Judicial Guidance on the Australian Autonomous Sanctions regime

Ongoing Federal Court litigation has provided further judicial guidance on Australia’s autonomous sanctions regime, and particularly the construction of restrictions on export sanctioned goods. The decision reinforces the approach in various Australian cases this year to give a broad interpretation to sanctions laws.

On 8 November 2024, the Full Court of the Federal Court (Moshinsky, Stewart and Button JJ) dismissed an appeal by subsidiaries of Russian aluminium producer, United Company Rusal (Rusal), against companies within the Rio Tinto group (Rio Tinto), following the landmark decision of the Federal Court in May 2024 in Alumina and Bauxite Company Ltd v Queensland Alumina Ltd [2024] FCA 43.

Our case note of the initial decision can be accessedhere.

In summary, in dismissing Rusal’s appeal, the Full Court upheld the primary judge’s decision that:

• Rio Tinto correctly interpreted the Australian sanctions regime against Russia; and
• the supply of bauxite and alumina to Rusal would be contrary to Australian sanctions.

Relevant sanctions measures

The appeal related to sanctions imposed by the Australian Government in mid-March 2022 against Russia and certain Russian business-people pursuant to the Autonomous Sanctions Act 2011 (Cth) and the Autonomous Sanctions Regulations 2011 (Cth) (Regulations). 

The two relevant sanctions considered by the Court were:

• the export sanctioned goods prohibitions in relation to Russia, imposed by the combined effect of regulations 4 and 12 of the Regulations and the Autonomous Sanctions (Export Sanctioned Goods—Russia) Designation 2022 (Cth) (made under reg 4(3)) (the Export Sanction), which designated aluminium ores and other aluminium oxides as export sanctioned goods for Russia; and
• the designated persons sanctions prohibitions imposed by the combined effect of reg 14 of the Regulations and the Autonomous Sanctions (Designated Persons and Entities and Declared Persons—Russia and Ukraine) Amendment (No 7) Instrument 2022 (Cth) (made under reg 6(a)) (the Designated Persons Sanction), which (relevantly) added Oleg Deripasksa and Viktor Vekselberg to the list of designated persons for Russia.

These sanctions commenced on 20 March 2022 and 18 March 2022, respectively.

Background

The background facts relevant to the appeal are described in our case note of the initial decision, which can be accessed here.

In short, at all relevant times:

• Queensland Alumina Ltd (QAL) – a joint venture between Rio Tinto (80%) and Rusal (20%) – owned and operated an alumina refinery in Gladstone.
• Under the terms of the joint venture, Rio Tinto supplied bauxite to Rusal’s indirect wholly-owned subsidiary, Alumina and Bauxite Company Ltd (ABC), and transported it to Gladstone for processing into alumina.
• QAL received the bauxite and refined it into alumina on a toll basis on behalf of ABC and Rio Tinto’s subsidiaries, and delivered the alumina to those parties.
• Rusal is Russia’s only primary aluminium producer. Deripasksa and Vekselberg both indirectly held significant shareholdings in Rusal.
• Following the commencement of the Export Sanction and Designated Persons Sanction in March 2022, in April 2022 QAL invoked force majeure provisions in its agreements with Rusal and ABC, and ceased to supply bauxite or shipping services to ABC.

Grounds of Appeal  

The appellants (all being subsidiaries of Rusal) appealed from the whole of the judgment of the primary judge on eight grounds, although the success of grounds 4 to 8 turned on grounds 1 to 3.

Grounds 1 and 2 of the appeal both related to the Export Sanction and ground 3 related to the Designated Persons Sanction, as follows:

1. the primary judge erred in concluding that alumina delivered by QAL to ABC on and after March 2022 would have been exported to Russia for use in aluminium smelters owned and operated by Rusal (and for the benefit of Russia);
2. the primary judge erred in concluding that transfer of alumina by ABC and/or Rusal otherwise than to Russia would directly or indirectly result in a transfer of alumina for the benefit of Russia; and
3. the primary judge erred in concluding that the production of alumina by QAL for ABC and the delivery of the alumina to ABC pursuant to the parties’ contractual arrangements would constitute directly or indirectly making an asset available to, or for the benefit of, Deripaska and Vekselberg.

Decision of the Full Court

Ultimately, the Full Court concluded that grounds 1 and 2 were not made out, and therefore held that it was unnecessary to determine ground 3.

Following from the conclusion that grounds 1 and 2 were not made out, the Full Court found that grounds 4 to 8 were not made out.

The key findings in relation to the Full Court’s consideration of grounds 1 and 2 concerning the Export Sanction are below.

Given the bases on which the Full Court determined the appeal, the Full Court provided no findings or observations in relation to the construction of the Designated Persons Sanction (i.e. regulation 14 of the Regulations) (namely, ground 3). The Federal Court’s first instance decision in this litigation (which is reviewed in our case note here) remains the only Australian judicial guidance on the Designated Persons Sanction.

Issue of construction  

The Full Court considered it appropriate to first deal with a general issue of construction relevant to the Export Sanction.

The primary judge held that (at [221] to [224]):

• a sanctioned supply requires two events to occur – the first event is that a person must supply, sell or transfer export sanctioned goods to another person, and the second is that as a direct or indirect result of the first event, the export sanctioned goods are transferred to the country subject to the sanction, for use or benefit of that country; and
• the two events may occur at the same time in a single transaction, or from more than one transaction.

