By Claire Boyd, Justin Little, Michael BlakistonPhil Edmands, Marshall McKenna, Sarah Turner, Tim O'LearyJulia AthanasoffMarcello Cardaci and Mark Gerus 

1. ASIC Information Sheet 214

Industry is concerned about the ramifications of ASIC Statement 214, including in relation to the level of uncertainty surrounding “secure funding”, the potential impact on future capital raisings by the Australian resources sector and the broader economic impact this may have. We understand that the regulators are working on some (much needed) additional guidance but in the meantime we expect ASX and ASIC will be paying close attention to the Diggers & Dealers presentations.

For more background follow these links:

2. Changes to ASX admission requirements and other developments

ASX released its consultation paper proposing to change the admission requirements for entities seeking admission to the official list.  The changes, if progressed, are likely to impact small cap IPO candidates and back-door listings and consequently were the subject of considerable comment from mining industry groups.

ASX is currently assessing the feedback received and discussing it with regulators and other stakeholders. ASX expects to release a final version of the rule changes and associated guidance in September or October after it has completed those discussions and has deferred the start date for the changes until 19 December 2016.

In the meantime, ASX is also cracking down on announcements of contractual negotiations that fail to name the counterparty.  It is important to note that if companies chose to announce their non-binding contractual arrangements, ASX will expect to see the counterparty names.

For more background follow these links:

3. Roe 8 and what it means

After much press coverage and debate over the EPA’s handling of the Roe 8 decision, the Court of Appeal has clarified that the EPA was not required to take into account certain of its policies when making recommendations.  Although the Court of Appeal’s approach somewhat relaxed the EPA’s obligations, this decision only related to certain EPA policies, so it remains prudent to consider (and potentially to expressly address) any government policy that may be applicable when preparing documents such as a proposal the subject of an administrative decision or recommendation.

For more background follow this link:

4. Introduction of rangelands leases

The draft Land Administration Amendment Bill 2016 (WA) proposes the introduction of rangelands leases that may be granted over rangelands by the Minister for Lands for “any purpose that is, or purposes that are, principally consistent with the preservation of the rangelands as a natural resource.”

Rangelands Leases are designed to provide an alternative to the significant limitations on land use imposed on pastoral leases and therefore maximise the potential of WA’s vast rangelands by enabling multiple and varied land uses.  This is intended to create new economic and social opportunities and enable the development of more sustainable business models for those rangelands, including those that might benefit the mining industry.

For more background follow this link:

5. Shire rates - it's that time of year

At this time of year, miners are likely to be concerned about any potential surprises in their rates notices. The ability, and willingness, of local governments to impose differential rating on land the subject of mining tenements and/or land containing capital improvements has long been a concern of the mining industry.  It is now exacerbated by the valuation of workers camps on a Gross Rental Value basis.  Miners are encouraged to consider their rates notices carefully, including the valuations placed on them and raise any queries with the relevant Shires.

For a related discussion follow this link:

6. New sources of energy generation

The mining sector is starting to see real benefits from turning to natural gas and renewable energy.

There is new technology which would allow modified mining fleet vehicles to run on compressed natural gas rather than diesel, which would reduce fuel costs and CO2 emissions.

The falling cost of solar generation and storage technologies is encouraging their use to power off-grid mine sites. By reducing the use of diesel generators, companies are able to lower their electricity costs and improve environmental outcomes.

Sandfire Resources NL (Sandfire) is a notable example, integrating a 10.6 MW solar PV installation into its existing diesel generation facility at the DeGrussa Copper Mine (DeGrussa Mine), together with 6 MW (1.8 MWh) of storage capacity.  The DeGrussa Mine facility is the world’s largest off-grid solar powered system used in the mining industry.  Sandfire is reported to have entered into a 6 year power purchase agreement, with an upfront cash contribution to the project of less than $1 million (out of a total cost of $40 million).  The company expects that the solar generated power will provide the majority of the DeGrussa Mine’s daytime electricity requirements, offsetting more than 20% of total diesel consumption.

Other examples include solar generation at Independence Group's recently commissioned Nova nickel project and Rio Tinto's Weipa bauxite mine.

7. Digital disruption and innovation

The mining industry has seen a significant development in innovation and efficiency.  For example, in 2015 more data was generated and collected each day than existed through all of 2003, via sensors and other devices from mining equipment.  This data has been used by miners and equipment manufacturers to track performance and eliminate unforeseen maintenance, resulting in time and monetary savings.

The industry has also started to see a shift towards automation at a rapid pace. Not only has the use of autonomous machines increased, but the complexity of the tasks they can perform and their reliability has also risen.  This has had an effect not only on productivity and cost savings, but also on safety, as machines can now perform hazardous or dangerous tasks.  The main use of autonomous machines remains in the realm of transportation, as companies have seen a reduction in cost of ownership of 15 to 40 percent (depending on cost of labour) thanks to automated haulage.  However, the transition to automation has not always been seamless, for example the software glitches delaying the rollout of Rio Tinto’s $US518 million AutoHaul program in the Pilbara.

The mining industry is likely to benefit from automated contract drafting, with the success of software such as Contract Express, Ariba, Neota Logic and CobbleStone Systems.  Blockchain (a form of digital database) is likely to have a profound impact on commerce, including securing smart contracts, which can self-execute for example by automatically releasing payment upon delivery of a good tracked by GPS.

Further, 3D printing is allowing miners to ‘print’ parts on demand where it would not have been feasible to wait for a replacement to arrive.

The law, and clients, are sometimes struggling to keep up with the rapid development of these new technologies and the implications for business.  For further reading on these and related issues, click through to the G+T Digital Focus Area.

8. Health and safety on mine sites

In the last couple of years there has been growing concern about the social cost of FIFO arrangements, identifying punishing rosters and long periods away from home as associated with the growing number of FIFO workers taking their own lives.  The WA State Parliament report on the impact of FIFO work practices on mental health was released in June 2015 and made 30 recommendations.  A number of these recommendations were to be progressed through the proposed Work Health and Safety (Resources) Bill.

