Ports ahoy! ACCC runs aground in its appeal in the NSW Ports case

The Full Federal Court has ruled to dismiss the ACCC’s appeal against a primary judge’s 2021 ruling that agreements entered into by NSW Ports did not contravene the Competition and Consumer Act 2010 (Cth) (CCA).

The Full Court agreed with the primary judge’s findings that NSW Ports enjoyed ‘derivative crown immunity’ but in any event, the ACCC had also not established that either the purpose or likely effect of the provisions was to substantially lessen competition, in breach of the CCA.

Background

In NSW, there are three major ports that handle cargo:

1. Port Botany
2. Port Kembla
3. The Port of Newcastle.

Port Botany is the primary container port in NSW. Port Kembla and the Port of Newcastle are primarily bulk ports. However, in 2007 the State of NSW decided that the Port of Newcastle would be the next container port in NSW once Port Botany became capacity constrained.The consequence of a container terminal development at the Port of Newcastle, would be that a ship would not use Port Botany or Port Kembla.

In 2013 Port Botany and Port Kembla were sold to a consortium of infrastructure investors.  As part of the privatisation, the State entered into various agreements with entities connected to Port Botany and Port Kembla (NSW Ports).

The agreements, known as the Port Commitment Deeds, each contained:

• compensation provisions: a commitment by the State to compensate the new owners of Port Botany or Port Kembla if container traffic at the Port of Newcastle exceeded a specified cap and reduced container traffic at either Port Botany or Port Kembla.
• reimbursement provisions: an agreement by the State to reimburse payments made under the compensation provisions by a group of companies (PON) who had been operating the Port of Newcastle following its privatisation in 2014.

The ACCC’s Case

In 2018, the ACCC commenced proceedings against NSW Ports alleging that the compensation provisions had the purpose and likely effect of substantially lessening competition in the market for the supply of port services for container cargo in NSW.  The ACCC specifically alleged the provisions were intended, and were likely, to hinder or prevent the development of a container terminal at the Port of Newcastle.

In response, NSW Ports contended that:

• the State’s purpose in entering into the compensation provisions was ‘to ensure that bidders did not discount their bids because of the risk of the establishment of a container terminal at the Port of Newcastle’; and
• the likely effect of the compensation provision was that there was no credible threat of entry by a private operator at Newcastle.

Primary judgment

On 29 June 2021, the Court found that the CCA did not apply to NSW Ports’ decision to enter the Port Commitment Deeds, because NSW Ports had derivative crown immunity.  Whilst this was enough to dismiss the claim, the judge also concluded that the compensation provisions in the Port Commitment Deeds did not have the requisite purpose, or likely effect, of substantially lessening competition in the relevant market for the supply of port services.

The Full Court’s findings

In February 2023, the Full Federal Court upheld each of the primary judge’s findings.

Anti-competitive purpose

The Full Court ultimately agreed with the primary judge’s finding that the purpose was:

‘to ensure that bidders did not discount their bids because of the risk of a future change of Government policy [and that this purpose was] … not put in terms directed to any end or purpose of preventing or hinder competition’.

The Full Court summarised the relevant ‘real world circumstances’ it relied on to properly characterise the purpose of the provisions as follows:

1. It had always been the policy of the NSW Government that the container ports would only be developed in sequence after Port Botany’s capacity was fully or nearly exhausted.
2. The State of NSW was in full control of the means to prevent a container terminal from being developed where it did not want it, in part due to the fact that the compensation provisions and the reimbursement provisions alleviated or removed any consideration as to State liability that might have inhibited the State from changing its policy. Therefore, there was no rational basis to conclude that the purpose of the provisions were to hinder the ability of the State to change its policies.
3. Bidding would produce the best price only if there was a provision which provided for future compensation in the unlikely event that Government policy should change and result in a competing container terminal.
4. The State was disposing of valuable monopoly assets to the highest bidder and the State wanted the best price, in the interests of the economy and people of New South Wales.
5. Commercially, the compensation provisions could be viewed as a price adjustment clause, or an “insurance clause”, to reduce the risk of a significant devaluation to the commercial prospects of the privatised port assets.

