Landmark judicial guidance on the Australian Autonomous Sanctions regime: A case note on Alumina and Bauxite Company Ltd v Queensland Alumina Ltd [2024] FCA 43

In a landmark case, the Federal Court of Australia has directly considered the scope of the Australian Autonomous Sanctions Regulations (2011) (Cth) (Regulations), marking the first instance where an Australian court has interpreted the prohibitions on sanctioned supplies (regulations 4 and 12) and dealings with designated persons and entities (regulation 14).

This decision marks the first in a series of recent decisions by the Federal Court of Australia regarding Australia’s autonomous sanctions regime. For our further updates on other recent decisions and developments, see Tigers Realm Coal Limited, Federal Court Decisions prompt legislative changes and a case note prepared by our mining team Russian sanctions – Force majeure and illegality in joint venture relationships.

Summary

The Federal Court dismissed an application by subsidiaries of Russian aluminium producer, United Company Rusal (Rusal), seeking declaratory and injunctive relief and damages relating to a decision by companies within the Rio Tinto group (Rio Tinto) to cease supply of bauxite and alumina to them as continued supply would be contrary to Australian sanctions.

The Court found that Rio Tinto correctly interpreted the Australian Sanctions Regime (defined below) against Russia, and the supply of bauxite and alumina to Rusal would be contrary to Australian sanctions.

Background

Queensland Alumina Ltd (QAL), a joint venture between Rio Tinto (80%) and Rusal (20%), owns and operates an alumina refinery located in Gladstone, Queensland (the Gladstone Plant). Rusal is an international public joint stock company registered in Russia.

As per a participation agreement, Rio Tinto supplies bauxite to Rusal's subsidiary, Alumina and Bauxite Company Ltd (ABC), and transports it to the Gladstone Plant for processing into alumina. QAL receives the bauxite and refines the bauxite into alumina on a toll basis on behalf of ABC and Rio Tinto’s subsidiaries and delivers the alumina to those parties.

In response to Russia’s invasion of Ukraine, the Australian Government imposed sanctions against Russia and certain Russian individuals pursuant to the Autonomous Sanctions Regulations 2011 (Cth) (Regulations) made under the Autonomous Sanctions Act 2011 (Cth) (the Act) (collectively, the Australian Sanctions Regime). Relevantly (collectively, the Sanctions):

• On 18 March 2022, the then Minister for Foreign Affairs designated Oleg Deripaska (Deripaska) and Viktor Vekselberg (Vekselberg) (the Designated Persons Sanctions). Deripaska held a 30% effective interest in UC Rusal and Vekselberg held a 10% effect interest in UC Rusal.
• On 19 March 2022, aluminium ores and concentrates and aluminium oxide were designated as “export sanctioned goods” for Russia (the Aluminium Export Sanctions). Following the introduction of the Aluminium Export Sanctions, the alumina produced by QAL at the Gladstone Plant was deemed an “export sanctioned good” for Russia for the purpose of regulation 4(3).

On 8 April 2022, as a result of the Sanctions, Rio Tinto invoked force majeure provisions in its agreements with Rusal and ABC, and ceased to supply bauxite or shipping services to ABC. On 17 August 2022, ABC commenced proceedings against QAL and Rio Tinto, seeking declaratory and injunctive relief as well as damages.

The Court was faced with interpreting the following regulations in the Australian Sanctions Regime, specifically:

• Regulations 4 and 12: the sanctioned supply of “export sanctioned goods”; and
• Regulations 14 and 15: dealings with Designated Persons.

Regulations 4 and 12: The sanctioned supply of “export sanctioned goods”

Regulations 4 and 12 prohibit a person or body corporate from making a sanctioned supply, unless it is an authorised supply. A “sanctioned supply” in regulation 4(1) means:

• A person must supply, sell or transfer goods to another person.
• the goods must be export sanctioned goods in relation to a country or part of a country; and
• as a direct or indirect result of the supply, sale or transfer the goods are transferred:
• to that country or part of that country; or
• for use in that country or part of a country; or
• for the benefit of that country or part of a country.

The issue in dispute between the parties was whether the delivery of alumina to ABC by QAL pursuant to the contractual arrangements that govern the Gladstone Plant joint venture is a “sanctioned supply” within the meaning of regulations 4 and 12.

The Court considered each of these elements.

1. Supply, sell or transfer

The Court interpreted “supply, sell or transfer” broadly, encompassing not only sale transactions, and the formal transfer of title in goods, but the physical delivery of the goods. Similarly, although “supply” in trade or commerce can refer to a sale transaction, its broader meaning includes “to furnish or provide”.

2. Direct or indirect result

The Court gave the term “direct” its ordinary meaning of “in a direct line”, while defining “indirectly” to have the opposite meaning. The Court also found that “result” means the consequence or outcome of the supply, sale or transfer referred to in regulation 4(1). Taking these findings together, the Court held that the phrase “direct or indirect result” is to be understood as including the immediate consequences or outcome of the “supply, sale or transfer” of the “export sanctioned goods” as well as the consequences and outcomes caused by the supply, sale or transfer but which involve additional steps or actions in a casual chain.

