Transport Legal Insight - Aviation

December 2010

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The inclusion of aviation into the European Union Emissions Trading Scheme

by Nikolina Babic

Introduction

The European Parliament and Council of the European Union resolved in 2008 to expand the European Union Emissions Trading Scheme (EU ETS) to include the “aviation activities” from the aviation sector. This represents a significant expansion of the EU ETS and also a significant new obligation for the international aviation industry.

Both EU and non-EU aircraft operators will be required to comply with the scheme to the extent that their aircraft fly within, into or out of the EU. Whilst there are certain de minimis provisions excluding small operators, and providing exemptions for certain military and other activities, the majority of commercial aircraft operators flying into and out of the EU will be obliged to comply with the scheme.

Key points for consideration

The primary obligations on aircraft operators subject to the EU ETS will be to:

  • submit for approval an initial monitoring and reporting plan to the relevant Member State
  • monitor annual CO2 emissions and fuel burn for flights within, in and out of the EU and submit annual emissions reports to the relevant Member State
  • in April of each year, commencing in 2013, surrender carbon allowances equal to the aircraft operator’s total CO2 emissions for flights within, into and out of the EU for the preceding calendar year.
Outcome

The EU ETS imposes a carbon liability on aircraft landing into the EU, in respect of their emissions within EU airspace and also outside EU airspace (e.g. for flights from Singapore to London, emissions liability would be calculated based on fuel burn from departure from Singapore). This ‘extra-territorial’ effect of the EU ETS has generated criticism by some industry stakeholders and is the subject of a current class action in the European Court of Justice. The class action was commenced by several American operators and seeks to challenge the lawfulness of the extra-territorial effect of the EU ETS on international aviation. It is likely that the hearing will take place within the next six to 12 months.

EU ETS: aviation activities

The European Parliament and Council of the European Union resolved in 2008 to expand the European Union Emissions Trading Scheme (EU ETS) to include the “aviation activities” from the aviation sector. This represents a significant expansion of the EU ETS and also a significant new obligation for the international aviation industry.

From 2012, aircraft operators will need to surrender one carbon allowance per tonne of C02 emitted on all flights within and to and from the EU.

Both EU and non-EU aircraft operators will be required to comply with the scheme to the extent that their aircraft fly within, into or out of the EU. Whilst there are certain de minimis provisions excluding small operators, and providing exemptions for certain military and other activities, the majority of commercial aircraft operators flying into and out of the EU will be obliged to comply with the scheme.

The inclusion of aviation activities in the EU ETS poses a significant challenge to aircraft operators in terms of increased regulatory compliance and also in terms of increased operational costs.

The underlying premise of the EU ETS is that emissions from energy intensive industries are capped at a limit below the “business as usual” level. Installations currently covered by the EU ETS include activities in the energy sector, iron and steel production and processing, the mineral industry and wood pulp, paper and board industry and emitting the specific greenhouse gases associated with that activity.

Each aircraft operator subject to the EU ETS has been assigned to a specific Member State and will need to comply with the Member State’s domestic implementing legislation and regulatory requirements. However some of the EU Member States are yet to implement the relevant domestic legislation.

The primary obligations on aircraft operators subject to the EU ETS will be to:

  • submit for approval an initial monitoring and reporting plan to the relevant Member State
  • monitor annual CO2 emissions and fuel burn for flights within, in and out of the EU and submit annual emissions reports to the relevant Member State, and
  • in April of each year, commencing in 2013, surrender carbon allowances equal to the aircraft operator’s total CO2 emissions for flights within, into and out of the EU for the preceding calendar year.

Free allowances

The EU ETS will cap the amount of free emissions available to airline operators in 2012 at 97 per cent of the average aviation emissions level for 2004 to 2006 (as determined by the EU). In 2013 and through to 2020, this amount will be reduced to 95 per cent.

Of the total available free allowance, 85 per cent will be issued free of charge to the aircraft operators between 2012 and 2020. The remaining 15 per cent will be auctioned and a special reserve (equating to three percent of the total quantity of allowances) created for those operators who are new to the EU ETS or can be classified as “rapidly growing”.

