Wells Fargo Bank Northwest National Association v Victoria Aircraft Leasing Limited and Ors

Supreme Court of Victoria|2004-09-09|Before: DODDS-STREETON J.

PRACTICE AND PROCEDURE - Appeal - Stay of trial of the proceeding - Relevant principles. PRACTICE AND PROCEDURE - Stay of proceeding - Acts of State - Non-justiciability - Whether defence and counterclaim non-justiciable due to allegations of transactions between foreign states - Whether plaintiff mortgagee's claim should be stayed if defence and counterclaim non-justiciable - Connection between plaintiff's claim and non-justiciable matters, and strength of defendants' case not sufficiently established. PRACTICE AND PROCEDURE - Whether further security required for the usual undertaking as to damages in respect of injunction restraining mortgagee to be assessed against future risk arising from restraint, including probable diminution in value of the security property and loss of use of funds - Relevance of defendants' inability to pay further security where mortgagee's powers of enforcement challenged and appeal pending. PRACTICE AND PROCEDURE - Preliminary questions - r.47.04 - Truth of certain allegations assumed - Unclear whether facts relevant to determination of preliminary question - No such facts identified - Case not sufficiently clear.

The background to the present applications is set out in Wells Fargo Bank Northwest National Association v Victoria Aircraft Leasing Limited and Ors[1] ("Wells Fargo"), a judgment delivered on 28 July 2004_,_ in which I determined, inter alia, that the defendants' Third Party Notice dated 5 September 2003, and served on the United States on 20 February 2004, should be set aside, on the ground that the dealings and transactions alleged in the Third Party Notice did not constitute "a commercial transaction" pursuant to s.11(3) of the Foreign States Immunity Act 1985 (Cth) ("the Act") and that the United States was entitled to foreign state immunity pursuant to s.9 of the Act.

By Notice of Appeal dated 2 August 2004 the defendants appealed against my judgment in Wells Fargo.

There are currently five applications before the Court.

By summons dated 2 August 2004, made returnable before the Court of Appeal on 13 August 2004, the defendants seek orders that the hearing of the trial be stayed pending the hearing and determination of the appeal against the judgment in Wells Fargo, and that the hearing of the appeal be expedited.

By summons dated 3 August 2004 the defendants seek orders that:

"The proceeding be stayed on the basis that the claims alleged in the Defence and Counterclaim dated 15 August 2004 are not justiciable as they require:

(a) the adjudication of `acts of state'; and

(b) determination of matters bearing upon the validity of acts and transactions of a foreign state,

such that it would be an abuse of process or create a substantial injustice if the plaintiff's claim was to be heard and determined without the defendants being able to defend those claims on the basis of the matters alleged in the Defence and Counterclaim."

On 6 August 2004 I referred the summons dated 2 August 2004 to the Court of Appeal for hearing together with the summons dated 3 August 2004.

On 13 August 2004 the Court of Appeal ordered that the hearing of the appeal be expedited, but referred the applications for a stay made by the summons dated 2 August 2004 and the summons dated 3 August 2004 to be heard and determined by the trial judge.

By summons dated 20 August 2004 the defendants seek orders that:

"The plaintiff...make discovery of all documents evidencing or concerning any communications, discussions or correspondence between Export-Import Bank of the United States and the State Department of the United States or their respective officers or legal advisers in relation to the enforcement, or potential enforcement, of any of the agreements referred to in the Amended Statement of Claim dated 15 June 2004 filed in this proceeding".

By summons dated 19 August 2004 the plaintiff seeks orders:

1. That the defendants pay to the plaintiff's solicitors US$110,000 per calendar month prior to the last business day of each calendar month to be held by the plaintiff's solicitors until the hearing and examination of this proceeding as security in support of the defendants' undertaking as to damages.

2. That a number of specified questions be tried before the trial of the proceeding.

The relationship between the five applications before the Court is complex. The resolution of each application depends on different principles, but there is a considerable overlap of subject-matter. The way in which one application is determined may depend, to some extent, on the determination of other applications. If the application for a stay of the proceeding on the grounds of acts of state and abuse of process were granted, it may be unnecessary to determine any of the other applications.

However, the application for the stay of the proceeding seeks, in effect, a stay only for so long as the defendants are precluded from conducting their only defence to the plaintiff's claim. While the summons asserts that the claims in the amended defence and counterclaim are non-justiciable on the basis of the "act of state" doctrine, Dr Pannam, senior counsel for the defendants, conceded that if the defendants succeed on appeal from the decision in Wells Fargo, and it is held that the United States is not immune under the Act, there will be no basis for a stay of the proceeding. That concession was based on the view that immunity under the Act and non-justiciability depend upon the same circumstances, so that if the transactions alleged in the amended defence and counterclaim give rise to immunity under the Act, they will also give rise to non-justiciability on the basis of "act of state", and vice versa.

The application for a stay of the trial of the proceeding pending the hearing and determination of the appeal is to be determined on different principles from the application for a stay of the proceeding, although the two applications overlap. The question of a stay of the trial has been, to some extent, overtaken in practice, as the trial date of 23 August 2004 has been vacated and there is now no available date for hearing and determining the proceeding prior to 2005.

The parties agreed that the defendants' discovery application should be deferred until a later date.

In the present case, the plaintiff sues in its capacity as security trustee for Eximbank. It seeks to exercise mortgagee's rights and enforce remedies in relation to an aircraft purchased by the first defendant ("VALL") with funds advanced by Eximbank and secured by a mortgage over the aircraft. The aircraft is the sole aircraft operated by the second defendant ("NAC") which conducts an airline under the name "Air Nauru". The Republic of Nauru is the third defendant.

The status of Eximbank and its relationship to the United States are central to the defendants' amended defence and counterclaim. Those matters are also significant factors in the determination of the present applications.

Eximbank is a corporation and an agency of the United States, established pursuant to the Export Import Bank Act of 1945 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" [2].

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..."[3]. 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.

The defendants' amended defence and counterclaim dated 4 August 2004 contain virtually identical allegations to those contained in the Third Party Notice, which has been set aside in the decision the subject of the appeal. The amended defence does not deny the loan, security agreements, or mortgage. Rather, it alleges that the attempted enforcement of Eximbank's remedies as mortgagee constitutes a breach by the United States of the agreement allegedly made by the United States and Nauru.

The amended defence and counterclaim further or alternatively alleges that:

"The failure by the United States to make good the representations would make it unconscionable for the United States, through the agency of Eximbank, to take the benefit of the legitimate reliance which the defendants placed on the representations. In the premises, Eximbank and Wells Fargo are precluded from exercising whatever rights Eximbank might otherwise have had to rely on [default in payment] so as to take possession and/or foreclose in respect of the aircraft."

The defendants contend that the immunity of the United States pursuant to the Act, and the consequent setting aside of the Third Party Notice, prevent them from effectively asserting their claims against the United States, from obtaining discovery from the United States[4] and from rendering the United States amenable to any judgment or order of this Court. As such, they are effectively deprived of any defence, and a trial of the proceeding will be tantamount to submitting to judgment. In consequence, the aircraft will be repossessed and Air Nauru, deprived of its only aircraft, and without the funds to purchase or lease an alternative aircraft, will cease to operate. The defendants contend that, in those circumstances, if their appeal were subsequently to succeed, it would not be possible to restore them to their current position.

The effectiveness of the amended defence and counterclaim depends on the defendants' establishment of a nexus between Eximbank and the United States, whereby Eximbank is bound by the alleged acts and representations of the United States, so that it is estopped or precluded from exercising its rights under the mortgage. If that nexus is not established, then although the defendants may have an independent claim against the United States for breach of the agreement, or failure to honour agreement or representations which allegedly induced the performance of requested acts by Nauru, then the matters alleged in the amended defence and counterclaim will not constitute a defence to the plaintiff's claim made as security trustee for Eximbank.

The plaintiff denies that Eximbank is bound or affected by the acts, agreements or representations of the United States. It contends that although Eximbank is an agency of the United States, it is a separate legal entity.

The plaintiff also contends that, on a proper analysis, the defendants' amended defence and counterclaim make no allegations against Eximbank. Mr Fajgenbaum, senior counsel for the plaintiff, argued that the pleadings do not even allege the necessary connection between the United States and Eximbank. He pointed out that the defendants do not allege that Eximbank authorised anyone to make an agreement or representation on its behalf. The basis on which Eximbank is allegedly precluded from exercising its rights by reason of the conduct, agreement or representations of the United States is not articulated, but merely incorporated in the term "in the premises", which is not defined or explained. Therefore, the plaintiff argues that, as the defendants admit the debt and the mortgage, the plaintiff's claim to exercise Eximbank's rights as mortgagee should be viewed independently of the matters alleged in the amended defence and counterclaim.