This proposed Bill is still to be presented to Parliament.  The DMP released a regulatory impact statement on the proposed Bill in February 2016 and has indicated that there will be a regulatory impact statement and consultation on the regulations that would support the proposed Work Health and Safety (Resources) Act this year.

In the meantime:

  • earlier this year the Chamber of Minerals and Energy published the Blueprint for mental health and wellbeing to assist the resources sector in promoting wellbeing in the workforce; and
  • the WA Police have been running Operation Redwater, a drug detection initiative in the oil and gas and mining industries, targeting remote worksites in the Pilbara. The latest phase of Operation Redwater (June 2016) saw an extensive 4-day raid of 4 different sites in the area.

As always, mining companies need to remain vigilant about their duties to staff and their responsibility for them while they are at work.

9. Foreign resident capital gains withholding - more red tape

For agreements signed on and from 1 July 2016, new rules require purchasers of certain taxable Australian property to withhold 10% of the first element of tax cost base (which will usually mean the purchase price, but could mean a higher amount if the parties are not acting at arm’s length) and pay it to the ATO.  The relevant taxable Australian property includes:  

  • real property in Australia with a market value of $2 million or more;
  • a valuable lease over real property in Australia with a market value of $2 million or more;
  • a mining, quarrying or prospecting right (eg a mining tenement) with a market value of $2 million or more;
  • an interest in an Australian entity where more than 50% of its assets include any of the above asset types (ie an indirect interest).  Note transactions conducted through an approved stock exchange are typically excluded, although arguably schemes and takeovers are not conducted on the relevant stock exchange for these purposes; or
  • a valuable option or right to acquire any of the above asset types.

This is an advance CGT collection mechanism, and a powerful information gathering tool for the ATO.  The 10% non-final (ie, the vendor will still need to lodge a tax return) withholding is intended to apply to property only when the vendor is a foreign resident.  However, by implication all vendors are assumed to be a foreign resident unless they obtain certification from the ATO that they are not.

An Australian resident vendor of Australian real property needs to obtain a clearance certificate from the ATO prior to signing to ensure they do not incur the withholding (although the ATO have indicated that obtaining clearance prior to settlement is all that is required).  For other asset types, a vendor declaration confirming non-foreign residency or that the asset in question is not taxable Australian property may be sufficient.

10. Changes to the Foreign Investment regime

On 1 December 2015 the new Foreign Acquisitions and Takeovers Act came into force. As with the old regime, subject to certain exceptions, acquisitions of mining and production tenements are notifiable under the Act regardless of the value of the transaction, however all applications now incur significant application fees.

As of 1 July 2016, mining, production or exploration tenement transactions attract a fee of $10,100 or $25,300 and interests in securities in an entity will incur a fee starting at $25,300.

For more background follow this link:

Energy and Resources

By Sarah Turner and Vikram Kumar

A non-binding memorandum of understanding (MOU) that:

  • reflects an incomplete proposal or negotiation which remains confidential; or
  • is not materially price sensitive,

will not be required to be announced in accordance with an entity’s continuous disclosure obligations under the ASX Listing Rules.

However, while there may be no legal obligation to disclose such MOUs, in practice, as a marketing and shareholder engagement exercise, many listed entities choose to disclose.  In doing this, the entity hopes to demonstrate the existence of third party interest in the entity’s projects and the intention to negotiate and execute binding documentation.

When announcing the MOU, it can be commercially advantageous for the entity to refrain from naming the counterparty (for example, to preclude a competitor entity from seeking out a relationship with that counterparty) and they may also withhold the counterparty’s identity from disclosure on the basis that they are subject to confidentiality obligations, and/or the identity is not price sensitive information. Further, the base pricing parameters are sometimes withheld from disclosure, since they could provoke disruption by a competitor entity or prejudice ongoing or future negotiations. 

Where ASX takes the view that the identity, and in turn the profile and creditworthiness of the counterparty, is potentially price sensitive, this has resulted in a halt or suspension by ASX if the company does not release a clarifying announcement revealing the identity of the counterparty, and sometimes other withheld details such as proposed pricing structures.

So while the MOU, in the first instance, may not require disclosure, ASX is likely to take the view that once the existence of the MOU is voluntarily disclosed by the company, all and any key details of the MOU should be disclosed. In this sense, by announcing the MOU, the entity waives the ability to partially rely on the exceptions to continuous disclosure for discrete information.

Companies are on notice – if you choose to disclose, be prepared to disclose every term…

Corporate Advisory

By Adam Laura, Adam D'Andreti and Richard Francis

The recent decision in Re AMP Capital Funds Management Limited [2016] NSWSC 986, has sought to clarify the uncertainty around the application of section 253E of the Corporations Act, which determines whether a responsible entity of a registered managed investment scheme, and its associates, are entitled to vote on a members’ resolution of that scheme.  Whether a responsible entity’s associates can vote is often a key issue in trust schemes, IPOs and varying a schemes’ constitution.

It has always been clear that a responsible entity of a listed scheme and its associates are entitled to vote on a change of responsible entity.  However, historically there has been confusion in the market regarding whether this section precludes an associate of the responsible entity from voting on other resolutions when the responsible entity, but not the associate, has an extraneous interest in the resolution. If section 253E is given its ordinary meaning, it would have the effect of preventing an associate of a responsible entity with an extraneous interest from voting, despite the associate itself not having such an interest.

This broader construction recognises that associates have the ability to act jointly for the purpose of creating a benefit for one or more of their number, despite it not benefiting the voting entity.  This behavioural trait is well recognised and the key driver of the regulation of associates under the Corporations Act. Of course the difficultly with regulating associates effectively and equitably is defining the entities that should be regarded as associates.

Confusion about the proper application of section 253E has been exacerbated as a result of conflicting authorities. In Re Great Southern Managers Australia Limited, the court’s view was that section 253E only prohibited an associate of a responsible entity from voting if that associate had an interest other than as a member of the scheme.