As the amount of available free allowances from 2013 will be based on 95 per cent of the 2004 to 2006 emission levels, it is expected that there will be an insufficient number of free allowances available to aircraft operators to cover their full carbon liability under business as usual operations. Aircraft operators who emit in excess of their allocation of free allowances will need to either reduce emissions and or purchase additional carbon units on the open market.

Penalties and the industry response

The EU ETS contains significant penalties for non-compliance with the EU ETS, including a financial penalty of €100 per tonne of CO2 emitted for which an allowance was not surrendered. The EU ETS also contains provisions enabling aircraft seizure and re-sale in certain circumstances.

The EU ETS imposes a carbon liability on aircraft landing into the EU, in respect of their emissions within EU airspace and also outside EU airspace (e.g. for flights from Singapore to London, emissions liability would be calculated based on fuel burn from departure from Singapore). This ‘extra-territorial’ effect of the EU ETS has generated criticism by some industry stakeholders and is the subject of a current class action in the European Court of Justice. The class action was commenced by several American operators and seeks to challenge the lawfulness of the extra-territorial effect of the EU ETS on international aviation. It is likely that the hearing will take place within the next six to 12 months.

While some stakeholders applaud the EU on taking a leading role in international aviation emission regulation, others argue that aviation emissions should be regulated at the global level. With the development of separate emissions trading schemes in several countries, there is likely to be continued international dialogue on the importance of global regulation and coordination.

Convergence, comity and consistency: Interpreting IATA’s Agency Agreement

Leonie’s Travel Pty Ltd v Qantas Airways Limited [2010] FCAFC 37

by Adrian Honnery

Introduction

The Full Federal Court of Australia has applied the principles of convergence, comity and consistency in interpreting the International Air Transport Association’s standard Agency Agreement: Leonie’s Travel Pty Ltd v Qantas Airways Limited [2010] FCAFC 37.

Key points for consideration
  • the Full Federal Court found in favour of Leonie’s Travel
  • in applying the three principles, the Court found Qantas could not exclude a fuel surcharge unilaterally when calculating the commission payable to travel agents
  • this was despite it being reasonably arguable by Qantas that the wording in a provision of IATA’s Agency Agreement gave it that right.
Outcome

Qantas is now liable to Leonie’s Travel and other travel agents potentially for tens of millions of dollars in unpaid commission.

The Full Federal Court’s judgment is likely to apply in numerous international transport contexts, not just to the airline industry. And its observations on convergence, comity and consistency are likely to provide guidance to courts, both inside and outside of Australia.

The International Air Transport Association’s standard Agency Agreement

The Full Federal Court of Australia has applied the principles of convergence, comity and consistency in interpreting the International Air Transport Association’s standard Agency Agreement: Leonie’s Travel Pty Ltd v Qantas Airways Limited [2010] FCAFC 37.

International transport has led to a convergence in contractual terms, conditions and practices. Through comity or mutual respect between the world’s courts, the interpretation of these internationally used standardised contracts is informed by judgments made all around the world. This has the desirable effect of providing operators with consistent rights and obligations internationally.

The unanimous decision of Justices Lander, Rares and Besanko in Leonie’s Travel v Qantas placed emphasis on those three principles of interpreting international contracts.

In applying the three principles, their Honours held that Qantas could not exclude a fuel surcharge unilaterally when calculating the commission payable to travel agents.

This was despite it being reasonably arguable by Qantas that the wording in a provision of IATA’s Agency Agreement gave it that right.

An industry standard used by many

In reaching their decision their Honours gave substantial weight to the fact that IATA’s Agency Agreement essentially is an industry standard used by many airlines and travel agents internationally. They recognised that this convergence in industry practice requires courts to carefully consider the judgments of other courts “to give international trade and commerce certainty and coherence”. This they held is important because participants in the international business community have a “need to know authoritatively what their rights and obligations are”.