Consistently with its claim that Eximbank and the United States are independent entities, the plaintiff disputes the defendants' contention that it should be fixed with the consequences of any delay or other conduct of the United States in the course of the litigation. It also disputes the defendants' contention that Eximbank may legitimately be identified with the United States for the purposes of assessing the existence and extent of any prejudice likely to result from a stay of the trial or of the proceeding, or from a failure to order that the defendants provide further security for their undertaking as to damages.

Dr Pannam, senior counsel for the defendants, submitted that the amended defence and counterclaim did not depend on Eximbank's constitutional or statutory relationship to the United States government or its status as a separate legal entity. Rather, they depended on the relationship as a matter of fact, which did not conform to or reflect, the statutory provisions. In support of that contention, he referred to a number of documents discovered by Eximbank, exhibited to the affidavit of Mr Lucarelli sworn 20 August 2004, comprising internal memoranda between officers of Eximbank and between officers of the State Department. Dr Pannam submitted that the documents established that there was at least a significant question to be determined whether Eximbank, despite its statutory independence, in practice deferred to, and sought, instructions or direction from the State Department of the United States in relation to the institution of the proceeding.

While Dr Pannam did not contend that the necessary identification of Eximbank with the United States was yet established, he argued that the defendants' present case was more than a mere allegation in the pleadings. There was documentary evidence of communication between Eximbank and the United States State Department in relation to the litigation, and evidence that Nauru had effected the reforms which the United States had allegedly required. In the defendants' submission, such evidence was emerging on a continuing basis. Dr Pannam acknowledged that the defendants did not plead that the "deniable operatives" acted with the authority or on behalf of Eximbank, or that Eximbank was accustomed to act in accordance with the directions of the United States, but foreshadowed the defendants may make an application to further amend the amended defence and counterclaim.

Application for stay of the trial of the proceeding pending the hearing and determination of the appeal

In their written submissions dated 25 August 2004 the defendants submitted that the trial of the proceeding should be stayed until after the appeal is heard and determined, on the grounds that:

"(a) the Defendants have substantial prospects of success in their appeal;

(b) if the proceeding is determined before the appeal, the appeal may well be rendered futile; at best, this Court will be unable to restore the Defendants to the position that they properly enjoyed before the judgment under appeal; and

(c) the only prejudice that might be caused by the stay is prejudice to the United States, for which the United States itself is largely responsible."

By an affidavit sworn 5 August 2004 in support of the application for a stay of the trial, Mr William Herdman, the Chief Financial Officer of Air Nauru deposed that he had revisited and updated his cashflow estimate made at 3 March 2004 for Air Nauru from $400,000 at the end of calendar year 2004 to $970,000. He further deposed that, without the aircraft, Air Nauru will cease generating operational revenue. Although it might be theoretically possible for Air Nauru to source a replacement aircraft, it was not a realistic possibility, because Air Nauru did not have the funds, was unlikely to obtain finance and could offer no security. Further, even if it were financially possible, the practical difficulties of finding a suitable replacement immediately or in the short term were very great.

By an affidavit sworn 5 August 2004 John Goulding, the Manager, Commercial of Air Nauru, deposed that Air Nauru carried approximately 87,000 passengers in the aircraft during the year ended 30 June 2004 and would carry an estimated 93,000 for the financial year ending 30 June 2005.

He deposed that Air Nauru is the only commercial airline providing commercial airline passenger and cargo services to Nauru. The aircraft also operates a Fiji route and Norfolk Island route. The populations of Nauru and Kiribati are heavily dependent on Air Nauru for their contact with the outside world. Some of the cargo comprises perishable foodstuffs and urgent medical supplies. There is no known alternative aircraft to provide alternative services.

Mr Goulding further deposed that if the aircraft were to be repossessed, Air Nauru would cease its operations immediately, probably lose its major client and other sources of business, strand residents of the island, stand down its workforce, and possibly lose its air operator's certificate. It would lose its entire business, which has a current turnover of AU$25million and net profit of AU$1,020,226 for the year ended 30 June 2002. A suitable replacement for the aircraft, even if located, would take no less than three, but up to five, months to become available for use, by which time Air Nauru's business would be likely to be totally destroyed.

Mr Kinza Clodumer, a director of the first defendant, chairman of the second defendant and a member of the parliament of Nauru, by affidavit sworn 5 August 2004 deposed to his attempts to raise re-finance for the aircraft over the past two to three months.

In the present case the defendants apply not to stay the execution of judgment but to stay the trial. Rule 49.03 of the Supreme Court (General Civil Procedure) Rules 1996 provides that the Court may adjourn a trial on such terms as it thinks fit.

It is well established that the Court has an inherent power to direct that any matter which comes before it should stand over for a period in order to do justice between the parties,[5] although an indefinite postponement may amount to a refusal to exercise jurisdiction[6].

Although counsel did not identify any authority specifically on the stay of a trial pending the hearing and determination of an appeal, guidance is provided by the principles governing analogous applications for a stay of execution of judgment pending the determination of an appeal. In Victoria, such applications are governed by Rule 64.25 of the Supreme Court (General Civil Procedure) Rules 1996.

In determining whether to exercise its discretion to grant a stay pursuant to Rule 64.25, this Court has consistently approved the requirement of special circumstances.

In Cellante v G. Kallis Industries Pty Ltd[7], Young CJ (with whose judgment Brooking J concurred) recognised that, despite some apparently inconsistent or ambiguous observations which he had made in Normans Wines Pty Ltd v Cawsand Pty Ltd[8], "the appellant must show special or exceptional circumstances before a stay will be granted ... "[9].

The onus of satisfying the requirement of special circumstances rests on the applicant. As Batt J (as he then was) observed in Westpac Banking Corporation v Market Services International Pty Ltd[10], "The fact that an appeal will be rendered nugatory is ordinarily sufficient to constitute special circumstances."[11]

In Largarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd[12] Tadgell J (as he then was) concluded that upon the material before the court, "the failure to grant a stay would produce a real risk - perhaps a near certainty - that the applicant could not be restored substantially to its former position if the appeal succeeded".[13]

His Honour further observed that, in the context of a stay application, where it could not be said the appeal was hopeless, it was not appropriate to try to make a judgment as to the extent to which the appeal might fail.[14]

In Scarborough v Lews Junction Stores Pty Ltd[15], Adam J granted the defendant (who had been ordered to pay damages for personal injuries) a stay, in circumstances where the successful plaintiff was an unemployed American citizen without assets in the jurisdiction, who intended to return to America. His Honour concluded that if the defendant succeeded on appeal, there was a real risk that he would have no real chance of getting his money back.[16]

In Held v Deputy Commissioner of Taxation[17] the Full Court, in a joint judgment referred to Scarborough's case, and stated:

"In that case Adam J held, without intending to limit the circumstances in which a stay might be granted, that special circumstances might be found to exist where a successful appellant would be deprived of the fruits of his appeal if a stay of execution were not granted. Adam J went on to say that that test is whether there is a real risk that the appeal would prove abortive if the appellant were not granted a stay."

In J.C. Scott Constructions (a firm) v Mermaid Waters Tavern Pty Ltd (No. 2)[18] it was recognised that an applicant for a stay must adduce evidence sufficient to discharge the onus of establishing special circumstances, rather than vague apprehensions[19].

In Challenge Charter Pty Ltd v Curtain Bros (Qld) Pty Ltd[20] Callaway JA (with whom Chernov JA agreed) considered that on an application for a stay of a judgment or order pending the hearing and determination of the appeal, "the relevance of a threat of liquidation and the weight to be given to it vary from case to case. Sometimes it is significant that a winding up order will bring a company's business to an end or diminish the value of its assets or both, or that the company, regarded as a legal person, will cease to exist when the winding up is completed."[21]

In the present case, it cannot be said that the defendants' case on appeal is hopeless or without prospects of success. There was no direct authority to guide the Court in the construction of the relevant provisions of the Act. The defendants' construction of s.11 of the Act was open on its wording. The determination of the case involved complex issues and doctrines of international law. The defendants' argument was impressive.