3. Transferred to that country, for use in that country, or for the benefit of that country

Paragraph 4(1)(c) outlines three potential effects of exporting sanctioned goods to Russia: physical delivery, usage, or providing some benefit within the country. The emphasis is on the term “transferred,” highlighting the movement or advantage given to Russia, with the interpretation of “for” reflecting the intended purpose or the probable effect, assessed objectively based on the transaction's terms and surrounding circumstances.

4. Benefit

The Court found that “benefit” should be given its ordinary meaning as “anything that is for the good of a person or thing” or “advantage, profit, good”. This can include any financial or non-financial advantage or good, accruing to the country the subject of the sanction (in this case, Russia). The Court refuted the notion that “benefit” pertains solely to the subjective intent behind the transfer of goods, focusing instead on the objective outcomes or effects.

For there to be a “benefit”, the Court emphasised the necessity of a clear causal link between the alumina transfer and the benefit to Russia (such as, for example, direct and indirect employment and / or taxation benefits for the sanctioned country). That is, the regulation requires the “benefit” to be the object, effect or likely effect of the transfer of the export sanctioned goods.

Conversely, the Court suggested that some benefits may be too remote to qualify under the sanctions framework, particularly if such benefits are dependent upon other events and are too removed from any transfer. Examples given by the Court included increased taxation which arises from minority shareholder transactions, or payment of dividends to minority shareholders in the sanctioned country. This suggests a narrower interpretation that doesn't automatically include all positive impacts for Russia from the alumina transfer. Whether a particular alleged benefit satisfies the required causal nexus will involve a fact-specific enquiry in each case.

Conclusion on the Export Sanctions

The Court concluded that QAL's delivery of alumina to ABC from 20 March 2022 constituted a breach of sanctions, given the potential for direct or indirect benefits to Russia, influenced by ABC's connections to UC Rusal, historical shipments to Russia, and UC Rusal's heightened demand post-Ukraine supply loss.

The Court determined such transfers could economically benefit Russia through job creation and tax revenue, and that even measures to prevent direct alumina transfer to Russia would not preclude indirect economic advantages to Russia, potentially supporting UC Rusal's operations.

However, the Court rejected broader interpretations of potential taxation benefits to Russia, such as speculative profitability increases for ABC leading to enhanced UC Rusal share values or dividends, deeming these too speculative to constitute direct or indirect benefits from the alumina transfer.

Regulations 14 and 15: Dealings with Designated Persons

Regulation 14 of the Regulations prohibits a person from:

• directly or indirectly making an asset available to, or for the benefit of, a designated person or entity; and
• the making available of the asset is not authorised.

A Person will contravene Regulation 15 of the Regulations if:

1. the person holds a controlled assert; and
2. the person:
   1. (uses or deals with the asset; or
   2. allows the asset to be used or dealt with; or
   3. facilitates the use of the asset or dealing with the asset; and
3. the use or dealing is not authorised

The central question was whether QAL's alumina production and delivery to ABC under their contract at the Gladstone Plant amounted to dealings with a designated person as prohibited by regulation 14(1). The Court specifically examined whether this prohibition applied when the asset in question is a production facility like the Gladstone Plant, or the produced goods, such as alumina, are owned indirectly through a series of companies in which a designated person holds a financial interest.

The Court considered each of these elements.

1. Directly or indirectly

The Court interpreted “directly” to mean “in a direct line”, with “indirectly” having the opposite meaning. The compound use of “direct or indirect” was found to have a wide import and embrace any number of degrees of remoteness of causation.  The Court further clarified that the word “indirectly” qualifies the phrase “makes an asset available” and includes actions done through an intermediary or through the interposition of corporate entities.

2. Makes an asset available to

The designated person is the person to whom the asset is made available. To “make an asset available to” means to “cause or bring about the availability of the asset; that is, rendering it suitable or ready for use or able to be used”.

3. For the benefit of

The Court interpreted “for the benefit of” as meaning the “object, effect, or likely effect” of making the asset available, “where the object of making the asset available is determined objectively from the terms of the relevant commercial arrangements and any surrounding circumstances”. This does not refer to the subjective purpose of the person making the asset available.

4. Benefit

The Court found that “benefit” should be given its ordinary meaning of “anything that is for the good, advantage or profit of a person, including financial and non-financial advantages”.

5. Regulatory context and purpose

The Court considered that limited guidance can be ascertained from existing case authority and, to fasten upon the proper construction of regulation 14, consideration of regulatory context and purpose is necessary. In this context:

• The Court considered that regulation 15(1) (which is in the nature of a freezing asset) provides little, if any, assistance in construing regulation 14(1).
• Similarly, the Court placed no material weight on the prohibitions imposed by regulations to the Charter of the United Nations as these sanctions are imposed under their own legislative framework and also raise their own questions of construction.

Conclusion on the Designated Persons Sanctions

The Court ultimately found that regulation 14 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.

The Court found that the production of alumina by QAL for ABC and the delivery of the alumina to ABC would be contrary to the Sanctions due to Mr Deripaska’s and Mr Vekselberg’s effective financial interest of 31.03% and 12.58%, respectively, in Rusal.

Case Conclusion

The Court dismissed Rusal’s application, finding that Rio Tinto correctly interpreted the Australian Sanctions Regime against Russia, and the supply of bauxite and alumina to Rusal would be contrary to the Sanctions. The Court also ordered that Rusal pay Rio Tinto’s costs of the proceeding.