Article government Australian Foreign Relations

How will the Australia’s Foreign Relations Act affect government and business contracts?

08 March 2021

In a time of heightened focus by countries across the globe on national interests, including national security and certainty of supply – and in the midst of a global pandemic – the Australia’s Foreign Relations (State and Territory Arrangements) Act 2020 (Cth) (Act), and its associated Australia’s Foreign Relations (State and Territory Arrangements) Rules 2020 (Rules), commenced on 10 December 2020.

The new Act and Rules follow other recent initiatives by the Australian Government that prioritise the national interest, including:

changes made to the Foreign Investment Review Board (FIRB) legislation to introduce a new national security test;
proposed changes to the Security of Critical Infrastructure Act 2018 (Cth) and notably a proposed expansion of ‘critical infrastructure’ to include education and research, health, telecommunications, data and cloud services, financial services, energy and utilities, food, defence and space; and
the inquiry into foreign interference in Australia’s public universities and research agencies.

As deadlines for notification of arrangements caught by the Act approach, we consider how both business and government will be affected by the new regime.

Key purpose and immediate impact of the Act

The Act establishes a framework for the Commonwealth Government to ensure that arrangements, whether existing or proposed, between Australian state or territory governments and foreign governments (and associated entities of those governments) do not adversely affect Australia’s foreign relations, and are not inconsistent with Australia’s foreign policy.[1]

The Act aims to create a systematic and consistent approach to foreign engagement across all levels of Australian government.[2] From 10 March 2021, State/Territory entities will be required to:

seek approval from the Minister for Foreign Affairs to negotiate or enter into any ‘core foreign arrangements’;
notify the Minister when proposing to enter into any ‘non-core foreign arrangements’; and
notify the Minister after entering into any ‘foreign arrangements’, whether core or non-core.[3]

To ensure oversight of arrangements that are effective before 10 March 2021, State/Territory entities must notify the Minister of pre-existing foreign arrangements (and known ‘subsidiary arrangements’) that are core foreign arrangements (before 10 March 2021) and that are non-core foreign arrangements (before 10 June 2021) unless a longer period is prescribed (which is not currently the case).[4]

The notification obligations under the Act are imposed on State/Territory entities.

What are relevant ‘foreign arrangements’?

A foreign arrangement is any written arrangement, agreement, contract, understanding or undertaking entered into between a State/Territory entity and a foreign entity.[5] This includes arrangements that are not legally binding or are not made in Australia.[6]

Certain foreign arrangements, and variations, are exempt from key provisions of the Act.[7]

A core foreign arrangement is an arrangement between a core State/Territory entity and a core foreign entity.[8]

A non-core foreign arrangement is an arrangement between:

a non-core State/Territory entity and a non-core foreign entity;
a non-core State/Territory entity and a core foreign entity; or
a core State/Territory entity and a non-core foreign entity.[9]

The meaning of State/Territory entity is discussed in more detail below. Foreign entities include a foreign country, the national government of a foreign country and certain universities without institutional autonomy.[10] The Act specifies which foreign entities are core – any other type of foreign entity will be considered non-core.

What is a State/Territory entity?

A State/Territory entity is defined to mean any of the following entities.[11]

Entity	Further guidance[12]
A state or territory	(a) This part of the definition covers New South Wales, Queensland, South Australia, Tasmania, Victoria, Western Australia, the Australian Capital Territory, the Northern Territory and Australia’s seven external territories.
The government of a state or territory	(b) This part of the definition covers the executive government of the state or territory (and not the legislature or judiciary).
A department or agency (however described) that is part of an entity covered by paragraph (a) or (b)	(c) This part of the definition covers departments, and other agencies, commissions and offices that are part of a state or territory or its government .The words ‘however described’ in the definition are intended to capture entities that are akin to a department or agency, but known by another name (for example, a ‘commission’). Authorities of a state or territory established for a public purpose are not included in the definition, recognising the legal separation of these bodies from state or territory governments.
A body established for the purposes of local government by, or under a law of a state or a territory	(d) This part of the definition covers all local government areas, regardless of their name, including councils, district councils, cities, shires and towns. The inclusion of this type of entity recognises that local government bodies frequently enter into arrangements with foreign entities, including sister city or friendship arrangements.
A university established by, or under, a law of a state or a territory	(e) This part of the definition covers universities to the extent that they are established by, or under, a state or territory statute. The Act separately states that the Australian National University will generally be treated as falling under this limb of the definition, even though it is established by Commonwealth legislation.This part of the definition is not intended to cover private universities.
An entity that is prescribed by the Rules to be a State/Territory entity	(f) This paragraph gives the Minister flexibility in prescribing entities that are not covered by the other elements of the definition, but are still appropriately characterised as State/Territory entities. The Minister may prescribe both types of entities as well as specific entities. The Rules do not currently prescribe any such entities.