Contrary to this view, in Everest Capital Limited v Trust Company Limited, the court held the view that merely being an associate of a responsible entity with an interest other than as a member disentitled that associate from voting. The most recent decision in Re AMP Capital Funds Management Limited makes it clear that this view is to be preferred.

It will be interesting to see whether the ruling in Re AMP Capital Funds Management Limited prompts amendments to the Takeover Panel’s Guide Note 15 relating to trust schemes.  Guidance Note 15 states that trust schemes should be subject to a condition that it will only be approved if the resolution is passed disregarding any votes cast in favour by, among others, “the responsible entity of the target and its associates (other than related fund managers)”. Given the uncertainty that previously existed, this was interpreted to mean that even if an associate could vote, from the Takeover Panel’s perspective, this might only be appropriate when that associate was a fund manager acting in the interests of its (third party) clients and beneficiaries.

However, Re AMP Capital Funds Management Limited arguably closes the door on any voting by the responsible entity or its associates where any of them have an interest in a resolution other than arising as a member of the scheme, unless it’s a listed scheme and the resolution relates to a change of responsible entity.  

Corporate Advisory, Funds

By Elizabeth Avery, Chris Boyd, Gina Cass-Gottlieb, Steven Glass, Andrew Floro and Stephanie Wee

On 18 July 2016, Japanese shipping company Nippon Yusen Kabushiki Kaisha (NYK) entered a plea of guilty to charges of criminal cartel conduct in the Federal Court of Australia – a significant milestone for the Australian Competition and Consumer Commission (ACCC) and the Commonwealth Director of Public Prosecutions (CDPP) in Australia’s first ever criminal cartel prosecution based on laws introduced in 2009.

Criminal charges were brought by the CDPP against NYK under section 44ZZRG(1) of the Competition and Consumer Act 2010 (Cth) (CCA) last Thursday (14 July 2016).  Appearing before Justice Wigney at a court directions hearing on Monday, NYK entered a plea of guilty and proceedings were adjourned to a further directions hearing on 12 September 2016.

NYK now faces a fine the greater of $10 million, three times the value of the benefit attributable to the commission of the offence or, if the attributable benefit cannot be determined, 10% of its annual turnover connected with Australia.

Collusion in the global automobile transportation industry

In its press release, ACCC Chairman Rod Sims said, “[t]his matter relates to alleged cartel conduct in connection with the transportation of vehicles, including cars, trucks, and buses, to Australia between July 2009 and September 2012."1 

According to documents lodged with the Federal Court, NYK is charged with a single offence of intentionally giving effect to cartel provisions in an arrangement or understanding with others in relation to the supply of ocean shipping services, knowing or believing that the arrangement or understanding contained cartel provisions – in breach of section 44ZZRG(1) of the CCA.

International dimension

The Australian prosecution is the latest enforcement action in relation to alleged conduct in the “roll-on, roll-off cargo” industry (or Ro-Ro).  Criminal convictions, jail terms and hundreds of millions of dollars in fines have been apportioned in several jurisdictions, including the United States, Japan, South Africa and China – with investigations ongoing in other countries.

In January 2015, NYK admitted to customer allocation, bid-rigging and price fixing in the United States, agreeing to pay fines of USD 59.4 million.  In July 2016, the total fines issued for contraventions in the United States topped USD 234 million as Wallenius Wilhelmsen Logistics AS (WWL), a Norweigan firm, became the fourth shipping company to be charged by the Department of Justice (DOJ) and agreed to pay a fine of USD 98.9 million.   

In March 2015, a NYK employee, Susumu Tanaka, was sentenced to 15 months imprisonment for his involvement in the cartel and became the third individual to plead guilty to antitrust charges related to the global shipping cartel in the United States.2 In June 2016 a fourth individual, an executive from Chilean shipping company Compañia Sudamericana de Vapores S.A. (CSAV), was also indicted for price fixing and bid-rigging.3

A total of seven executives, including two from NYK, have been sentenced to prison in Japan.  NYK was also fined JPY 13 billion (around USD 59 million) by the Japan Fair Trade Commission (JFTC) in March 2014.  In South Africa, NYK has been fined ZAR 104 million (around USD 8.5 million).

In China, NYK received first-in immunity from the National Development and Reform Commission (NDRC) and has avoided paying a fine.

Global cartels.  A local enforcement priority.

International cartel investigations in Australia

The criminal cartel charges laid by the CDPP against NYK follows an investigation by the ACCC into “roll-on, roll-off” shipping routes to Australia.

The ACCC is armed with sweeping powers to investigate potential contraventions of both the civil and criminal cartel prohibitions, including:

  • search and seizure powers (dawn raids, including with the assistance of the Australian Federal Police (AFP) in criminal investigations); and
  • broad powers to compel production of information or documents, or compel person(s) to give evidence under oath or by way of affirmation (by way of section 155 Notice).5

The ACCC also has cooperative arrangements with competition regulators in other jurisdictions.

The threshold for the ACCC to issue a section 155 notice is low – merely requiring that the ACCC have a “reason to believe” that the person to whom the notice is issued is capable of furnishing the information or documents, or providing evidence about a matter which may constitute a breach of the CCA.   Failure to comply, or deliberating providing false or misleading information in response to a section 155 notice may lead to an ACCC referral to the CDPP for criminal prosecution and attract a penalty of 12 months imprisonment.

Obtaining immunity from criminal prosecution or ACCC-initiated civil proceedings

The ACCC’s investigatory capability is further strengthened by its Immunity and Cooperation Policy6 (Immunity Policy).  The policy grants full immunity from any civil enforcement action brought by the ACCC to the first individual or corporation to satisfy the criteria prescribed by the Immunity Policy, which includes ongoing cooperation and full disclosure of information relating to the alleged cartel.

