On 13 October 2021, the High Court of Australia handed down its decisions in Palmer v The State of Western Australia¹ and Mineralogy Pty Ltd & Anor v State of Western Australia², confirming that the State of Western Australia has the constitutional power to enact legislation absolving itself of any liability and erasing any right to damages under an arbitral award.

Background

Clive Palmer, Mineralogy Pty Ltd and International Minerals Pty Ltd (the "Plaintiffs") commenced an arbitration against the State of Western Australia ("WA") pursuant to an agreement entered into between the Plaintiffs and WA ("State Agreement").³

The arbitration concerned a decision by the relevant WA Minister, under the State Agreement, to reject proposals made by the Plaintiffs relating to iron ore processing works and associated activities in areas covered by mining tenements held by the Plaintiffs.

The arbitrator delivered two partial awards, which found that WA had breached the State Agreement, and that the Plaintiffs were entitled to pursue a claim for damages for those breaches.

A hearing before the arbitrator was scheduled in November 2020 to determine the quantum of the Plaintiffs' damages. The Plaintiffs claimed close to AUD 30 billion.

WA stated that the quantum of damages alleged by the Plaintiffs could bankrupt the State, and it was necessary to enact legislation, "to protect Western Australians from the crippling effects that an adverse determination in the arbitral proceedings…would have on the economy."⁴

In response to growing concerns that WA's Parliament would pass legislation which would affect the Plaintiffs' claims against WA, the plaintiffs applied to the Supreme Court of Queensland to register the arbitral awards under the Commercial Arbitration Act 2013 (Qld).⁵

The Amending Act

A day after the Plaintiffs applied to register the arbitral awards, WA's Parliament passed the Iron Ore Processing (Mineralogy Pty Ltd) Agreement Amendment Act 2020 (the "Amending Act"). The Amending Act enacted provisions which terminated the arbitral proceedings, rendered the arbitral awards and arbitration agreement of no legal effect, and prohibited the Plaintiffs from commencing further claims against WA.⁶ The Amending Act provided that: WA had no liability for any claim in the arbitrations, or the conduct which gave rise to the arbitrations, and prevented the Plaintiffs from attempting to execute the awards against WA's assets.⁷

The Plaintiffs' High Court challenge

The Plaintiffs commenced an application in the High Court of Australia, arguing that the Amending Act was invalid on a number of constitutional, statutory and common law grounds, most relevantly:

• contrary to Chapter III of the Australian Constitution, the Amending Act involved the impermissible exercise of judicial power or was of an act of such a nature that it intruded into the exclusive sphere of judicial power (the "Chapter III argument"); and
• the Amending Act was invalid pursuant to section 118 of the Australian Constitution because it conflicted with the uniform Commercial Arbitration Acts enacted by other State Parliaments. The Plaintiffs alleged a particular conflict arose between the provisions of the Amending Act which deprived the arbitral awards of their legal effect and the provisions of the uniform Commercial Arbitration Acts which operate to recognize the arbitral awards (the "section 118 argument").

WA disputed all claims raised by the Plaintiffs and argued that the Amending Act was constitutionally valid. The Attorney-Generals of a number of Australian States and Territories intervened in support of WA's position.

What the High Court found

The High Court unanimously dismissed the Plaintiffs' challenge and confirmed WA's constitutional power to enact legislation to abolish the arbitral awards made against it. Consequently, the Court confirmed the Plaintiffs' claim for damages was lawfully extinguished.

In summary, the Court found that:

• in regards to the Chapter III argument, the provisions of the Amending Act could not be characterised as an exercise of judicial power and therefore did not intrude into the exclusive sphere of judicial power. The Court held that the institutional integrity of a court as an independent and impartial tribunal cannot readily be threatened by a mere alteration of substantive legal rights, even if the alteration might be regarded as extreme or drastic; and
• in regards to the section 118 argument, there was no conflict which enlivened section 118 of the Australian Constitution because each of the uniform Commercial Arbitration Acts contained a provision which permitted the relevant State court to refuse recognition or enforcement of an arbitral award on the basis that the arbitral award (or arbitration agreement) was not valid under the law to which the parties had subjected it. Through the operation of these provisions, the Court found that the uniform Commercial Arbitration Acts accommodated any changes in the law applicable to the arbitration agreement, which in this instance, included the Amending Act.