Arrangements entered into by public officials or other agents acting in their official capacity on behalf of any of the above entities are considered to be entered into by the relevant State/Territory entity.

An entity covered by (a), (b) and/or (c) in the table above is a core State/Territory entity, even if it is also covered by (d), (e) and/or (f).[13]

Any other State/Territory entity will be considered a non-core State/Territory entity.

Which entities are excluded from the definition?

The following entities are specifically excluded from the definition of State/Territory entity under the Act.

Entity	Further details[14]
A corporation that operates on a ‘commercial basis’	(a) This exclusion is intended to ensure that any commercial corporation, even one that is owned or controlled by a state or territory, is not covered by the Act. For example, state or territory-owned corporations, such as water corporations or port authorities, are not intended to be covered by the Act. The exclusion recognises that the scheme is not intended to regulate purely commercial head arrangements. Previous cases (on laws other than the Act) suggest that relevant factors in determining whether an entity operates on a commercial basis include any legislation that establishes the entity (considered as a whole) and the operations of the entity. Based on previous case law, the relevant legislation that establishes the entity does not need to explicitly state that the entity must operate on a commercial basis for it to be considered to be operating on a commercial basis.[2] Although previous relevant cases were decided in the context of different legislation and the meaning of ‘commercial basis’ was not the focus of the litigation, they provide useful guidance as to how this exclusion may be approached under the Act.
A hospital	(b) No further guidance is provided by the Explanatory Memorandum or by government-published resources. This exclusion is somewhat unusual because a hospital (of itself) is generally not a legal entity capable of entering into a contract.
An entity that is prescribed by the Rules (as not being a State/Territory entity)	(c) Similarly to (f), this exclusion ensures the Minister has the flexibility to prescribe both types of entities and specific entities as not being included in the definition of ‘State/Territory entity’. No such entities are currently prescribed.

Who else could be affected by the Act?

Parties to subsidiary arrangements

Although State/Territory entities are responsible for notifying the Minister of foreign arrangements and subsidiary arrangements, the Act has the potential to affect the operations of a broad range of other entities.

Most directly, and as noted above, the Act also applies to ‘subsidiary arrangements’ of a foreign arrangement. An arrangement will be a subsidiary arrangement of a foreign arrangement where it is entered ‘under the auspices’ of a foreign arrangement, but is not itself a foreign arrangement.[16]

An arrangement is entered under the auspices of a foreign arrangement if it is entered at the same time, or after, the foreign arrangement, and any of the following applies:

the arrangement is entered for the purposes of implementing a foreign arrangement (whether directly or indirectly);
the foreign arrangement contemplates the arrangement (or arrangements of the same kind) being entered, and the arrangement is entered as a consequence of the foreign arrangement or any actions taken under the foreign arrangement; or
the arrangement and the foreign arrangement have a relationship that is prescribed by the Rules.[17] No such relationship is currently prescribed.

Importantly, the classification of an arrangement as a subsidiary arrangement under the Act does not depend on the parties to the subsidiary arrangement. A wide range of entities may be captured by this drafting, regardless of who they are contracting with.

Other entities

Although Australian private universities are not covered by the Act, the Department of Foreign Affairs and Trade (DFAT) has published guidance that indicates that Australian private universities are encouraged to be transparent about arrangements with foreign entities by publishing information about those arrangements on their website.[18] Australian private universities can also seek advice from DFAT on the foreign policy implications of potential arrangements before entering into them.[19]

Separately, it is worth noting that the flow-down effects of a foreign arrangement or subsidiary arrangement being the subject of a declaration of a Minister could affect a range of other entities.