As the agency with responsibility for investigating and referring cases involving serious cartel conduct to the CDPP for prosecution, the ACCC also accepts applications for criminal immunity and makes  recommendations to the CDPP that an applicant be granted immunity pursuant to the Prosecution Policy of the Commonwealth.7 Such a recommendation will only be made where the individual or corporation first satisfies the criteria for a conditional immunity application under the ACCC’s own civil Immunity Policy.

Gilbert + Tobin’s Corporate Crime + Investigations team

Gilbert + Tobin’s Corporate Crime + Investigations team has experience managing complex cartel investigations across diverse industries.  Our lawyers and partners are highly respected by the ACCC and have served as trusted advisors to both companies and individuals on high-profile cases.

We provide strategic thinking and clear advice for our clients.  Whether preparing an application for immunity, engaging with the ACCC on the investigation process or negotiating settlement, our team draws on its deep understanding of competition law to deliver the best possible outcome.

Background to criminal cartels in Australia

Australia has had in place a criminal cartel regime since July 2009 when, under the Trade Practices Amendment (Cartel Conduct and Other Measures) Act 2009, a new Division 1 of Part IV was introduced to the CCA, including two specific criminal cartel offences.8 By supplementing Australia’s existing civil cartel regime with criminal prohibitions, Australia adopted OECD recommendations calling for tougher sanctions against serious cartel conduct.

From that time it has been an offence in Australia to intentionally make or give effect to a contract, arrangement or understanding, where the individual or corporation has the knowledge or belief that the contract, arrangement or understanding contains a cartel provision (for example, a price fixing or customer allocation provision).

1See, ACCC Press Release, 18 July 2016.

2  See, United States Department of Justice, ‘Third Ocean Shipping Executive Pleads Guilty to Price Fixing on Ocean Shipping Services for Cars and Trucks’, 10 March 2015.

See, United States Department of Justice, ‘Fourth Ocean Shipping Executive Indicted for Price Fixing and Bid Rigging’, 7 June 2016.

CCA, section 154X.

5 CCA, section 155.

6 Australian Competition and Consumer Commission, ACCC Immunity and Cooperation Policy, September 2014.

7 Commonwealth Director of Public Prosecutions, Prosecution Policy of the Commonwealth, Annexure B: Immunity from Prosecution in Serious Cartel Offences, September 2014.

8 CCA, sections 44ZZRF and 44ZZRG.

 

Competition and Regulation, Litigation and Dispute Resolution

Gilbert + Tobin’s Bernadette Jew (Partner) and Peter Reeves (Special Counsel) work with clients around the world, developing best practice for blockchain initiatives.

 

Corporate Advisory, TMT

By Marshall McKenna, Guy Greer and Claudia Henfry

Introduction

At the end of last year, the Supreme Court of Western Australia considered a decision of the Environmental Protection Authority (EPA) to recommend to the Minister that a Proposal to extend Roe Highway (the Proposal) be implemented. Chief Justice Martin found that the decision was invalid as there was an implied obligation to take certain EPA policies (the Policies) into account, which the EPA had failed to do (the Original Decision).1 Accordingly, the decision of the Minister to allow the Proposal to be implemented based on the recommendation of the EPA was also invalid.

On Friday 15 July 2016, the Court of Appeal upheld the Government’s appeal of the Original Decision. That is the EPA’s recommendation of the Proposal, and the Minister’s decision to allow the implementation of the Proposal, are valid.2

In our article on the Original Decision, we explained that it reaffirmed that anyone making submissions in relation to a proposal should have regard to any relevant EPA policies (whether or not the EPA was referring to them). The Appeal Decision clarifies that a failure by EPA to take into account its own policies is not necessarily fatal to the validity of an implementation decision.

The decision

In the Original Decision, Martin CJ found that the subject matter, scope and purpose of the Environmental Protection Act 1986 (WA) (EP Act) led to the conclusion that the EPA was bound to take into account the Policies and a failure to do so invalidated any decision.3  The sole ground of appeal before the Court of Appeal was that Martin CJ erred in law in holding that the Policies were mandatory relevant considerations.

The Court of Appeal accepted that the obligation to consider certain matters under legislation may arise by implication.4 However, they found that the express provisions of the EP Act “leave no room for an implication”5 that the Policies were mandatory relevant considerations in the EPA’s decision.

In reaching this conclusion, the Court of Appeal considered a number of aspects of the EP Act which weighed against a finding that the Policies were a mandatory relevant consideration, including:

  1. Pt III sets out an extensive process for the formulation of approved policies, which are express   relevant considerations;6
  2. section 44(2) specifies matters the EPA is obliged to set out in its assessment report;7
  3. the EPA assessment report is a long way from the final decision;8
  4. the EPA’s role is to perform an expert evaluative and advisory function, not exercise a discretionary power;9 and
  5. the EPA is in sole control of the form, content, timing and procedure of any environmental review.10

Consequences

The Court of Appeal’s decision clarified that the EPA was not required to take into account certain policies in its decision making. There remains some uncertainty, as the Court’s decision does not exclude the possibility that some policies could require consideration in relation to other decisions under the EP Act. The EPA will now hopefully take measures to simplify its policy framework, following the recommendations of the independent review.11

Although the Court of Appeal’s approach somewhat relaxed the EPA’s obligations in relation to its process of making recommendations (in that it is not necessarily required to take into account all policies), it is important to recognise that this decision only related to certain EPA policies. It remains necessary for an administrative decision maker to consider policy when expressly required to do so by legislation, such as the ‘approved policies’ under the EP Act. Also, an obligation to consider policy may still arise by implication, although it did not do so in this case. For those reasons, it remains prudent to consider (and potentially to expressly address) any government policy that may be applicable when preparing documents such as a proposal the subject of an administrative decision or recommendation.

Finally, it is likely that this decision will be subject to an application for leave to appeal to the High Court, so watch this space.