It therefore logically followed that if the relevant provisions in the IATA Agency Agreement had been judicially determined by a well respected court previously, then that earlier decision “is entitled to be given considerable respect”.

Following an international decision

The meaning and effect of the relevant provision had already been determined. It had been the subject of a case heard by the Court of Appeal of England and Wales: Association of British Travel Agents Ltd v British Airways plc [2000] 2 All ER (Comm) 204. In that earlier decision, the Court of Appeal of England and Wales held that airlines do not have the right to unilaterally exclude a fuel surcharge from the calculation of commission payable to travel agents under the IATA Agency Agreement.

The Federal Court was of the view that the earlier judgment was not plainly wrong, and therefore should be followed. And so it did, finding in favour of Leonie’s Travel.

This means that Qantas is now liable to Leonie’s Travel and other travel agents potentially for tens of millions of dollars in unpaid commission.

The Full Federal Court’s judgment is likely to apply in numerous international transport contexts, not just to the airline industry. And its observations on convergence, comity and consistency are likely to provide guidance to courts, both inside and outside of Australia.

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Acquittal of pilots in night take-off case

by Toby Biddle

A recent Supreme Court case highlights the importance of early investigation and preservation of evidence of transport incidents by investigating authorities.

Key points for consideration:

  • Supreme Court granted permanent stay of proceedings on the basis of delay in investigation and prosecution
  • High Court appeal reversed stay of proceedings and resulted in jury finding pilots not guilty of all charges.

Two commercial pilots charged with reckless operation of an aircraft during take-off have been acquitted of all charges. The two pilots, a captain and a first officer, were operating a Boeing 737 from Launceston to Melbourne. The aircraft’s departure took place after the closure of the airport’s control tower, so the pilots were required to activate the airport’s runway lights through radio signals. It was alleged that the pilots failed to do this and thereby endangered the lives of approximately 70 passengers on board.

The allegations were strenuously denied by the pilots who stated that the lights were on at all times prior to take-off. On behalf of the pilots, it was contended that:

  • witness observations of the lights being off were likely explained by an anomaly in the airport lighting system which caused the lights to extinguish just as the aircraft was leaving the ground, at which point the pilots could not see the runway
  • on the basis of expert aviation and lighting evidence that there was sufficient light emanating from the aircraft to make the take-off without lights safe
  • on the basis of psychological evidence, that any failure of the pilots to notice the lights extinguishing could be explained by inadvertence rather than recklessness.

The pilots were prosecuted in the Supreme Court of Tasmania. In 2008 the Supreme Court granted a permanent stay of the proceedings on the basis of delay in investigation and prosecution which resulted, among other things, in loss of data on the aircraft’s flight data recorder which could have established the pilots’ innocence.

However, later in 2008, the High Court allowed an appeal reversing the stay and directed that the matter be listed for trial in the Supreme Court. The trial resulted in a jury finding the pilots not guilty of all charges

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Immunity Offerings: Federal Court provides guidance on the Foreign States Immunities Act

Australian Competition and Consumer Commission v P.T. Garuda Indonesia Ltd [2010] FCA 551

by Calum Henderson and Tara Michaels

Introduction

P.T. Garuda Indonesia (Garuda) is one of a number of international airlines currently the subject of a suite of proceedings brought by the Australian Competition and Consumer Commission (ACCC) in the Federal Court against the airlines alleging that they entered into, and gave effect to, price fixing arrangements/understandings in relation to the charges they levied for freight services.

Earlier this year, Garuda sought, by way of a pre trial application, to bring these proceedings to an early conclusion on the basis of an entitlement to immunity from the jurisdiction of the Court under sections 9 and 22 of the Foreign States Immunities Act 1985 (Cth) (FSIA).