Further, although there is, in my opinion, considerable force in the plaintiff's criticisms of the defendants' failure clearly to articulate in their pleadings the nature of the connection between the United States and Eximbank, which is said to preclude the exercise of Eximbank's rights and remedies as mortgagee, the plaintiff's application for summary judgment before Gillard J was unsuccessful. The application was made before a defence and counterclaim was filed, but the essential elements of the amended defence and counterclaim were set out in affidavits filed on behalf of the defendants. In his judgment delivered on 24 July 2003, Gillard J considered those matters[22]. His Honour acknowledged the plaintiff's criticisms of the vagueness of the defendants' claims and the problems of identifying or binding Eximbank with or by the conduct of the United States. The plaintiff echoed those criticisms on the hearing of the present applications. However, Gillard J concluded that:

"Mr Brett QC submitted that the evidence was lacking in substance and uncertain and in the light of the fact that Air Nauru was prepared to hand over the aircraft and then changed its mind after consulting lawyers, that the defences raised lack substance and were an afterthought. He said that all discussions appeared to be vague, there was vagueness as to promises made, there was uncertainty as to who made the representations and the authority of such a person, and that the court should view the evidence with scepticism. I hear what Mr Brett QC says. There may be some substance in some of his observations and criticisms of the evidence, but the fact is that there is some affidavit material before the court, albeit untested, and in my view it would be unjust to the defendants and the Republic of Nauru if the court was to deny the defendants the opportunity of placing all the evidence before the court as an answer to the plaintiff's claim. In my opinion, a grave injustice would be caused to the defendants if they were denied the opportunity of seeking to enforce the agreement and/or the representations made leading to an expectation that Eximbank would not seek to enforce its rights against Victoria Leasing. In my opinion, the defendants have satisfied the court that there is a question to be tried. In my view, there should be a trial of the issues and to deprive the defendants of that opportunity would, at this stage, be a grave injustice."[23]

Gillard J reached the above conclusion at a relatively early stage of the proceeding. At that date, his Honour envisaged that the trial of the proceeding would take place within six months, that is, by early 2004.

His Honour considered that there was a question to be tried, and that justice required that the defendants have an opportunity of placing all the evidence before the Court in answer to the plaintiff's claim. The plaintiff has not applied to strike out the amended defence and counterclaim. In the context of the application to stay the trial of the proceeding, consistently with Gillard J's approach, I proceed on the basis that the defendants should have an opportunity to answer the plaintiff's claim on the ground of the alleged dealings between Nauru and the United States. (That approach is, of course, incompatible with the view that the claims made in the amended defence and counterclaim are non-justiciable, as the defendants now contend in the context of their application to stay the proceeding).

I am satisfied that, as Dr Pannam contended, the defendants' would encounter insuperable difficulties in running their case effectively while the Third Party Notice is set aside, and the United States consequently remains immune from suit.

If the plaintiff's claim were to be heard and determined in those circumstances, Dr Pannam conceded that the defendants would have no effective defence. The aircraft would be repossessed, with serious and perhaps irrevocable consequences which are deposed to in the affidavits in support of the application. Although the plaintiff submitted that the defendants could then pursue their claims in another jurisdiction or through an international law tribunal, such avenues are unlikely to provide prompt redress, even if the claims are ultimately established.

In my opinion, if the plaintiff's claim is heard and determined while the United States is immune from suit, the defendants, if successful on the appeal, would effectively be deprived of its fruits. There is "a real risk - perhaps a near certainty - that [they] could not be restored substantially to [their] former position . . . "[24]

The plaintiff, for its part, claims that the delay occasioned by a stay of the trial is likely to occasion irreparable prejudice to it, in that the debt will increase while the value of the aircraft declines, and, as Nauru faces extreme financial problems, the amount of the shortfall may be irrevocably lost.

While there is force in that contention, in practical terms the delay occasioned by a stay of the trial is unlikely to exceed the delay resulting from the lack of an available trial date for the balance of this year. The appeal is to be expedited, although a date for hearing has not been set down. Further, the risk of prejudice to the plaintiff from a stay of the trial may be addressed, to some extent at least, by the formulation of fair terms, such as an appropriate order for further security for the defendants' undertaking as to damages. That issue is discussed in detail below.

In the present case, in my view there are special circumstances, in that the defendants are prevented from, or severely impeded in, conducting their only defence, by reason of the immunity from suit of the United States, which immunity is the subject of challenge in the appeal. Justice requires that the trial of the action be deferred, on fair terms, until the expedited appeal is heard and determined. The defendants are not without prospects of success, and should the trial proceed in the interim, any success could be rendered ineffective. It may well be impossible to restore the defendants, in substance, to their former position, and considerable waste, delay and duplication in the litigation would be occasioned. Balancing all the competing factors, in my opinion, the trial of the proceeding should be stayed pending the hearing and determination of the appeal, on condition that the defendants pay an appropriate amount in order to secure further their undertaking as to damages.

Application for stay of the proceeding on ground of "acts of state" and abuse of process

The defendants also seek a stay of the proceeding on the ground that if their defence is not justiciable, it would be an abuse of process to permit the plaintiff to prosecute its claim. The defendants argue that, consistently with the holding in Wells Fargo, if the United States is immune from suit, the subject matter of their amended defence and counterclaim is non-justiciable on the basis of the doctrine of "act of state". They contend that, as in Buttes Gas and Oil Co v Hammer[25], it follows that the prosecution of the plaintiff's claim should be stayed as unjust, or an abuse of process, in circumstances where the only defence to that claim cannot be entertained by the Court due to its non-justiciable nature.

The defendants rely in this context upon State Bank of New South Wales Ltd v Alexander Stenhouse Ltd[26]. In that case, Giles CJ considered the legitimate scope of the doctrine of abuse of process in relation to an application for a stay of a proceeding said to be an attempt to re-litigate matters determined in an earlier proceeding.

"This Court's jurisdiction to stay its proceedings for abuse of process extends to all those categories of cases in which the processes of the Court, which exist to administer justice with fairness and impartiality, may be converted into instruments of injustice or unfairness (Walton v Gardiner (1993) 177 CLR 378 at 395 per Mason CJ, Deane and Dawson JJ). It is important that freedom of access to the Courts should be preserved, and that defendants should not be encouraged to seek a stay on flimsy grounds for tactical reasons (Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509 at 519 per Mason CJ, Dawson, Toohey and McHugh JJ), but the fundamental policy considerations informing the jurisdiction are that the Court must ensure that its processes are used fairly as between the parties to the litigation and that the Court must avoid the erosion of public confidence through concern that its processes may lend themselves to oppression and injustice. So there have been identified as aspects of abuse of process first, oppression and unfairness to the other party to the litigation and, secondly, that the matter complained of will bring the administration of justice into disrepute (Rogers v The Queen (1994) 181 CLR 251 at 256 per Mason CJ; 286 per McHugh J; see also Hunter v Chief Constable of the West Midlands Police [1981] UKHL 13; (1982) AC 529 at 536 per Lord Diplock and Walton v Gardiner at 393)."

The plaintiff argues that the defendants have not pleaded, much less established, the necessary link between Eximbank and the United States. It is only the involvement of the latter which gives rise to potentially non-justiciable issues. The plaintiff, in any event, denies that the matters raised by the amended defence and counterclaim are non-justiciable. Rather, Mr Fajgenbaum, senior counsel for the plaintiff, adopted the narrow approach to the "act of state" doctrine previously advocated by the defendants at the trial of the immunity question in Wells Fargo. He submitted that Australia (which was aware of the application and did not propose to intervene), Nauru and the United States did not object to, and would not be embarrassed by, the determination of the relevant matters.

Mr Fajgenbaum also argued that the application of the principles recognised in Buttes was confined to specific circumstances in which the court was asked to adjudicate on the validity of transactions in international law, such as the grant of concessions by a sovereign state, and the determination of territorial boundaries.

He emphasised that, in the present case, the matters which allegedly gave rise to "act of state" considerations, or non-justiciability, were introduced solely by the defendants' amended defence and counterclaim, and were wholly extraneous to the plaintiff's claim. In Mr Fajgenbaum's submission, the claims contained in the amended statement of claim, on the one hand, and the amended defence and counterclaim on the other hand, were independent. The proper approach in such circumstances was (if, contrary to his submission, the defence and counterclaim raised matters which were not justiciable), to determine the plaintiff's claim separately. The defendants would then have the option to pursue relief against the United States through other means or in another forum.

The plaintiff argued that any other approach to claims of non-justiciability would permit a legitimate claim to be frustrated merely by filing a defence which introduced allegations of transactions or involvement by a foreign state, entailing non-justiciable issues.