The Court concluded that the Amending Act and the disputed provisions of the State Act⁸ were wholly valid and operational.

Implications

The Amending Act was ostensibly an extreme example of the constitutional powers exercisable by an Australian State Parliament. However, the High Court's confirmation of those powers is a reminder to investors who contract (or wish to contract) with an Australian State of the sovereign risk that accompanies entering into agreements with such entities, whether by a standard contract or through a State Agreement.

Whether a sovereign risk in the form of legislation that alters contractual rights will materialise depends on the political will of the government of the day. If any general rule could be stated, it is that such risks increase as the materiality/significance of the contract increases.

In Mr Palmer's case, legislation was enacted to remove any liability of WA for damages for breach of the State Agreement. However, this is not the only legislative strategy open to State governments. States have in the past (and very recently) used legislation to (or threaten to) extricate themselves from contractual obligations or to deny counterparties' rights.⁹

States have strong incentives to resist implementing the types of legislative action taken by WA against Mr Palmer and the other plaintiffs. A part of a State's success in attracting foreign investment is ensuring the State is perceived as having a low sovereign risk. This entails upholding the rule of law and keeping to contractual bargains.

Ultimately, that perception may change as regards to WA following this case and these types of risks could be considered by credit rating agencies when assessing a State's credit rating. As stated by Edelman J the decision to enact the Amending Act, "may reverberate with sovereign risk consequences. But those consequences are political, not legal".¹⁰

Finally, the confirmation of WA's powers to retrospectively intervene in arbitral awards that have been validly made may also impact Australia's prospects of becoming an "arbitral hub" in South-East Asia. The High Court's decision may deter parties from choosing Australia (or an Australian State) as the seat for an arbitration when contracting with a State or the Federal Government.

A question that remains is whether Mr Palmer may seek recourse against the Commonwealth of Australia under its free trade agreement with Singapore on the ground that his project is an investment made by Mineralogy Investment, a Singaporean entity.

1 [2021] HCA 31 ("Palmer").
2 [2021] HCA 30 ("Mineralogy").
3 That agreement was ratified by an Act of the WA Parliament in 2002; the Iron Ore Processing (Mineralogy Pty Ltd) Agreement Act 2002 (WA).
4 Palmer [15] (separate opinion of Edelman J).
5 Although these orders were ultimately set aside, see Mineralogy Pty Ltd v Western Australia [2020] QSC 344.
6 Iron Ore Processing (Mineralogy Pty Ltd) Agreement Amendment Act 2020 (WA) ss. 9(1)-(2), 10(4)-(7), 11(3)-(4), (7), 18(1)-(3), and 19(1)-(4) and (7).
7 Iron Ore Processing (Mineralogy Pty Ltd) Agreement Amendment Act 2020 (WA) ss. 11(1)-(2) and 19(1)-(2), 17 and 25.
8 Iron Ore Processing (Mineralogy Pty Ltd) Agreement Amendment Act 2020 (WA) ss. 9(1)-(2), 10(4)-(7).
9 See, for example, sections 57 and 58 of the Delivering Victorian Infrastructure (Port of Melbourne Lease Transaction) Act 2016 (Vic) which declares that none of the matters or things to which that section applies is "to be regarded as", for example, creating a breach of contract or placing someone in default; and that the State is not liable to pay compensation for anything resulting from that legislation. The State even expressly relieves itself from liability for ‘unconscionable’ and ‘misleading’ conduct.
10 Mineralogy [97].

Isabelle James (White & Case, Graduate, Sydney) contributed to the development of this publication.

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