Footnotes

1 Save Beeliar Wetlands (Inc) v Jacob [2015] WASC 482.

2 Jacob v Save Beeliar Wetlands Inc [2016] WASCA 126.

3 Save Beeliar Wetlands (Inc) v Jacob [2015] WASC 482, [151], [184] – [186].

4 Jacob v Save Beeliar Wetlands Inc [2016] WASCA 126, [50].

5 Ibid [50], [54].

6 Ibid [56].

7 Ibid [58].

8 Ibid [57].

9 Ibid [59].

10 Ibid [60].

11 P D Quinlan SC et al, Independent Legal and Governance Review into Policies and Guidelines for Environmental Impact Assessments under the Environmental Protection Act 1986 (WA), May 2016.

Energy and Resources, Litigation and Dispute Resolution

By Neil PathakCraig SempleNirangjan Nagarajah and Frederick Brodie

2015 was an interesting year for Australian public company mergers and acquisitions. It had two distinct stories. Market activity by number of transactions remained steady in line with 2014. However, the total value of transactions rose significantly with a number of high value transactions, the likes of which Australia has not seen for a few years.

This report examines 2015’s public company transactions valued over $50 million and provides our perspective on the trends for Australian M&A in 2015 and what that might mean for 2016.

We also consider the impact regulators are having on the M&A market. As is usually the case, the review examines public company transactions valued over $50 million as we consider this gives a more focussed review of market and sector trends which are most relevant to our clients, M&A financial advisers and other interested readers. The data from 2015 is also compared against previous years.

We trust you will find this report to be an interesting read and a useful resource for 2016.

Mergers and Acquisitions

By Christopher Flynn, Ryan Turner and Denitsa Vasileva

Yesterday the Permanent Court of Arbitration in The Hague, constituted under the United Nations Convention on the Law of the Sea (UNCLOS) issued its final award in The Republic of Philippines v The People’s Republic of China (the Arbitration). That Arbitration – in which China refused to participate – and the arbitral awards – which China has refused to accept – risk escalating tensions in the South China Sea and set the stage for future proceedings under international law against China to protect states’ sovereignty over their exclusive economic zones (EEZs) in the South China Sea.  It also carries real implications for other boundary disputes as well as oil and gas production, navigation, customs, fisheries and sub-sea infrastructure in disputed areas, including the area in dispute between Australia and Timor-Leste in the Timor Sea.

Most significantly, the Tribunal rejected China’s longstanding assertion of sovereignty over much of the South China Sea based on claimed historical rights extending to the “nine dash line”.  In doing so, the Tribunal iterated the central role of UNCLOS as the basis of states’ maritime entitlements  The Tribunal also held that China had engaged in multiple breaches of international law through its interference in the sovereignty of the Philippines, facilitation of illegal fishing; prevention of the exercise of traditional fishing rights; construction activities that caused severe harm to the environment; operation of maritime vessels in a dangerous manner; and aggravation of the dispute. Although the Tribunal determined that it did not have jurisdiction over two parts of the Philippines’ claim, the award represents a resounding loss for China and a carefully-worded rebuke of China’s activities in the South China Sea.


Part 1: Background to the Arbitration

The South China Sea contains important shipping lanes through which more than one quarter of the world’s trade passes.  It also contains fishing reserves and natural resources in the seabed.  The South China Sea is a flashpoint of territorial tensions.  China has asserted an expansive “historical” claim over much of the South China Sea.  China’s territorial claim is opposed by the Philippines, Vietnam, Malaysia and Brunei, who each claim their own EEZs and maritime features.  These claims draw those states into dispute with China and, in some cases, each other.

The Philippines commenced the Arbitration on 22 January 2013.  However, China objected to the jurisdiction of the Tribunal on the basis that it had chosen not to accept the dispute resolution procedure under UNCLOS for disputes involving: delimitation of territorial seas, EEZs or continental shelf between states; military activities and law enforcement; or a matter with which the United Nations Security Council is engaged (the Reservation).  Consequently, it refused to accept or participate in the Arbitration.

The catch-22 for China between participating in the Arbitration and refusing to participate in order to impugn the legitimacy of the Arbitration is clear. Yet, this was not the first time that China has refused to participate in an international court or tribunal. China also refused to participate in the only case brought against it in the Permanent Court of International Justice (or the International Court of Justice as it is now known).[1]

China’s non-participation is also consistent with its approach to international law.  That approach is grounded in its own ancient civilisation and history.  Rather than being based on sovereign equality between states under international law (which, at least nominally, is how the West approaches international law), the Chinese tributary approach to international law rests on a hierarchy in which other states are ordered below, and relative to, China. The Arbitration must be viewed in this context. As China re-establishes itself as a global power and takes its historic and traditional position in world affairs, its conception of international law will collide with the current Western-oriented approach and provoke tensions in the establishment of a sustainable and equitable rules-based order in the Asia Pacific.


Part 2: Implications

General implications

The future of economic and diplomatic relations in the region will turn on the reaction of China and South-East Asia to the Tribunal’s award. Although a Chinese Foreign Ministry spokesperson has previously described the Tribunal’s preliminary award as “null and void”[2] and China has repeatedly affirmed its unwillingness to accept the Tribunal’s determination, technically the award is binding on China.[3]  Indeed, in seeming anticipation of China refusing to accept the award, the Tribunal expressly rejected China’s earlier criticism of the Tribunal’s jurisdiction and its refusal to accept the Tribunal’s preliminary award.[4]

China’s response to the Arbitration highlights the enforcement conundrum at the heart of international law and, so, the international legal system.  If China refuses to accept the Tribunal’s rejection of its “historical” claim over parts of the South China Sea, tensions between states with EEZs in the South China Sea and China may escalate and China could again find itself before an international tribunal or court. In turn, that may lead to a Chinese withdrawal from key international institutions and multilateral treaties in favour of bilateral treaties and ad-hoc arrangements that allow China to exert its economic and military power, undiminished by principles of sovereign equality.  Indeed, China is already adopting such an approach. China has announced that it will establish an “international maritime judicial centre”, its own international court in China to hear maritime disputes, although no further details of the court have been released since it was announced in March this year. The problem for other states of suing China, in China, is clear.