The defendants relied upon Australian Federation of Islamic Councils Inc v Westpac Banking Corporation[28]. In that case, the plaintiff, the Australian Federation of Islamic Councils Inc ("the Federation") sought declarations that the sum of $US1 million deposited with the defendant ("Westpac"), was the Federation's property and that the funds were subject to the sole control and direction of its officers.

Westpac sought a declaration that the Ambassador of the Kingdom of Saudi Arabia was a necessary and proper party in the proceedings, but as the Ambassador was immune from the jurisdiction of the Court, and the plaintiff sought to implead the Kingdom of Saudi Arabia, the Court had no jurisdiction to hear the proceedings.

The background to the dispute was that the Ambassador of Saudi Arabia had previously provided funds, drawn upon Saudi Arabia, which were deposited with Westpac. The deposit document stated that, at maturity, instructions would be given in writing by both an officer of the Federation and by the Ambassador. The applicant for the deposit was stated to be the Federation and the funds were stated to be received from the Federation.

The Federation subsequently instructed Westpac that henceforth its officers were to be the sole authorised signatories of the deposit. It argued that the funds belonged to it beneficially and that the Ambassador had surrendered all interest in, and control of, the funds. Westpac insisted that the funds in the deposit account could not be dealt with save in accordance with the terms of the original agreement, contending that the initial deposit created a tripartite contract. Westpac further argued that the Ambassador was a necessary party to sue upon, or seek declarations in respect of, the deposit. It contended that because the Ambassador had diplomatic immunity, and Saudi Arabia had foreign state immunity, the action should be stayed.

Cole J was satisfied that the funds were the property of the Federation, and had been given for a specific purpose by the Kingdom of Saudi Arabia. Further, the gift was subject to a condition that the control of the disposition of the funds was to be exercised by both the Federation and the Ambassador. The Ambassador's right to the control of the fund had not been waived, and Westpac could deal with them only in accordance with the instructions of both parties.

In determining whether the proceeding should be stayed, Cole J held that the Ambassador was a necessary party, because he was affected by the relief sought in the proceedings. The declaration sought by the plaintiff would, if granted, remove the control over the funds to which the Ambassador was presently entitled[29].

Cole J stated: "Whether the Ambassador could be joined depends on whether he has immunity from being joined. This, in turn depends upon whether the proceedings concern his position as representative of a foreign State, and secondly whether the subject matter of the suit falls within the area of immunity afforded to foreign States and their representatives by statute or at common law[30]."

His Honour considered that the Ambassador had immunity pursuant to the Diplomatic Privileges and Immunities Act 1967 (Cth), as he was acting in his official capacity on behalf of the Kingdom of Saudi Arabia. Alternatively, there was at least a triable issue as to whether or not diplomatic immunity arose, which was itself sufficient to confer immunity on the Ambassador "as, at Common Law, the courts had no jurisdiction to require an Ambassador to come before the court to argue that he was entitled to immunity"[31].

Cole J stated that it was not necessary that a foreign government or ambassador prove its claimed title to property in order to establish immunity. It was necessary only to satisfy the court that the claim was "not merely illusory, nor founded on a title manifestly defective", and that conflicting rights must be decided in order to determine the foreign government's claim. At that point, but not before, the court must stay the action[32].

Cole J relied, in that context, upon Juan Ysmael & Co. Inc. v Government of the Republic of Indonesia[33]. In that case, the appellants, who were incorporated under the law of the Phillipine Islands, issued a writ in the Supreme Court of Hong Kong claiming possession of a steamship. The Indonesian government entered an appearance under protest. It claimed to be the owner of the vessel and sought that the writ and all subsequent proceedings be set aside, on the ground that the writ impleaded a sovereign foreign state.

"The rule according to a foreign sovereign government immunity against being sued has been considered and applied in many cases. The basis of the rule is that it is beneath the dignity of a foreign sovereign government to submit to the jurisdiction of an alien court, and that no government should be faced with the alternative of either submitting to such indignity or losing its property. The rule was stated by Lord Atkin in the case of The Cristina[35] as involving two propositions. The first, that the courts of a country cannot implead a foreign sovereign; and the second, that they would not by their process, whether the sovereign is a party to the proceedings or not, seize or detain property which is his or of which he is in possession or control."

"Where the foreign sovereign is directly impleaded the writ will be set aside, but where the foreign sovereign is not a party to the proceedings, but claims that it is interested in the property to which the action relates and is therefore indirectly impleaded, a difficult question arises as to how far the foreign sovereign must go in establishing its right to the interest claimed. Plainly, if the foreign government is required as a condition of obtaining immunity to prove its title to the property in question the immunity ceases to be of any practical effect."

Earl Jowitt considered that the bare assertion of a right of property was insufficient to justify the stay of the action. He concluded[37]:

"In their Lordships' opinion a foreign government claiming that its interest in property will be affected by the judgment in an action to which it is not party, is not bound as a condition of obtaining immunity to prove its title to the interest claimed, but it must produce evidence to satisfy the court that its claim is not merely illusory, nor founded on a title manifestly defective. The court must be satisfied that conflicting rights have to be decided in relation to the foreign government's claim. When the court reaches that point it must decline to decide the rights and must stay the action, but it ought not to stay the action before that point is reached."

In Buttes Gas and Oil Co v Hammer[38], on which the defendants principally relied, a Californian oil exploration company ("the plaintiff"), issued proceedings for alleged slander against another Californian oil exploration company ("the defendant"). Both parties had oil concessions in the Persian Gulf. The plaintiff alleged that the defendant had slandered it by assertions made by its chairman in London, to the effect that the plaintiff had used improper methods and had colluded with the then rule of Sharjah to backdate a decree which conferred rights in an oil bearing deposit in a certain location on the plaintiff, thus depriving the defendant of rights in that location.

The defendant, by defence and counterclaim, pleaded justification to the claim of slander. The defence and counterclaim pleaded a number of overt acts whereby the rules of Sharjah, the plaintiff, and others, conspired, inter alia, to cheat and defraud the defendant.

The plaintiff sought an order that the Court not exercise jurisdiction over "acts of state", or alternatively, that parts of the defence and counterclaim be struck out or all proceedings stayed, on the ground that they raised matters which were "acts of state"[39].

The Court of Appeal had declined to strike out the defence and counterclaim. Lord Denning MR emphasised that the scope of the doctrine of "act of state" in English law was "very ill defined".[40] Roskill LJ considered that the "acts of state" doctrine raised difficult and controversial matters of law, and the court's power to strike out should be applied only sparingly, in a very clear case.[41]

The defendants' subsequent application for the discovery of confidential documents of a foreign sovereign in the possession of the plaintiff was ultimately unsuccessful, on various bases.

The defendants appealed to the House of Lords. They contended that it was illogical and unfair that, although its counterclaim was not stayed, they were unable to prosecute it.

Lord Wilberforce (with whom Lords Russell, Keith and Bridge agreed) considered "the general issue of justiciability"[42]. In that context, he acknowledged that the case "gave rise to novel and important questions"[43].

The plaintiff contended, inter alia, that there was, in English law, no general doctrine of "act of state" applicable to the circumstances of the case, nor any rule of judicial restraint, such as that found in some United States cases.

The House of Lords determined the issue of justiciability of the claims on the basis of the facts alleged in the pleadings[44]. Lord Wilberforce acknowledged that the "act of state" doctrine was a generally confused topic, in part due to the indiscriminate use of the term to cover diverse situations[45]. He recognised that a number of distinct versions of "act of state" had been recognised in different authorities.

Having considered the different circumstances in which, historically, English courts had refrained from the adjudication of matters involving foreign states, his Lordship stated that he did not regard the case against justiciability of the disputes in the case before him as validated by the rule itself. If it were to be made good, it must be upon "some wider principle".[46] His Lordship stated[47]:

"So I think that the essential question is whether, apart from such particular rules as I have discussed, viz. those established by (a) the Moçambique [1893] A.C. 602 and Hesperides [1979] A.C. 508 cases and by (b) Luther's case [1921] 3 KB 532 and Princess Paley Olga v. Weisz [1929] 1 K.B. 718, there exists in English law a more general principle that the courts will not adjudicate upon the transactions of foreign sovereign states. Though I would prefer to avoid argument on terminology, it seems desirable to consider this principle, if existing, not as a variety of `act of state' but one for judicial restraint or abstention. The respondents' argument was that although there may have been traces of such a general principle, it has now been crystallised into particular rules (such as those I have mentioned) within one of which the appellants must bring the case - or fail. The Nile, once separated into a multi-channel delta, cannot be reconstituted. In my opinion there is, and for long has been, such a general principle, starting in English law, adopted and generalised in the law of the United States of America which is effective and compelling in English courts. This principle is not one of discretion, but is inherent in the very nature of the judicial process."

