensland Alumina Ltd (QAL), a joint venture owned and operated by subsidiaries of Rio Tinto (80%) and Rusal (20%) a registered international public joint stock company in the Russian Federation.
In general terms, the Sanctions prohibit:
- the supplying, selling or transferring alumina to a person where, as a direct or indirect result, the alumina is transferred to Russia, for use in Russia or for the benefit of Russia; and
- directly or indirectly making an asset available to or for the benefit of two Russian businessmen: Oleg Deripaska and Viktor Vekselberg who hold significant shareholdings in UC Rusal.
QAL operates the refinery under agreements where Rio Tinto is obliged to supply bauxite to Alumina and Bauxite Company Ltd (ABC), a subsidiary of Rusal, and to ship Bauxite to Gladstone on behalf of ABC. QAL receives the bauxite and refines the bauxite into alumina on a toll basis on behalf of ABC and certain of Rio Tinto’s subsidiaries and delivers the alumina to those parties.
As a result of the Sanctions, QAL invoked provisions of the agreements to cease receiving bauxite and producing alumina for ABC and delivering alumina to ABC. Rio Tinto invoked provisions of the agreements and ceased supplying and shipping bauxite to ABC.
Rusal sought an injunction and damages for the losses incurred by Rio Tinto’s actions. The case was heard in the Federal Court of Australia and Justice Michael O’Bryan. Importantly, the Autonomous Sanctions Regulations that are in dispute in the case that had not previously been the subject of judicial consideration.
His Honour dismissed the application of Rusal, who was ordered to pay Rio Tinto’s costs of the proceeding.
Summary of legal issues
The three legal questions that arose:
- whether the actions of QAL and Rio Tinto are in breach of contracts with the applicants;
- whether imposition of the Sanctions rendered performance of the contracts by QAL illegal and was therefore a supervening illegality to excuse performance; and
- whether imposition of the Sanctions was an event of force majeure for purposes of contractual provision to excuse performance.
The Parties
QAL operates the Gladstone plant under a Participation Agreement with three subsidiaries of United Company Rusal IPJSC (UC Rusal), ABC, Rusal Limited and JSC Rusal (collectively, Rusal) and Rio Tinto Plc, Rio Tinto Limited, RTA Holdco Australia 5 Pty Ltd (RTA Holdco), Rio Tinto Aluminium (Holdings) Limited and Rio Tinto Aluminium Limited (RTA) (collectively, Rio Tinto).
Under the Participants Agreement, QAL refines bauxite into alumina on a toll basis for ABC, RTA Holdco and RTA (collectively, the Participants). ABC holds 20% of the shares in QAL and RTA Holdco and RTA collectively hold 80% of the shares in QAL.
QAL, Rusal and Rio Tinto are also parties to five Tolling Contracts, under which a percentage of the capacity of the Gladstone Plant is allocated to each Participant.
Rio Tinto also entered into Bauxite Supply Agreements and a Shipping Agreement with Rusal relating to the supply of bauxite to ABC and the shipment of bauxite to the Gladstone Plant for processing into alumina.
QAL, ABC, RTA Holdco and RTA are also party to a Caustic Soda Supply Agreement under which the parties agree to supply their proportionate (equity) share of caustic soda to QAL for use in the production of alumina at the Gladstone Plant.
The Applicant’s claims
Rusal argued that the acceptance of bauxite by QAL from ABC, the refining of alumina by QAL for ABC, and the delivery of alumina by QAL to ABC for sale to third parties outside of Russia did not and would not have amounted to a contravention by QAL of the Sanctions.
Rusal also alleged that QAL breached its contractual obligations under the Participants Agreement and Tolling Contracts by ceasing to deliver alumina to ABC pursuant to those agreements, and that Rio Tinto breached their contractual obligations under the Bauxite Supply Agreements and the Shipping Agreement by ceasing to supply and ship bauxite to ABC at the Gladstone plant pursuant to those agreements.
The Respondent’s defences
QAL argued it was relieved of its obligations to deliver alumina to ABC because of step-in arrangements in the Participants Agreement which applied if an Australian government authority imposed sanctions on UC Rusal, ABC or any of their affiliates likely to prevent QAL from undertaking business activity with ABC and its affiliates. His Honour found there was no evidence adduced in the proceeding that would support a finding that it was within the power of Rio Tinto to control how QAL responded to the Russia Sanctions.