China has also consistently stated that it would prefer to resolve maritime disputes bilaterally, rather than multilaterally (and in doing so has iterated its traditional tributary approach to international relations). Any Chinese withdrawal from multilateral treaty-making should be cause for concern for investors and states as it decreases the prospects of comprehensively addressing international economic and political challenges through collective action.  It also increases the real and political risks of investing in those areas.

For maritime and extractive organisations involved in the South China Sea or reliant on shipping lanes passing through the region, the award presages heightened uncertainty and tension between China and the Philippines, Vietnam, Malaysia, Brunei and Indonesia.  Given the importance of the sea lanes passing through the South China Sea to East Asia, it also carries clear implications for Taiwan, Japan and the Koreas.  For extractive organisations, in particular, any failure to finally draw maritime boundaries, or at least resolve to jointly develop resources in a contested area, creates uncertainty and risk that will undermine attempts by any of the littoral states to licence and exploit natural resources in the South China Sea.

Implications for Australia and Timor-Leste

Beyond the South China Sea, the award has important implications.

For Australia, the award brings into stark focus the ongoing dispute with Timor-Leste over the delimitation of the Timor Sea and the claims of espionage that have undermined the Treaty on Certain Maritime Arrangements in the Timor Sea (CMATS) between Australia and Timor-Leste.  On 23 April 2013, Timor-Leste commenced arbitration against Australia under the Timor Sea Treaty seeking to set aside CMATS, although the proceedings have not progressed.  More recently, Timor-Leste sought to commence conciliation proceedings with Australia under UNCLOS.[5]

Like China, Australia issued a reservation to the dispute resolution procedure in UNCLOS after its ratification on 5 October 1994. That reservation is not dissimilar to China’s Reservation.  In the Arbitration, the Tribunal demonstrated that it will exercise a broad jurisdiction that pushes right up to the edges of such reservations in order to arbitrate disputes under UNCLOS.  While the Tribunal did not determine the maritime boundary between China and the Philippines, it had no compunction in asserting the comprehensive scope of UNCLOS for states parties in delimiting maritime boundaries. Consequently, if CMATS were invalidated or set aside diplomatically, the Tribunal’s award raises the prospect that Timor-Leste might successfully initiate an arbitration against Australia seeking a determination of the entitlements of Timor-Leste and Australia (but not delimitation of the maritime boundary between the two states) notwithstanding Australia’s reservation.  If that were to occur, Australia could not escape the application of UNCLOS – and the likely application of the equidistance principle – to the dispute between Australia and Timor-Leste.

If the equidistance principle were applied to the Timor Sea, Timor-Leste’s sovereignty would extend beyond the existing maritime boundary.  This would likely result in the substantial overhaul of the existing regime governing the extraction of hydrocarbons from the area between Australia and Timor-Leste.  Importantly, it would also likely give Timor-Leste control of the development of the Greater Sunrise field (and all, or the lion’s share of, the revenues delivered from its development).

Australia has implored all states to act consistently with international law in the disputes over maritime boundaries in the South China Sea. This morning on Radio National, the Foreign Minister stated that Australia will also abide by international law in such disputes.  Applying the Tribunal’s reasoning in the Arbitration, that would effectively mean that Australia would need to finally abandon its own expansive claims in the Timor Sea and accept the application of the equidistance principle in the delimitation of the maritime boundary between the two states.  The Tribunal’s award and, in particular, its position on reservations to UNCLOS such as those made by Australia and China indicate that compliance with international law mandates that Australia adopt a new approach in its conciliation with Timor-Leste. That approach should reflect solely and fully the principles of UNCLOS and the equidistance principle.


Part 3: The Four Disputes in the Arbitration

The Arbitration involved four disputes.

Dispute 1: The Source of States’ Maritime Entitlements

The Tribunal’s award falls short of delimiting the boundaries between China and the Philippines in the South China Sea; indeed, the Tribunal would not have had jurisdiction to delimit the maritime boundary due to China’s Reservation to UNCLOS.  However, the Tribunal determined the “entitlements” of states that would allow for the boundaries to be delimited.

China’s claim to the South China Sea extending to the “nine dash line” was based on claimed historic rights.  According to the Tribunal, China had asserted such rights in three ways:

(a) licensing of arrangements for the exploitation of petroleum blocks by the China National Offshore Oil Corporation in maritime areas beyond 200nm from any maritime feature claimed by China;

(b) objecting to the Philippines’ award of petroleum blocks in maritime areas claimed by China on the basis of the nine dash line; and

(c) restricting fishing in the South China Sea in areas within China’s jurisdiction.

The characterisation of the rights of China was pivotal to the justiciability of the maritime entitlements of China and the Philippines.  If the Tribunal had determined that China’s rights amounted to “historic title” (rather than mere historic rights), the Tribunal would not have had jurisdiction to arbitrate the maritime entitlements of the states due to China’s Reservation.  However, the Tribunal held that:

“China does not claim historic title to the waters of [the] South China Sea, but rather a constellation of historic rights short of title”.[6]

The Tribunal went on to reject “historic rights” as a basis of maritime entitlements under UNCLOS. UNCLOS is a “comprehensive” treaty framework that supersedes historic rights and agreements that are inconsistent with its terms.[7]  However, if a state’s historic rights in a maritime area rise to the level of “historic title”, the jurisdiction of a tribunal under UNCLOS may still be excluded (in effect, carving historic title out of the scope of UNCLOS if a state issues a reservation to this effect).

The Tribunal emphasised that its determination that historic rights could not form the basis of a state’s entitlements under UNCLOS would not bring about a significant change in the rights of the states parties. This was because the rights exercised by China in the South China Sea to the nine dash line were not sufficient to give rise to historic rights that might be recognised and protected under international law. Instead, the rights of navigation and fishing exercised by China and Chinese nationals were no more than the exercise of freedoms permitted under international law (and therefore imposed no disability on other states), while the exploration and exploitation of natural resources was not of sufficient long-standing to be “historic”.[8]

The Tribunal’s conclusion that historic rights cannot form the basis of maritime entitlements under UNCLOS foreshadows disputes with the other littoral states in the South China Sea: Vietnam, Malaysia and Brunei.  Such states may initiate proceedings in order to have their entitlements to an EEZ extending beyond the nine dash line declared or to protect the interests of their nationals and extraction efforts.