His Lordship stated that, in the case before him, if the proceedings were to go on, they would inevitably involve the determination of the issues of whether the defendant had a right to explore in the relevant location. That in turn involved a consideration of which state had sovereignty over that location, the width of the territorial waters and the boundary of the continental shelf.

He concluded that a municipal court lacked "judicial or manageable standards" by which to judge such matters and the court would be in "a judicial no-man's land" if required to review the transactions[48].

Lord Wilberforce considered that the counterclaim in conspiracy was really the kernel of the litigation and could not succeed without bringing to trial non-justiciable issues. The court therefore could not entertain the conspiracy counterclaim. The plea of justification by the defendant raised the same issues as the conspiracy counterclaim. The defendant's libel counterclaim raised the same issues. The court therefore could not entertain the counterclaims or the defence[49].

Lord Wilberforce acknowledged that, in circumstances where the defence and counterclaims which went to the kernel of the litigation, could not be entertained, it would seem unjust if the plaintiff insisted on proceeding with its claim. His Lordship considered that the plaintiff should be held to its offer to submit to a stay on the claim if the counterclaim were stayed. He stated[50]:

"The plea of justification made by [the defendant] in the slander action raises the same issues as the conspiracy counterclaim and is for the same reason not capable of being entertained by the court. In these circumstances a problem might arise if [the plaintiff] were to insist upon the action proceeding: to allow it to proceed but deny [the defendant] the opportunity to justify would seem unjust, although [the plaintiff] suggests that there are precedents for such a situation being accepted by the court. However, in the event, [the plaintiff] . . . offered to submit to a stay on the claim, if the counterclaims are stayed: [the plaintiff] should be held to this offer."

In my opinion, in Buttes, as the defendants contended, Lord Wilberforce recognised that under the doctrine of non-justiciability, English courts will not entertain actions requiring them to interpret or ascertain the precise obligations arising under transactions between foreign states. He recognised the existence of a "wider principle" of judicial restraint or abstention, which will prevent the court from entering into a consideration of the dealings between foreign states. Lord Wilberforce appeared to reject the submission that the wider principle had crystallised into a number of prescriptive rules or specific concepts.

The Court of Appeal in K_uwait Airways Corporation v Iraqi Airways_ Co. ("Kuwait")[51] identified "three separate insights" which English law sought to balance. The second insight was the principle of non-justiciability that[52]:

"...whether the sovereign acts within his own territory or outside it, there is a certain class of sovereign act which calls for judicial restraint on the part of our municipal courts...It may not be easy to generalise about such acts, and the application of the principle may be fact sensitive. Guidance, however, is to be found in such considerations as whether there are 'judicial or manageable standards' by which to resolve the dispute, whether the court would be in 'a judicial no-man's land', or perhaps whether there would be embarrassment in our foreign relations, at any rate if that possibility was drawn to the court's attention by the executive. Sensitive issues involving diplomacy between states, or uncertain or controversial issues of international law, may be other examples of situations calling for judicial restrain."

The third insight was that the above was only a prima facie rule, subject to exceptions.[53] In Kuwait itself, the doctrine of judicial restraint was held not to apply to the acts done in violation of international law.

The defendants contended that the House of Lords in Kuwait [54] did not disturb the "insights" of the Court of Appeal. Lady Fox, in her authoritative study of state immunity, concluded that in the House of Lords decision in Kuwait, consideration of those issues was minimal and "did little to dispel the general incoherence of thought in this branch of the law"[55].

In Petrotimor Companhia de Petroleos SARL v Commonwealth of Australia[56] certain companies (purportedly holding concessions granted by Portugal entitling them to exclusive rights in relation to resources in the Timor Sea) brought a proceeding against the Commonwealth of Australia and others. The applicants alleged, inter alia, expropriation of their property rights and interference with contractual relations and beneficial interests. The respondents contended that the applicants' claims were not justiciable or enforceable, because they involved an adjudication on an act of, or the validity, meaning or effect of transactions of, a foreign state.

The Full Court of the Federal Court held that an essential ingredient of most of the claims was that the applicants held a valid concession from the Portuguese government.

The applicants argued that the Buttes doctrine of judicial restraint had no application in Australia. Alternatively, they argued that the House of Lords' decision in Kuwait required the Buttes principle to be read down.

Black CJ and Hill J, in their joint judgment, stated:

"No doubt that is true to the extent that the facts of that case required that to happen".[57]

"In Buttes the defendant, which had a concession granted by the rule of Umm al Qaiwain, was sued for slander by the plaintiffs which had a concession granted by the ruler of Sharjah both concessions over an oil rich area. The defendant pleaded justification and cross claimed for damages for conspiracy. The plea and the cross claim both called in issue the validity of the acts of the ruler of Sharjah and other States. it was held to be the very nature of the judicial process that municipal courts would not adjudicate on the transactions of foreign states. the issues before the Court were not issues upon which a municipal court could pass. Lord Wilberforce said (at 938): `... there are ... no judicial or manageable standards by which to judge these issues, or to adopt another phrase ... the court would be in a judicial no-man's land: the court would be asked to review transactions in which four sovereign states were involved, which they had brought to a precarious settlement, after diplomacy and the use of force and to say that at least part of these were `unlawful' under international law. ... this counterclaim cannot succeed without bringing to trial non-justiciable issues.' It would seem that his Lordship saw the principle that the courts should adjudicate upon transactions of foreign sovereign states as involving judicial restraint or abstention (see at 931). This is not surprising, given that international relations can be controversial and the outcomes of a court adjudication might well create embarrassment for the government."

Their Honours referred to Lord Nicholls' recognition in Kuwait[58] that the adjudication problems confronting the court in Buttes had not arisen in Kuwait, because there was a clear breach of established international law. The standard being applied by the court was therefore clear and manageable, and the outcome not in doubt.

Beaumont J discussed Buttes in detail and stated that "its ratio decidendi does appear to be the absence of any 'judicial standards', arising in large because the British Government regarded the matter as one to be solved by diplomacy, or 'third party' settlement[59]". His Honour acknowledged the great difficulty of the concept of "non-justiciability". He considered that in Buttes, the House of Lords was concerned with non-justiciabilty in one distinct sense, that is, where the court possessed jurisdiction but did not feel obliged to exercise it, or determine for itself all or part of the issues or questions which arose from its exercise[60].

The Federal court in Petrotimor recognised both the authority of Buttes and the complexity of the matters discussed in that case.

Lady Fox recognised four main curial responses to the instituting of proceedings relating to the act of a foreign state or its agents: (a) immunity on the basis of independent sovereign personality; (b) immunity on the basis of the subject-matter of the proceedings relating to the exercise of sovereign governmental power; (c) the doctrine of "act of state" whereby a governmental act affecting any private property valid by the law of the state in which the property is situate is recognised as valid; (d) non-justiciability, whereby a court abstains from adjudication on the transactions of foreign states because there are no judicial standards applicable to its determination.[61]

The learned author recognised a "perceived incoherence" in the doctrine of non-justiciability[62]. She acknowledged that neither the ambit of each category of immunity or non-justiciability, nor the relationship of the categories inter se, is clearly defined. There is significant overlap, and also potential conflict in the application of the categories to the same set of facts.

Another approach would be to treat non-justiciability as a mere exception to "act of state", whereby recognition of the validity of another state's acts would be refused in cases of grave infringement of recognised principles of public international law[63]. Lady Fox conceded that neither approach was consistently supported by the few relevant authorities. In particular, she regarded the latter approach as inconsistent with that of Lord Wilberforce in Buttes.

As Lady Fox recognised, Lord Wilberforce in Buttes drew together diverse strands of authority in support of a general principle of judicial restraint and abstention. The reasons for the restraint had differed in the diverse cases he discussed. Lady Fox considered that Lord Wilberforce recognised one category of case justifying restraint on a vaguer principle, perhaps distinguishable from both act of state and justiciability, which imposes a prohibition on a court from meddling in the affairs of a foreign state, or investigating its motives or bona fides in enacting legislation or like matters.[64]

Lady Fox recognised that the scope of non-justiciable issues recognised in Buttes was much wider than those which may be covered by the common law plea of "act of state" or the doctrine of state immunity[65]. She concluded that the law has shown conflicting views and considerable ambiguity in national courts' treatment of the doctrines of act of state and non-justiciability, and that those difficulties were likely to persist in the absence of clear rules.