Rio Tinto successfully argued that QAL was relieved of its obligations to deliver alumina to ABC because the imposition of the Sanctions rendered the performance by QAL of the Participants Agreement and the Tolling Contracts illegal and was accordingly a supervening illegality that excused QAL from complying with those obligations. Additionally, the imposition of the Sanctions was an event of force majeure for the purposes of the Tolling Contracts.
Rio Tinto also successfully argued that RTA was relieved of its obligations to supply and ship bauxite to ABC at the Gladstone Plant due to force majeure provisions and sanction provisions in the Bauxite Supply Agreements.
Legal issues
Participants Agreement, Tolling Contracts and Caustic Soda Supply Agreement
On 4 April 2022, QAL implemented step-in arrangements pursuant to the Participants Agreement in reliance upon the Sanctions. The effect of the step-in arrangements was to reallocate ABC’s entitlement to refine bauxite into alumina at the Gladstone Plant to RTA and RTA Holdco, thereby excluding ABC from participating at the Gladstone Plant for the duration of the Sanctions. QAL ceased to accept bauxite and caustic soda deliveries from ABC and ceased to refine and deliver alumina to ABC in accordance with the Participants Agreement and Tolling Contracts.
His Honour found that the defence of supervening illegality was available to QAL where the Sanctions made it unlawful for QAL to refine and deliver alumina to ABC. At common law, supervening illegality is a change to the law that arises after the formation of a contract and that renders the future performance of a contract unlawful. Supervening illegality is a defence to non-performance of the contract. In some circumstances, supervening illegality may have the same terminating effect as frustration. Rusal did not dispute that if the Sanctions rendered it unlawful for QAL to refine and deliver alumina to ABC, then the defence of supervening illegality would operate to excuse QAL’s non-compliance with the Participants Agreement and the Tolling Contracts.
Parties to a contract may address the consequences of supervening illegality in their contract. In this case, QAL was contractually excused from failing to perform the Tolling Contracts due to the force majeure provisions in the Tolling Contracts under Article 17 (and also by the common law doctrine of supervening illegality). Article 17 of the Tolling Contracts stated “QAL shall not be liable for failure to perform if such a failure is caused by Force Majeure”. In Article 1, a “Force Majeure” event took its meaning from the definition in the Participants Agreement to include “…acts or restraints of governmental authority which directly or indirectly prevent the construction of a Plant, obtaining equipment, machinery or supplies therefor, obtaining bauxite to be converted to alumina therein, or manufacture of alumina therein”. The word “Plant” was defined to refer to the Gladstone Plant. Therefore, the Sanctions were held to be an event of force majeure within the meaning of the Tolling Contracts. Relevantly, the drafting of the force majeure clause was specific to capture the Sanctions.
Bauxite Supply Agreements and Shipping Agreement
On 8 April 2022, RTA invoked force majeure provisions in the Bauxite Supply Agreements and the Shipping Agreement relying on the Sanctions. RTA ceased to supply bauxite or shipping services to ABC under those agreements. Relevantly, RTA was relieved of its obligations to supply and ship bauxite to ABC at the Gladstone Plant by the operation of the force majeure provisions and sanction provisions in the Bauxite Supply Agreements.
Article 21.1 of the Monohydrate Bauxite Supply Agreement stated that “RTA shall not be liable to ABC for any failure to deliver bauxite if such failure is due to any of the specified events of force majeure”, which relevantly included “the imposition of Sanctions…which results in third parties refusing to provide services necessarily required by the parties to this agreement to perform their obligations contained herein”. The definition of the word “Sanctions” in Article 1.1 included “any trade embargo or economic or financial sanctions imposed by the Australian Government”.
Questions of contractual construction
Designated Person Sanctions
Justice O’Bryan had recourse to consider a number of questions of contractual construction in this case. His Honour noted that the prohibition of dealing with designated persons in regulation 14(1) is written in relatively straightforward language but gives rise to a difficult question of construction concerning the intended breadth of the clause “indirectly makes an asset available for the benefit of a designated person”. Specifically, the question is whether the prohibition is intended to apply to circumstances such as the present case in which the relevant asset constitutes a production facility (the Gladstone Plant), or the goods produced at the facility (alumina), which are owned through a chain of companies in which the designated person has an indirect financial interest.