As a result, the Full Court held that the purpose was to ensure bidders did not discount their bids, rather than a purpose of lessening competition.

Anti-competitive effect

The ACCC argued the primary judge had failed to consider whether the threat of a competing container terminal at the Port of Newcastle was sufficiently credible and significant to be competitively meaningful.

In upholding the primary judge’s findings, the Full Court agreed that there was no real chance of:

• a container terminal being built at the Port of Newcastle while Port Botany had capacity; or
• the underlying Government policy changing to allow the development of a container terminal at Newcastle even if there was a change of Government, as the policy had been supported by both sides of politics.

The Full Court also agreed with the primary judge that neither the ACCC nor the Port of Newcastle had proved there was a viable business case to show that the Newcastle container terminal would be built before Port Botany had reached capacity, even if Government policy did change.

Crown immunity for State of NSW

The Full Court agreed the CCA would only apply to the State if the entry into the deeds and the compensation provisions was part of the State “carrying on a business”.  While the primary judge found the State was carrying on businesses (through statutory corporations) in operating each of the ports, entry into the deeds conduct lacked any connection those businesses, because deeds and the compensation provisions were ‘directed to the maximisation of price, not the operations of the businesses by the Crown’.

Derivative Crown immunity for NSW Ports

The Full Court agreed that NSW Ports enjoyed derivative Crown immunity. Of interest in relation to this conclusion, the Full Court noted that:

• No judge in Australia ‘would be taken to think that a State Parliament could pass a law to authorise a person to contravene a Commonwealth law, without the foundation for such State legislation being another law of the Commonwealth authorising it.’
• The application of s 45 of the CCA to corporations was not sufficient to produce a contrary intention to the availability and extent of Crown immunity.
• Derivative Crown immunity is not separate from Crown immunity, but part of the ‘ascertainment of the proper extent of the State’s immunity.’
• NSW Ports could claim derivative Crown immunity as it forms part of to the ascertainment of the true extent of the Crown immunity of the State.

What does this decision do?

The facts of the NSW Ports case involved yet another close interaction between competition law and public policy considerations, and the Full Court’s decision provides helpful guidance and further clarity that:

• The nature of derivative Crown immunity requires a close examination of the source of the powers, rights, and immunity in question.
• When assessing whether conduct has the purpose or likely effect of substantially lessening competition, ‘purpose’ and ‘effect’ are two terms that cannot be conflated; and must be assessed as separate tests. The question of purpose is not answered by whether or not the conduct may have an anti-competitive effect.
• ‘likely’ in the context of ‘likely effect’ under the CCA is taken to mean ‘real chance’ and this excludes possibilities that are considered speculative, fanciful, far-fetched, infinitesimal or trivial. This is particularly important when considering the likelihood of future matters influenced by government policy.

Postscript

Since the appeal, state legislation was enacted establishing a process for extinguishing the liability of the Port of Newcastle to reimburse the State for compensation paid to the operators of Port Botany and Port Kembla. The ACCC has said this should facilitate competition between ports in NSW for the provision of container port services.

NSW developer, Mayfield Development Corporation Pty Ltd (MDC), had the stay on its separate proceedings against NSW Ports lifted on 22 June 2023, arguing the Full Court’s decision was ‘plainly wrong.’ NSW Ports has stated it will argue that the finding on derivative crown immunity is a ‘complete answer’ to MDC’s case and that it should be dismissed. In a case management hearing in September, the court heard the possibility that the derivative crown immunity point might be subject of an application for special leave to appeal to the High Court, if developer Mayfield  is unsuccessful in its Federal Court proceedings.

Image credit: Shipping containers, by Sam Greeenhalgh | Flickr | CC BY 2.0 | remixed to B&W and resized

This article was written by Maeve Moore and Simon Cooke.