It appears from the above that, although the existence of the doctrines of act of state and non-justiciability is established, their scope, characteristic principles and relationship inter se are not precisely or definitively articulated. Potential conflict in their application is not yet resolved. The relevant area of law is in a fluid state of development, and is characterised by a significant degree of ambiguity, inconsistency and incoherence.

The necessity to determine the scope and application of such doctrines in the context of a relatively urgent interlocutory application is regrettable. In my view, however, a general principle of judicial abstention or restraint in relation to the transactions of foreign states was recognised by Lord Wilberforce in Buttes, the Court of Appeal in Kuwait, and the Full Court of the Federal Court in Petrotimor.

In the present application the defendants contend that the determination of the matters raised by the amended defence and counterclaim would involve questions of the relationship of a seemingly independent agency of the United States with other agencies, such as the CIA, and departments of the Executive Government, such as the State Department. It would also involve the question of the relationship of the "deniable operatives" to the United States Government. The Court would be obliged to examine the dealings of two foreign states in relation to matters of security, confidential foreign policy objectives and conformity with standards for international banking and passport control.

The defendants argued that those were the very issues which led to the finding in Wells Fargo that the alleged dealings between United States and Nauru were not "a commercial transaction" within terms of s.11(3) of the Act, so that the United States was immune from suit.

In my opinion, in the present case, the questions raised by the amended defence and counterclaim are non-justiciable, because they would require the court to consider and determine questions of the relationship of the United States government to "deniable operatives" (agents whose authority it ostensibly denied), uncertain and sensitive matters of espionage, intelligence, national security and diplomacy, and the elements and effect of an agreement and representations made in the course high level confidential dealings between the representatives of two foreign sovereign nations. Such matters do not appear to be susceptible of resolution by reference to judicial standards available to an Australian court.

Although the plaintiff contends that no objection has been taken by the sovereign nations involved, or by Australia, non-justiciability may not be overcome by the consent of the parties. In some of its guises, at least, non-justiciability appears to go to jurisdiction. Further, it may be doubted that the United States does not object to the determination by this Court of the claims contained in the amended defence and counterclaim. Although the United States has neither appeared nor made submissions on the hearing of these applications, it claimed immunity under the Act and argued strongly that the relevant matters were non-justiciable and embarrassing. Through its senior counsel, Dr Griffiths, the United States expressed an objection, which has not been retracted, to the entertainment by this Court of the matters alleged in the amended defence and counterclaim,.

If the matters contained in the amended defence and counterclaim are non-justiciable, the question arises whether the plaintiff's claim should be stayed because it would be unjust to determine it when the defendants are unable effectively to conduct their sole defence.

Although the plaintiff submitted that a claim should be stayed on the basis of a non-justiciable defence only where the non-justiciable matters clearly arose from, or were a mirror image of, the claim itself, Lord Wilberforce did not appear to impose that limitation. In my opinion, the kernel or heart of the litigation would ordinarily comprehend a defence and counterclaim, although they raise non-justiciable issues which do not arise from the amended statement of claim.

In the present case, the proceeding is, in essence, a claim to enforce Eximbank's rights and remedies as mortgagee. No suggestion of the involvement of a foreign state, of matters constituting "acts of state" or potentially non-justiciable dealings between sovereign states, arises in the plaintiff's amended statement of claim. The non-justiciable issues are raised only by the amended defence and counterclaim, and depend on the sovereign status of the United States. Non-justiciability depends, at a minimum, on the defendants making out, inter alia, the identification or control of Eximbank with or by the United States, which is disputed.

Dr Pannam argued that, by analogy with cases on non-justiciability where a sovereign asserts a claim to property, in determining whether the plaintiff's claim should be stayed, the test is whether the non-justiciable defence is more than "merely illusory" or not founded on a "manifestly defective title".

The researches of counsel did not reveal any decided case in which the involvement of the foreign sovereign, and hence the plea of non-justiciability, arose only in the defence and counterclaim.

In the Islamic Council and Buttes, the involvement of a foreign sovereign state and the matters giving rise to "act of state" or non-justiciability, were introduced by the plaintiff's claim. In each case, the identity of the foreign sovereign was undisputed.

If the mere raising of non-justiciable questions in a defence sufficed to stay a plaintiff's claim, there would be great potential for unfounded claims of non-justiciability, introduced only by way of defence, to frustrate the trial of bona fide claims.

Lord Wilberforce's conclusion that it would appear unjust if the plaintiff in Buttes proceeded to prosecute its claim while the defendants' defence could not be entertained, appeared to depend on his recognition that the non-justiciable claims were at the kernel of the litigation. In the absence of any authority directly on point, I do not consider that a defence introducing non-justiciable questions is a sufficient basis for staying an apparently strong claim unless the connection with the plaintiff's claim is clearly established, and the defence has reasonably strong prospects of success. As Giles CJ stated in State Bank of New South Wales Ltd v Alexander Stenhouse[66] the processes of the court must not be "converted into instruments of injustice and unfairness", and "it is important that freedom of access to the Courts should be preserved, and that defendants should not be encouraged to seek a stay on flimsy grounds for tactical reasons". In this context, the court should balance the relative strength of the claims of the plaintiff and the defendant. In my opinion, where a defendant seeks to stay the plaintiff's claim on the basis of non-justiciable matters alleged only by itself, it bears the onus of establishing a clear connection between the plaintiff's claim and those non-justiciable matters, and reasonably strong prospects of success.

The stage of the proceeding and the certainty of the issues may be significant in this context. In Buttes, Lord Wilberforce narrated the history of the events and litigation and stated[67]:

"This narrative has been necessary to show two things, first that the House is now in a position to adjudicate upon the entirety of the issues raised at the various stages between 1971 and 1980 and secondly, that since the last substantive decision of the Court of Appeal (the second decision of 1974) the issues have been more clearly defined, and crystallised. This House is now in as good a position as any court is likely to be to form an opinion as to the justiciability of the claims of either side, and the decision has to be made whether the proceedings should be allowed to continue to trial with appropriate discovery or should be terminated by stay or striking out."

In the present case, in contrast, the proceeding is not in a settled state. There may be deficiencies in the pleadings. The issues are not clear and an appeal is pending. Although, as Gillard J held, the defendants' defence and counterclaim raise serious questions to be tried, in the context of an application for a permanent stay of the plaintiff's claim, a higher standard should be imposed. While the defendants have produced some evidence of a connection between Eximbank and the United States, their case, as presently pleaded, appears to have significant lacunae.

I do not consider that the defendants' case as pleaded, and as supported by evidence to date, has such prospects of success, or a sufficiently clear relationship to the matters pleaded in the plaintiff's claim (many of which are not disputed), to justify a stay of the plaintiff's claim.

Therefore, in my opinion, the matters alleged in the amended defence and counterclaim are non-justiciable, but the defendants' application to stay the proceeding on the ground of "act of state" and abuse of process should be dismissed.

Application for further security for defendants' undertaking

The plaintiff seeks an order that the defendants pay $US110,000 per calender month as further security for their undertaking to pay any damages occasioned by an injunction restraining the plaintiff from taking any action which would have the effect of preventing the second defendant, NAC (trading as Air Nauru), from using the aircraft in the ordinary course of business. The plaintiff submits that the value of the aircraft is likely to diminish by approximately US$93,000 per month during the period ending on 31 December 2004. It also claims approximately US$17,000 for loss of use of the proceeds of sale of the aircraft. The defendants dispute the plaintiff's estimate of likely deterioration in value of the aircraft and loss of use of funds. They contend that Air Nauru is, in any event, unable to pay anything further.

The order restraining the plaintiff was made by Habersberger J on 12 March 2004, upon the defendants undertaking to pay the plaintiff's solicitors the sum of US$27,000 per calendar month, to be held in trust as security for their "usual undertaking" as to damages.

His Honour, on making the order, released the plaintiff from a restraining order made by Gillard J on 24 July 2003.