Key points for consideration
  • it was alleged that the conduct fell foul of price fixing and competition provisions of the Trade Practices Act 1974
  • fundamental to this case was whether:
    • Garuda was entitled to the immunity conferred by section 9 of the FSIA on the basis that it is a “separate entity”
    • the immunity (if conferred by section 9) was ousted by the engagement of the exception in section 11.
Outcome

While Justice Jacobson accepted that the alleged arrangements/understandings between the airlines might be construed as “commercial transactions”, the claims which constitute the subject matter of the ACCC’s proceeding do not arise out of the “transactions” between Garuda and the other airlines but rather from the alleged anti competitive effect of the transactions.

The legislation

It was alleged that Garuda’s conduct fell foul of section 45A (the former price fixing provision) of the Trade Practices Act 1974 (Cth) (TPA) and contravenes sections 45(2)(a)(ii) and 45(2)(b)(ii) on the basis that the alleged arrangements/understandings had the purpose or were likely to have the effect of substantially lessening competition.

The Federal Court has recently provided some guidance as to the degree of control required to be exercised by a foreign State government over an entity (in this case, an international airline) so as to enable the entity to take advantage of the immunity offered under the Foreign States Immunities Act 1985 (Cth).

Section 9 of the FSIA confers immunity on “foreign States” subject to the exceptions enumerated in the Act.

Section 22 of the FSIA operates to extend the application of this immunity to so called “separate entities” which are defined for the purposes of the FSIA as follows:

separate entity, in relation to a foreign State, means a natural
person (other than an Australian citizen), or a body corporate or
corporation sole (other than a body corporate or corporation sole
that has been established by or under a law of Australia), who or
that:

(a) is an agency or instrumentality of the foreign State; and
(b) is not a department or organ of the executive government of
the foreign State.

Of relevance, section 11 of the FSIA contains an exception to the immunity offered by section 9 where the proceeding, sought to be avoided by the foreign State, “concerns a commercial transaction”.

Two key questions

The decision of his Honour Justice Jacobson to dismiss Garuda’s application turned upon two key questions, namely:

  • whether Garuda was entitled to the immunity conferred by section 9 of the FSIA on the basis that it is a “separate entity”
  • whether the immunity (if conferred by section 9) was ousted by the engagement of the exception in section 11.

The consideration

In considering whether Garuda constituted a “separate entity” for the purposes of the FSIA, Justice Jacobson made some important observations as to the indicia necessary define a person/entity as “an agency or instrumentality of a foreign State”. In his Honour’s view, it is not sufficient that there be foreign State ownership or control of the person/entity. Rather, it is necessary that the “separate entity” “be an agency or instrumentality which performs many of the functions of a department or organ of the foreign State, although organised separately from it1 and that it “is empowered to, and in fact serves, a particular government purpose2.

Justice Jacobson did not consider it open to him on the evidence before him to find that the Republic of Indonesia exercised actual control (that is, real or tangible day-to-day management3) over Garuda’s business and operations. Having found that Garuda had not satisfied the “control test”, his Honour regarded the question whether Garuda performed “governmental functions” as redundant (although he dealt with it briefly finding that Garuda similarly failed to establish that it was carrying out functions of a public character).

Although Justice Jacobson noted, in light of his finding on the threshold question whether Garuda was entitled to immunity, that it was similarly unnecessary to determine whether the commercial transaction exception in section 11 was enlivened, he nevertheless addressed the question briefly in his reasons. This was the first occasion on which section 11 of the FSIA had fallen for consideration by the Court. His Honour therefore referred to United Kingdom authorities regarding corresponding legislation concluding that the task for him was to:

characterise the proceeding brought by the ACCC against Garuda and then ask whether the proceeding concerns, or relates to a commercial transaction. That is to say, what is the subject matter of the proceeding and does it arise out of a commercial transaction as defined in s 11(3) of the Act?4

While Justice Jacobson accepted that the alleged arrangements/understandings between the airlines might be construed as “commercial transactions”, the claims which constitute the subject matter of the ACCC’s proceeding do not arise out of the “transactions” between Garuda and the other airlines but rather from the alleged anti competitive effect of the transactions.


1 At 69 per Jacobson J
2 At 71 per Jacobson J
3 At 88 per Jacobson J
4 At 125 per Jacobson J

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