The Full Court rejected Rusal’s submission that a sanctioned supply can only occur in a single transaction, on the basis that this would give the provisions a narrow operation that would not achieve the objects of the Regulations and the legislation (at [148]).

The Court held at [145] that, having regard to the text, context, and purpose of the Regulations, reg 4(1) can apply to circumstances involving more than one transaction. That is, reg 4(1) can apply in a situation where the supply, sale or transfer of export sanctioned goods (para (a)) and the transfer of those goods (para (c)) are separate transactions.

The Court held at [146] that the natural way to read the regulation is that:

“…the requirements in paras (a) and (c) can be satisfied at different times; there is no express requirement that the supply, sale or transfer in para (a) and the transfer in para (c) occur at the same time or as part of a single transaction or that the transfer referred to in para (c) be planned or pre-ordained at the time of the supply, sale or transfer referred to in para (a).” 

Additionally, the description of the transfer in para (c) as a “direct or indirect result” of the supply, sale or transfer in para (a) also suggests that the two can be distinct events.

The Court accepted at [147] that, if there are two separate transactions, it may be impossible to determine at the time of the supply, sale or transfer of goods to another person (para (a)) whether it is a “sanctioned supply”.

In other words, whether or not a supply, sale or transfer constitutes a “sanctioned supply” may depend on a subsequent event linked to the supply, sale or transfer only by the nexus required by the words “direct or indirect result”.

Ground 1

Rusal argued that the primary judge erred in concluding that, on and after March 2022, alumina delivered by QAL to ABC would have been transferred to Russia for use in aluminium smelters owned and operated by Rusal in contravention of the Export Sanction.

In summary, Rusal submitted there was no proper basis for the primary judge to make the relevant findings, that the primary judge overlooked evidence in making the relevant findings, and critical matters were not put to Rusal’s witnesses. The Full Court did not accept these submissions.

The Court found at [168] that there was a proper basis in the evidence to support the primary judge’s finding that, if alumina had been delivered by QAL to ABC on and after 20 March 2022, that alumina (or at least some of it) would have been transferred to Russia.

The Court also noted at [175] that it “should be recalled that the transfer of alumina to Russia may occur by a number of means not involving the direct shipment of alumina from Australia to Russia”.

Ground 2

While finding it unnecessary to consider ground 2 (since the Court’s finding in relation to ground 1 was sufficient to dispense with the appeal), the Full Court considered it appropriate to do so for completeness.

Rusal argued that the primary judge erred in concluding that, on a proper construction of the Export Sanction, even if alumina was not physically transferred to Russia, a direct or indirect result of the delivery of alumina to ABC would have been that the alumina would have been transferred for the benefit of Russia, in breach of the Export Sanction.

This submission raised both factual issues and issues of construction, which the Full Court did not accept.

Regarding the Full Court’s observations in relation to the issues of construction, we note the following key matters:

“Benefit”

The Full Court rejected Rusal’s submission that the “benefits” for the purposes of reg 4(1)(c)(iii) mean “the advantage of the use or exploitation of material export sanctioned goods for their inherent physical or chemical qualities in a way that is connected with a matter of international concern to the Australian Government”. 

The Court found at [196] that this proposed construction lacked “any textual foothold” and instead held that “benefit” should carry its ordinary meaning (as identified by the primary judge) – namely, “anything that is for the good of a person or thing” or “advantage, profit, good”. This construction gives better effect to the purposes of the Regulations and legislation.

Rusal also submitted that sub-paras (i), (ii) and (iii) of reg 4(1)(c) have a “common object”. While the Court accepted that reg 4 is to be “read a whole, in context and having regard to its purposes”, they did not find that the primary judge applied differing interpretations to each sub-paragraph. Instead, they concluded that the primary judge’s interpretation gave effect to the object of reg 4(1)(c): to deny a sanctioned country the benefit of export sanctioned goods.

“Direct or indirect result”

Rusal also challenged the primary judge’s construction of the words “direct or indirect result”. At first instance, the primary judge stated that, in the context of reg 4(1), the composite phrase includes both the immediate consequences and those consequences caused by the supply, sale or transfer but “which involve additional steps or actions in a causal chain”.

The Full Court found no error in this approach, noting at [198] that it is consistent with the ordinary meaning of “indirect result,” which is a phrase apt to encompass a result produced through a causal chain.

While the primary judge had concluded that some alleged benefits were “too remote,” the Court agreed it was open to the primary judge to conclude this but found it unnecessary to determine the precise outer limits of the provision.

“For”

Finally, Rusal also challenged the construction of “for” adopted by the primary judge.

The Full Court found at [199] that the primary judge’s construction was consistent with the text of reg 4(1)(c)(ii) and (iii) and “best gives effect to the objects of the provision and the legislation”.

The Court did not accept that reg 4(1)(c)(iii) is to be read merely as an “anti-sham” device, but rather is a “substantive element” of the definition of “sanctioned supply” in reg 4(1).

The Court therefore found no error in the primary judge’s findings that, even if alumina was not physically transferred to Russia, a direct or indirect result of the delivery of alumina to ABC would have been that the alumina would have been transferred for the benefit of Russia, in breach of the Export Sanction.

Case Conclusion

The Full Court dismissed Rusal’s appeal, upholding the primary judge’s decision 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 Export Sanction. The Court also ordered that Rusal pay Rio Tinto’s costs of the proceeding.