The background to the plaintiff's application for further security for the undertaking is set out in detail in the judgment of Habersberger J dated 12 March 2004 at paragraphs 7 and 8, where his Honour stated[68]:

"7. On 2 July 2003 the parties appeared before me in order for NAC, through its counsel, to give undertakings to the Court that it would not take any steps to move the aircraft from the Qantas Airways Ltd Boeing 737 maintenance base in Melbourne prior to the completion of the heavy maintenance overhaul and that it would not take any steps to move the aircraft from the maintenance base after the completion of the heavy maintenance overhaul without giving the plaintiff and Eximbank at least two clear business days' notice of any intention to do so. 8. NAC did give notice to the plaintiff that it wanted to remove the aircraft, so the plaintiff issued a summons on 4 July 2003 seeking an injunction restraining NAC from doing so. That application came before Gillard J in the Practice Court on 7 July 2003. On that day, his Honour accepted an undertaking from the defendants and the Government of the Republic of Nauru that pending the hearing and determination of this proceeding or further order they would not take any steps to sell, dispose or in any way encumber the aircraft the subject of this proceeding pending the hearing and determination of this proceeding and any appeal; that the aircraft would only be used to carry on the business of providing NAC's normal commercial passenger and cargo airline business in accordance with its Air Operator's Certificate and to perform charter work with the written consent of the plaintiff; and that, if so ordered, they would deliver the aircraft the subject of this proceeding to the plaintiff at Melbourne International Airport or to such other location as might be reasonably requested by the plaintiff. His Honour then made certain orders including that the defendants pay to the plaintiff's solicitors US$455,879.78 by 8 July 2003 and US$1,678,930.21 by 11 July 2003. These amounts were to be held in trust by the plaintiff's solicitors pending the hearing and determination of this proceeding or further order. I was told by counsel that the two payments in question were offered by the defendants. Subsequently, on the application of the defendants the amount of the second payment was reduced by his Honour to US$800,000."

Before Habersberger J, the plaintiff sought security based on a shortfall in the value of the security.

Habersberger J considered that the valuations relied on by the parties indicated that the shortfall in March 2004, ranged between US$2.41 million and US$5.6 million. The midpoint was a shortfall of $4 million, based on a distressed sale.

In First Netcom Pty Ltd v Telstra Corp Ltd[69], the Full Court of the Federal Court recognised that although the giving of an undertaking as to damages was, in general, an essential condition of the grant of an interim injunction, there was no compulsion upon the plaintiff to give the undertaking. However, if the undertaking were not forthcoming, the injunction would never come into effect.

Beaumont, Burchett and Emmett JJ stated that although there is a "usual" form of undertaking as to damages[70]:

"since its terms are a matter for the discretionary judgment of the court, its provisions will be moulded so as to fit the circumstances of the case at hand. These circumstances may include the likelihood of the plaintiff's insolvency, which might produce an inability to discharge any liability to the party enjoined pending a final hearing that might accrue under the undertaking. In that event, the court is required to exercise its judgment as to what is an appropriate order to ensure the reality of adequate compensation, and not merely an empty form of compensation, to a party who is ultimately successful. In such a case the court may stipulate a further condition in connection with the undertaking, in the event that the plaintiff should elect to give the undertaking, and thus secure the injunction. The extra condition could be that any contingent liability under the undertaking be appropriately secured ... Again, the plaintiff can elect to comply with this condition or decline to do so, but must accept the consequence of its election."[71]

The Full Court observed that it followed that a condition cannot be imposed retrospectively.[72] All a court may do is refuse the injunction if the undertaking is declined. It cannot require the provision of security, but may refuse an injunction if security or other relevant condition is declined.

In reliance on First Netcom, Habersberger J accepted that in the application before him, the risk of the restraint imposed on the plaintiff was not that of a shortfall in security, which already existed, but the risk that in future the security property might depreciate, or that an opportunity for advantageous sale might be lost.

Habersberger J considered, as did Gillard J, that the defendants should not be deprived of the opportunity to seek to enforce the agreement they alleged. He acknowledged that the existence of the power to sell was itself the subject matter of the dispute. He rejected the contention that further security should be paid as a condition of leave to defend.

His Honour recognised that if the defendants succeeded in their defence, they would pay only what they could afford. Habersberger J considered that, although the continued use of the aircraft posed a risk that the value of the security would depreciate, he was unable to quantify the like depreciation. He held that the plaintiff had not established its case. NAC's financial position permitted it to pay US$27,000 per month. His Honour ordered that the defendants pay that amount as some security to cover the matters "in a general way".

In the present application, both parties have provided updated valuations and financial information.

The plaintiff relies on the affidavit of Robert Michael Lewandowski, which states that on 25 August 2004, the debt was US$14,446,216.40 and would increase to $14,733,957.14 by 31 December 2004. The affidavit states that the amount held in trust on 30 July 2004 was US$1,453,178.37.

The plaintiff also relies on the affidavit of Philip Leslie Seymour sworn 20 August 2004, which provided an opinion on the value of the aircraft as at 25 August 2004 and on a further affidavit of Mr Seymour sworn 25 August 2004.

It is also necessary to consider two previous affidavits of Mr Seymour sworn on 16 December 2003 and 3 March 2004 respectively.

The affidavit of Philip Seymour sworn 16 December 2003 ("first Seymour valuation") states that Mr Seymour is managing director of a company which provides aircraft and engine valuation and appraisal services. He is a Senior Certified Appraiser certified by the International Society of Transport Aircraft Trading ("ISTAT"), an organisation that promotes professional and ethical conduct in the aircraft, airline and aviation industries. He has been certified as an appraiser since July 1996 and as a senior certified appraiser since July 2002, in which role he regularly provides valuations of aircraft, aircraft engines and aircraft spare parts to manufacturers, airlines, aircraft purchasers, lenders, insurers and tax authorities.

In the first Seymour valuation, Mr Seymour estimated the value of the aircraft and the two engines subject to Eximbank's mortgage at approximately $12.36 million. He stated that he had not taken into account an overhaul conducted in June/July 2003, but noted that the total value of the aircraft would diminish as time passed.

The affidavit of Philip Seymour sworn 3 March 2004 ("second Seymour valuation") explained that the value stated in the affidavit of 16 December 2004 did not provide a distressed sale value and that it had been prepared on the basis of less detailed information than was currently available.

Mr Seymour described a number of different bases of valuation, namely:

(a) Base value

(b) Market value

(c) Adjusted market value

(d) Distressed sale value

He stated that a distressed sale period is typically less than the 12 to 18 months required to sell an aircraft so as to obtain market value.

He stated that in his professional opinion, a reduction of around 35% from adjusted market value was required in order to conclude a sale of the aircraft within a reasonable amount of time. He observed that there were many examples of aircraft which had failed to sell, even when discounted by much more than 35%. He concluded that, having regard to current conditions, in his opinion, the aircraft had a distressed sale value of $US8,125,000, representing a reduction from the adjusted market value of approximately 35%.

Mr Seymour stated that the major factor explaining the difference between Avmark's first valuation (discussed below) and his valuation was that Avmark had assumed 30 to 35 years of active service for the aircraft, whereas he assumed only 25 to 28 years of active service.

The affidavit of Mr Seymour sworn 20 August 2004 (`third Seymour valuation") observed that while overall airline profitability remained elusive, and the industry suffered from over-capacity, there were recent reports of profit by major airlines operating outside North America and "barring unforeseen events, such as further terrorist attacks, it is likely that conditions in the commercial aviation industry will continue to improve, at least to some degree, over the next two years." In relation to the Boeing 737-400 market specifically, Mr Seymour observed that the leasing market was beginning to improve but next generation aircraft would continue to keep an overall downward pressure on Boeing 737-400 values.

Mr Seymour ascribed a market value of US$10,994,000 to the aircraft, but considered that the gap between base value and market value should decrease, entailing only a 10% discount by about August 2004.

Mr Seymour gave an adjusted market value of $12,902,000, which took account of positive adjustments, including engine overhaul. He stated that a distressed sale value would still require a reduction of 35% from the adjusted market value, despite the change in market conditions.

He concluded that the distressed sale value of the aircraft was US$8,386,000. He acknowledged that the distressed sale value had increased by $US1,261,000, taking into account principally the overhaul and reinstatement of the engine, for which $1 million was previously deducted.

Mr Seymour estimated that the adjusted market value and distressed sale value of the aircraft would decline over the next 12 months at monthly amounts ranging between $93,000 and $91,000.

The defendants rely on the valuation of Avmark dated 23 August 2004 ("second Avmark valuation"). It is also necessary to consider the previous valuation of Avmark dated 23 September 2003 ("first Avmark valuation").

The first valuation of Avmark, prepared by Jeffrey Hughes, gave a fair market value of $US16,335,308 for the aircraft and fair market value of $US2,975,000 for the engines. It stated that a forced sale could cause those values to decrease by as much as 35%. It noted under "market comment" that since the events of September 11, the market for both new and used aircraft had been in serious disarray, but in recent months, the market for newer, narrow bodied aircraft (such as Boeing 737-400) had shown signs of stabilising.