What are the Minister’s key powers under the Act?

The Minister has a range of powers under the Act, including the ability to declare that a foreign arrangement is invalid and unenforceable; must be varied or terminated or is not in operation, (depending on the nature of the arrangement) to the extent specified in the declaration.

The Minister may make such a declaration where the Minister determines that an arrangement adversely affects foreign relations or is inconsistent with Australia’s foreign policy.[20]

The Minister can also declare that a subsidiary arrangement is invalid and unenforceable, must be varied or terminated, or is not in operation (depending on the nature of the arrangement),[21] where the subsidiary arrangement meets the following two criteria:

1. Any of the following apply to the head foreign arrangement:

the Minister declared that the foreign arrangement is invalid and unenforceable, required to be varied or terminated, or not in operation;
the foreign arrangement was entered into in breach of the Act (for example, a core foreign arrangement was entered into by the State/Territory entity without the Minister’s approval);
in relation to pre-existing foreign arrangements, the foreign arrangement was not notified in accordance with the Act.

2. The Minister is satisfied that the subsidiary arrangement adversely affects, or is likely to adversely affect, Australia’s foreign relations, or is, or is likely to be, inconsistent with Australia’s foreign policy.

Although the notification obligations in the Act are not imposed directly on contracting parties to a subsidiary arrangement (unless they are a State/Territory entity), State/Territory entities (or others involved in the administration of the Act) may request assistance in notifying such arrangements to the Minister.

Adverse consequences may arise where entities do not comply with their notification and approval obligations under the Act. Importantly, where a pre-existing foreign arrangement that is a core foreign arrangement is not disclosed in accordance with the Act, the arrangement will automatically be invalid and unenforceable, required to be terminated or cease in operation (depending on the nature of the agreement).[22]

Key takeaways

State/territory entities need to promptly consider their notification and other obligations under the Act, and work towards implementing processes to ensure ongoing compliance with the Act.

Other entities should identify whether any arrangements they have entered into, or are planning on entering into, could be captured as subsidiary arrangements. Processes and risk management strategies to deal with the potential consequences of the Act on any identified agreements should be considered. The Act requires the maintenance of a public register of foreign arrangements and subsidiary arrangements, which may be inspected online before entering into new arrangements to determine if they may be affected.

Parties to contracts being negotiated will also need to keep these new laws in mind, particularly how they may impact on confidentiality terms that attempt to make the existence of the arrangement confidential.

_{[1] Australia’s Foreign Relations (State and Territory Arrangements) Act 2020 (Cth) (Act) s 5(1); Revised Explanatory Memorandum, Australia’s Foreign Relations (State and Territory Arrangements) Bill 2020 (Explanatory Memorandum) [1].}
_{[2] Explanatory Memorandum [2].}
_{[3] See Parts 2 and 3 of the Act.}
_{[4] Act Schedule 1 ss 2(3) and 3(2).}
_{[5] Act s 6(2).}
_{[6] Act ss 6(2) and 9(1).}
_{[7] See in particular Act s 4 (definition of “exempt arrangement); Australia’s Foreign Relations (State and Territory Arrangements) Rules 2020 (Rules) r 5.}
_{[8] Act s 10(2).}
_{[9] Act s 4, noting that this definition states that a non-core foreign arrangement means a foreign arrangement that is not a core foreign arrangement.}
_{[10] See Act s 8 for a full list.}
_{[11] Act s 7.}
_{[12] See Explanatory Memorandum.}
_{[13] Act s 10(3).}
_{[14] See Explanatory Memorandum.}
_{[15] Airservices Australia v Canadian Airlines International Limited & Others [1999] HCA 62.}
_[16]_{Act s 12(1).}
_{[17] See Act s 12(2) for the full definition of ‘under the auspices’.}
_{[18] See https://www.foreignarrangements.gov.au/sites/default/files/2020-12/fact_sheet_4_-_australian_public_universities.pdf.}
_{[19] Ibid.}
_{[20] See Part 4 of the Act.}
_{[21] See Part 4, Division 3 of the Act.}
_{[22] Act Schedule 1 s 2(3).}