His Honour found that on the balance of probabilities the production of alumina by QAL for ABC and the delivery of the alumina to ABC would be contrary to the Designated Persons Sanction due to Mr Deripaska’s effective financial interest in UC Rusal is 31.03% and Mr Vekselberg’s effective financial interest in UC Rusal being 12.58%.
In weighing the competing considerations, his Honour’s view was that regulation 14(1) should be given the full meaning that is open from the words “indirectly makes an asset available for the benefit of a designated person”, where “indirectly” includes doing so through interposed corporate entities, and where the benefit is either the object, effect or likely effect of making the asset available. That construction does not provide a definitive answer to the application of the regulation in every case. Ultimately, the specific facts must be examined to assess whether the regulation applies. As acknowledged by the respondents, there may be a de minimis threshold below which a minority shareholding interest in a downstream company may be insufficient to satisfy the regulatory language. As discussed below, it is unnecessary to explore such questions in the present case.
Interestingly, his Honour also found that even if UC Rusal and/or ABC would have successfully taken steps to prevent alumina delivered to ABC from the Gladstone Plant being physically transferred to Russia, a direct or indirect result of the delivery to ABC would have been that the alumina would be transferred for the financial benefit of UC Rusal. Two financial benefits would arise to UC Rusal. First, it can be inferred that the sale of alumina by ABC would have been profitable, thereby increasing the value of UC Rusal. Second, UC Rusal would be able to direct the transfer of the Gladstone alumina to China which would increase the availability of other alumina in China to be purchased by UC Rusal. This would also place downward pressure on alumina prices in China. The supply of alumina to third parties in China would increase the likelihood that surplus alumina in China would be exported to Russia. Ultimately, those economic factors (of supply and demand) would improve UC Rusal’s security of supply of alumina, its terms of trade in alumina and its profitability which would directly and indirectly benefit its shareholders and each of Mr Deripaska and as noted above, Mr Vekselberg are significant shareholders in UC Rusal.
Export Sanctions
His Honour also found that on the balance of probabilities the delivery of alumina by QAL to ABC would have been contrary to the Export Sanction. That is because, on and after 20 March 2022, if QAL had delivered alumina to ABC:
- the alumina would have been transferred to Russia, and for use in Russia to meet the aluminium smelting needs of Rusal, and which would also thereby benefit Russia in the form of employment within Russia and increased tax revenue in Russia; and
- even if UC Rusal and/or ABC would have successfully taken steps to prevent the alumina being physically transferred to Russia, a direct or indirect result of the delivery to ABC would have been that the alumina would be transferred to China which would have improved UC Rusal’s security of supply of alumina and its terms of trade in alumina and its profitability, which would also benefit Russia in the form of employment within Russia and increased tax revenue in Russia.
Sanctions should be construed in light of surrounding circumstances
Rio Tinto submitted, and his Honour accepted that the “sanctions provisions” were to be construed in light of the surrounding circumstances. Those circumstances included the facts that the nature of the businesses of both Rio Tinto and Rusal is such that they are involved in dealings in different parts of the world with various counterparties, and that the imposition of sanctions can have ripple effects, including the possibility of secondary sanctions being imposed. It can be accepted that international trading companies such as the Rio would be concerned about the possibility of breaching sanctions and may require contractual rights that guard them against the possibility of breach.
Conclusion
It appears possible that a party can give a binding and enforceable undertaking not to breach sanctions but only in circumstances where the party can give such a legally enforceable commitment and when considering the facts in most scenarios involving sanctions such an undertaking is extremely difficult to prove would be an enforceable commitment in the future due to the nature in trade of commodities especially where swap agreements are common in the commodities markets.
The case also confirmed that supervening illegality is a defence to non-performance of contract at common law and that parties can protect themselves by including a well drafted force majeure clause in their contracts that specifically includes sanctions.
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The articles published on this website, current at the dates of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.