The second Avmark valuation dated 23 August 2004 was prepared by Barbara Beyer, the chief executive officer of Avmark and a senior appraiser of commercial aircraft experienced in the field of aviation since 1966. Ms Beyer is a senior certified appraiser of commercial aircraft, who regularly provides valuations. The source of her certification is not stated. The Avmark valuation gives a fair market value of US$13,485,020 for the aircraft.

The second Avmark valuation states that a distress sale could cause that value to decrease by as much as 25%, giving a distress sale value as at 31 December 2004 of US$10,113,765.

The second Avmark valuation does not break down the diminution on a monthly basis, but it equates to about US$73,000 per month. Ms Beyer estimated the current distress sale value of the aircraft at US$10,407,400 and a distress sale value as at 31 December 2004 at US$10,113,765.

The second Avmark valuation repeats the comment made in the first Avmark valuation, that since the events of September 11, the market for aircraft has been in serious disarray, but in recent months, the values of and market for newer narrow body jets has shown signs of stabilising. It states that it was expected that the market for the 300/400/500 Boeing 737 will improve, since the number of new deliveries of the third generation family of the B-737 will be limited over the next few years.

A further affidavit of Mr Seymour sworn 25 August 2004 pointed out that Ms Beyer was not accredited by any of the three internationally recognised aviation appraisal associations. It also referred to other apparent inconsistencies or contradictions in relation to Ms Beyer's methodology and treatment of market value. The defendants were unable to take instructions on the technical matters raised in the Seymour affidavit of 25 August 2004, so I do not take it into account.

It was not disputed that the relevant value on which to assess diminution was the distress sale value. However, the parties were critical of the methodology, reliability and consistency of the valuations on which the other relied.

Mr Brett, senior counsel, for the plaintiff submitted that the updated Seymour valuation should be preferred to that of Avmark, as Mr Seymour had applied consistent principles, whereas the Avmark valuation had unexplained inconsistencies when compared with its previous valuation. In particular, it ascribed a maximum discount of 25% from fair market value for a distressed sale value, compared with the 35% previously applied. Further, the longer operational life assumed by Avmark did not take into account the possible cost of conversions which might be required.

Mr Brett also pointed out that the Avmark valuation indicated a fall in base values of US$1.5million over an 11 month period, but did not predict any fall at all in base value over the next four months, which was unexplained.

Mr Manetta, on behalf of the defendants, emphasised that all the valuation evidence was subjective and made inherently uncertain predictions.

He submitted that there were inconsistencies in the Seymour valuations. In particular, he argued that the third Seymour valuation had increased the adjusted market value and distressed sale value of the aircraft because the plaintiff's case was now best served by a higher opening value from which depreciation could be calculated. In contrast, the second Seymour evaluation had suggested a distressed sale value as low as $3.49million, as it was, at that stage, considered that a high shortfall would best serve the plaintiff's interests.

I am satisfied that, as Mr Brett contended, some of the inconsistencies or unexplained issues in Mr Seymour's report were minor and that in other instances, the apparent variations were satisfactorily explained. There is no basis on which to conclude that Mr Seymour was attempting to tailor his valuation to the requirements of the plaintiff's case. There is no basis on which to question the bona fides or independence of either Mr Seymour or Ms Beyer.

To the extent to which the valuations differ, I incline to the view that Mr Seymour's third valuation is more thorough and consistent with his previous valuations. Further, his certification and qualifications are more satisfactorily stated than those of Ms Beyer. However, in acknowledgment of the difficulties posed by competing valuations without the benefit of hearing oral evidence and cross-examination of the relevant experts, I consider it preferable to adopt a middle course.

The plaintiff's estimate of the monthly diminution in distressed sale value is in round terms US$90,000 until December 2004, whereas the defendants' estimate of diminution in distressed sale value during that period equates to, in round terms, US$70,000 per month. I will assume that on the available evidence, the value of the aircraft is likely to diminish by about US$80,000 per month during the period from September to December 2004.

The plaintiffs also claim the sum of approximately US$17,000 in relation to loss of use of the funds which would be produced by the sale of the aircraft for US$8.014million as at December 2004, invested at 2.46%, which is the contractual rate under the securuty documents. The defendants contended that there was no evidence of the likely application of, or return from, such funds. Mr Manetta also argued that there could be no loss, because Eximbank could draw on the virtually unlimited funds of the United States for any lending opportunities. He argued that any loss would, in any event, be suffered by the United States, which was responsible for delays in the litigation.

I reject the contention that Eximbank may properly be identified with the United States for the purpose of assessing loss to Eximbank. Eximbank is a separate legal entity and the defendants have not established a sufficient basis for lifting the corporate veil. Although there is no evidence of the plaintiff's likely application of, and return from, the funds, in my view Eximbank is prima face entitled to a reasonable amount for the loss of use of the funds. The percentage of 2.46 is the rate of interest under the security documents and does not appear excessive.

The defendants contend that the US$1,453,178.37 held in trust was described by Gillard J as "a show of good faith", and was not intended as security for the undertaking. They argue that any further security should be paid from those funds in trust. Although the basis of the original deposit of the funds was described as "a show of good faith", I am satisfied that, as Mr Brett contended, Gillard J took into account the payment proffered by the defendants in deciding not to grant the plaintiff a mandatory injunction giving it control of the aircraft, at a time when there was no shortfall alleged in the value of the security property and the plaintiff was regarded as "well protected". Circumstances have since altered. If further security is appropriate it should provide additional comfort to the plaintiff, rather than being derived from the funds already held in trust. Prima facie, (if the mid point between the recent valuations is adopted) approximately US$100,000 per month would represent the maximum amount for the likely diminution in value of the security and for loss of funds to December 2004.

The defendants, however, plead an inability to pay any further amount. They argue that a requirement to pay any further amount, as an effective condition of restraining the plaintiff from preventing the use of the aircraft, is likely to lead to the collapse of the airline. The defendants would consequently be placed in a position which could not be reversed should they subsequently succeed in the appeal, and ultimately, in the proceeding.

In support of the defendants' submissions, the affidavit of William Herdman sworn 5 August 2004 deposes, that under the revised cashflow forecast for Air Nauru, its operational cash resources will stand at $970,000 as at 31 December 2004 assuming that it retains possession of the aircraft.

By an affidavit sworn 24 August 2004, Mr Herdman, however, referred to a number of circumstances or events which he had not taken into account in his forecast of 5 August 2004, which would have the effect of decreasing cash resources. Those matters are:

(1) The increase in world oil prices and consequent increase in the cost of purchasing aviation jet fuel will increase the cost of operating Air Nauru's business until 30 June 2005 by an additional A$120,000.

(2) Increased expenditure on legal costs, including the costs of the appeal from the decision made 28 July 2004 pursuant to the notice of appeal dated 2 August 2004 will incur additional costs and disbursements in the order of $100,000.

(3) An overhaul of the auxiliary power unit currently fitted to the aircraft is now required and is estimated to cost approximately $160,000.

(4) Allowance must be made for the payment of $415,276 to Qantas, being the net amount due to Qantas for the provision of engineering, ground handling, training and other services.

(5) Engine 593 is currently undergoing an overhaul which is expected to cost in the order of $1 million. The engine is currently situated in Vancouver and will be ready for shipment for re-attachment on 30 September 2004.

In relation to each of the above matters, Mr Herdman deposes that they have arisen since he prepared the earlier cashflow forecast on 5 August 2004 and were therefore not taken into account in his earlier affidavit. Mr Herdman deposes that the defendants are unable, on the basis of his forecast of the cashflows for Air Nauru between 5 August 2004 and 30 June 2005, to make monthly payments of US$110,000 whilst simultaneously:

(a) continuing to operate the airline in its existing form;

(b) continuing to defend this proceeding;

(c) continuing to prosecute the notice of appeal dated 2 August 2004

unless the moneys paid by the defendants and held in trust by the plaintiff's solicitors pursuant to the order of Gillard J made 7 July 2003, 11 July 2003 and 15 July 2003 are repaid to the defendants.

Mr Manetta, in a subsequent written submission corrected, the assertion of a projected operational cash balance for Air Nauru of about $400,000 to one of only $235,000, as at December 2004 as a result of the combined effect of the two Herdman affidavits (with the total additional costs of about $735,000 referred to in Mr Herdman's affidavit sworn 25 August 2004).

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Judgment (295 paragraphs)

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Legislation Cited (8)

Cases Cited (6)