Dispute 2: The Characterisation of Certain Maritime Features

The characterisation of maritime features as a “low-tide elevation”,[9] an “island” or a “rock” determines the effect of those maritime features for the territorial sea, contiguous zone, EEZ and continental shelf of a state. If a high-tide elevation is an island, for example, it generates the same maritime entitlements as other land territory.[10]  However, if a high-tide elevation cannot sustain human habitation or economic life, it is merely a “rock” and has no EEZ or continental shelf.[11]  An island is thus a high-tide elevation that is not a rock.

China had engaged in large-scale modifications of coral reefs in the South China Sea, including the erection of buildings and airstrips on the reefs.  Both “low-tide elevations” and “islands” are defined in UNCLOS as “a naturally formed area of land …”.[12]  So it is not surprising that the Tribunal determined that “human modification” of land areas could not change the status of those maritime features.  That is, a country could not convert “the seabed into a low-tide elevation or a low-tide elevation into an island”.[13]  Consequently, the Tribunal determined the status of the maritime features that were the subject of the dispute on the basis of their features prior to human modification.

However, before the award, it was less clear whether human modifications could convert a rock into an island by rendering it capable of habitation or supporting economic life.  This uncertainty stemmed from the structure of Art 121.  The ability to support human habitation or economic life is not a positive requirement for a high-tide elevation to be an island; rather, the inability to sustain human habitation or economic life renders a high-tide elevation a rock.  One might have argued, therefore, that the “natural formation” requirement does not affect the distinction between rocks and islands, only the distinction between submerged features, low-tide elevations and high-tide elevations. However, the Tribunal rejected this argument and held that the overall “status of a feature must be assessed on the basis of its natural condition” and “natural capacity”.[14] This conclusion is consistent with the purpose of UNCLOS recorded in the preamble and the travaux préparatoires and prevents the use of UNCLOS to extend the maritime zones of a state through colonisation and development of rocks into islands.  The Tribunal stated that:

“If States were allowed to convert any rock incapable of sustaining human habitation or an economic life into a fully entitled island simply by the introduction of technology and extraneous materials, then … [Art 121(3)] could no longer be used as a practical restraint to prevent States from claiming for themselves potentially immense maritime space.”[15]

The Tribunal expounded detailed guidance on the requirements for a high-tide elevation to be capable of “sustain[ing] human habitation or economic life”.[16]  Of particular significance to the dispute was the Tribunal’s determination that:

(a) human habitation requires “non-transient inhabitation … by a stable community of people for whom the feature constitutes a home and on which they remain”[17] and is not satisfied by “groups [who] are heavily dependent on outside supply”;[18] and

(b) “economic life” must be that of the maritime feature itself rather than the waters around the maritime feature (such as extractive activity in the surrounding waters).[19]

The Tribunal therefore held that Scarborough Shoal; Cuarteron Reef; Fiery Cross Reef; Johnson Reef; McKennan Reef; Gaven Reef (North); and the Spratly Islands were rocks rather than islands, while Hughes Reef; Gaven Reef (South); Subi Reef; and Mischief Reef were low-tide elevations. Accordingly, the low-tide elevations generated no maritime zones and the rocks generated no EEZ or continental shelf.

Dispute 3: China’s Activities in the South China Sea

The activities of China and Chinese nationals engaged in fishing activities in the South China Sea gave rise to five principal disputes about the lawfulness of those activities.

First, the Philippines alleged that actions by China violated the sovereignty of the Philippines.  China objected to the Philippines granting of concessions over blocks within part of the Philippines’ continental shelf (the Reed Bank).[20]  However, the Tribunal held that merely informing the Philippines (or informing a private party that has been granted a concession by the foreign state) of China’s claims to sovereignty over the maritime area did not constitute a breach of UNCLOS absent some coercive conduct.[21]  Although China’s objections were incorrect about the law (as stated by the Tribunal), China’s objections were made in good faith and, the Tribunal concluded, could not constitute a breach of UNCLOS.[22]

However, other actions by China went beyond a mere assertion of a claim to the maritime area.  These included:

(a) China’s inducement of a vessel hired by the operator of a concession granted by the Philippines to cease operations and depart from the area on the basis of China’s claim to sovereignty, which contravened Art 77 of UNCLOS as the actions occurred on the continental shelf of the Philippines;[23] and

(b) China’s moratorium on fishing in an area forming part of the EEZ of the Philippines, which contravened Art 56 of UNCLOS.[24]

Second, the Philippines alleged that China’s failure to prevent Chinese nationals from illegally exploiting fish reserves ( “living resources”) in the EEZ of the Philippines contravened its obligations under UNCLOS.  Article 62(4) of UNCLOS imposes an obligation on nationals fishing in the EEZ of another state to comply with the laws and regulations of that state.[25]  Similarly, Article 58(3) of UNCLOS obligates states exercising rights or duties in the EEZ of another state to “have due regard to the rights and duties” of that other state. The Tribunal interpreted Article 58(3), consistently with existing jurisprudence, as obligating China “to take … necessary measures to ensure that their nationals and vessels flying their flag are not engaged in [illegal, unreported and unregulated] fishing activities”.[26] The Tribunal determined that China had not simply failed to exercise due diligence but had acted in coordination with Chinese vessels engaged in illegal fishing by escorting and protecting those vessels. The Tribunal therefore held that China was in breach of Article 58(3) of UNCLOS.[27]

