Sydney – The commonwealth is fighting a US company's bid to win compensation in the federal court for losing vast gas reserves in the Timor Sea.

Petrotimor and its related company Oceanic Exploration claim in papers filed in the Federal Court in Sydney that Timor Gap treaty arrangements made by Australia breach international law. The government is seeking to have the case, which is in its earliest stages, thrown out of court on grounds yet to be outlined.

Petrotimor and Oceanic are suing the government and other corporations that now hold exploration rights, including Phillips Petroleum, claiming they held pre-existing rights to most of the reserves through a concession granted in 1974 by Portugal, which then controlled East Timor. The companies suspended that agreement after months of civil unrest and the invasion of the province by Indonesia in December 1975.

The Timor Gap Treaty signed by Australia and Indonesia in 1989 extinguished the exploration rights of Petrotimor and Oceanic, the court documents claim. The treaty was illegal because it breached section 31 of the constitution, which only permits the commonwealth to acquire property on "just terms", the papers said.

Ron Nathan for the companies said outside the court in Sydney today they would argue the gas reserve rights gained through the invasion of East Timor were illegally obtained. "This case is quite unprecedented as it raises lots of issues which flowed from the Indonesian invasion of East Timor," he said. "On one view, the Indonesian invasion was illegal in international law, yet recognised by Australia." The matter goes before the courts again on Friday and is listed for a directions hearing on January 16.