Third, the Philippines alleged that China had contravened Article 2(3) of UNCLOS by preventing Filipino fishermen from exercising traditional fishing rights in Scarborough Shoal (regardless of which state exercises sovereignty over Scarborough Shoal).  The Tribunal held that Filipino fishermen – as well as the fishermen of other nationalities such as China and Vietnam – had traditional fishing rights at Scarborough Shoal and that China had unlawfully prevented those fishermen from exercising their fishing rights.[28]

Fourth, the Philippines alleged that China had failed to protect and preserve the marine environment in breach of multiple articles of UNCLOS by allowing harmful fishing activities and engaging in harmful construction activities.[29] The Tribunal had reserved its decision on jurisdiction over this allegation until the merits stage but, having determined that China’s island-building activities were for civilian and not military purposes, the Tribunal considered that it had jurisdiction.[30]  The Tribunal found that China’s construction activities had caused severe harm to the coral reef and violated its obligation to preserve and protect fragile ecosystems and the habitat of depleted, threatened, or endangered species.[31]  The Tribunal also found that Chinese authorities had knowledge of and supported Chinese fishermen harvesting endangered sea turtles, coral, and giant clams on a substantial scale and who had employed methods that inflicted severe damage on the coral reef.  China was therefore in breach of Articles 192, 194(1), 194(5), 197, 123 and 206 of UNCLOS.[32]

Fifth, the Philippines alleged that China had breached the Convention on the International Regulations for Preventing Collisions at Sea (COLREGS) and, as a result, Article 94 of UNCLOS by operating its law enforcement vessels in a dangerous manner that created a serious risk of collision by obstructing Filipino vessels.[33]  The Tribunal agreed, finding that China had breached both treaties.  

Dispute 4: China’s Aggravation of the Dispute

The final dispute involved allegations by the Philippines – that were accepted by the Tribunal – that China had aggravated and extended the dispute since the commencement of the Arbitration through its interference in the Philippines rights of navigation; prevention of the rotation and supply of Filipino personnel stationed on the Second Thomas Shoal (which was within the EEZ of the Philippines); and its dredging, artificial island-building and construction activities.

To the extent that China’s alleged aggravation of the dispute involved “military activities”, the Tribunal determined that it did not have jurisdiction to arbitrate on the legality of China’s conduct as a result of China’s Reservation. The Tribunal held that it did, however, have jurisdiction to arbitrate the legality of China’s dredging and construction activities, which fell outside the scope of China’s reservation.[34]

The Tribunal determined that China was subject to a general duty under international law not to allow any step “to be taken that might aggravate or extend the dispute” and that such a step would also be inconsistent with Articles 296 and 300 of UNCLOS.[35] The Tribunal held that China’s dredging, construction and island-building activities aggravated and extended the dispute in contravention of general international law and UNCLOS. In doing so, China not only interfered in the EEZ of the Philippines but caused “irreparable harm to the coral reef habitat” in the South China Sea.[36]

 

 


[1] Denunciation of the Treaty of November 2nd, 1865, between China and Belgium (Belgium v China), PCIJ Rep Series A No. 8, 14, 16 18 and Series C No. 16.

[2] Shannon Tiezzi, ‘China: Court Ruling on South China Sea Case ‘Null and Void’”, The Diplomat, 31 October 2015.

[3] UNCLOS, Art 296(1).

[4] Award on Merits, paras 166-168.

[5] Tom Allard, ‘East Timor takes Australia to UN over sea border’, The Sydney Morning Herald, 11 April 2016.

[6] In the Matter of an Arbitration before an Arbitral Tribunal Constituted under Annex VII to the 1982 United Nations Convention on the Law of the Sea between The Republic of the Philippines and the People’s Republic of China (in an Award on Jurisdiction and Admissibility), Award on Merits, 12 July 2016 (Award on Merits).

[7] Award on Merits, para 246.

[8] Award on Merits, paras 268, 270.

[9] Article 13(1) UNCLOS provides that: “A low-tide elevation is a naturally formed area of land which is surrounded by and above water at low tide but submerged at high tide.”

[10] Article 121(1) UNCLOS provides that: “An island is a naturally formed area of land, surrounded by water, which is above water at high tide.”

[11] UNCLOS, Art 121.

[12] UNCLOS, Arts 13(1), 121(1).

[13] Award on Merits, para 305.

[14] Award on Merits, paras 508, 541.

[15] Award on Merits, para 509.

[16] Award on Merits, paras 540-551, 571-622

[17] Award on Merits, para 618.

[18] Award on Merits, para 620.

[19] Award on Merits, para 624.

[20] Award on Merits, para 705.

[21] Award on Merits, para 706.

[22] Award on Merits, para 706.

[23] Award on Merits, para 707-708.

[24] Award on Merits, para 712.

[25] Award on Merits, para 739.

[26] Award on Merits, para 743.

[27] Award on Merits, para 753.

[28] Award on Merits, para 812.

[29] Award on Merits, paras 815-821.

[30] Award on Merits, para 935-936.

[31] Award on Merits, para 966.

[32] Award on Merits, para 964-966, 992.

[33] Award on Merits, para 1044-45.

[34] Award on Merits, paras 1161-1162.

[35] Award on Merits, paras 1172-3.

[36] Award on Merits, paras 1177-1179

Energy and Resources

By Charles Coorey

The Sunrise Conference brought together Australia’s most successful tech leaders to tell stories from their beginnings. It included speakers like Mike Cannon-Brookes (Co-Founder & CEO, Atlassian) and Melanie Perkins (Co-Founder & CEO, Canva) and Lachlan McKnight (Founder & CEO, Legal Vision).Gilbert + Tobin Parter, Charles Coorey, also spoke at the conference, offering his top 10 tips for start-ups. They include: 

1.     What to do when you've got a great idea

2.     I have a co-founder - what do we do?

3.     Commercialising ideas

4.     Get ready for funding

5.     Premises and employing staff

6.     I'm ready to go to market

7.     When you need more funding

8.     Going global

9.     Exiting

10.   Found, learn, repeat 

Competition and Regulation, Intellectual Property, Startups

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