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Focus: Absolute state immunity prevents enforcement in Hong Kong

29 June 2011

In brief: Hong Kong's Court of Final Appeal recently held that no state may be sued in Hong Kong's courts unless the state waives its immunity, and that submitting to arbitration does not constitute a waiver. This will have a major impact on any business wanting to enforce a claim against a state's assets in Hong Kong. For the first time, the court also referred questions about the interpretation of Hong Kong's Basic Law to the standing committee of the National People's Congress in Beijing. Partner Simon McConnell , Special Counsel Nicola Nygh , and Law Graduate Edmund Robinson report on the court's decision.

How does it affect you?

The decision in Democratic Republic of the Congo and Others v FG Hemisphere Associates LLC establishes that:

  • the doctrine of absolute state immunity applies in Hong Kong. This means that Hong Kong will never make a state a party to legal proceedings, or seek to recover specific property or damages from the state, unless the state in question waives immunity; and
  • Hong Kong's courts will not treat the state entering into an arbitration agreement or submitting to arbitration as a waiver of that immunity. A state will only be taken to have waived its immunity where it expressly waives immunity before the court.

Background

In 1980 and 1986, Energoinvest JNA entered into two credit agreements with the Republic of Zaire and a Zairean corporation called Société Nationale d'Electricité. Both credit agreements contained an International Chamber of Commerce (ICC) arbitration clause. Zaire and Société Nationale d'Electricité defaulted and, in 2001, Energoinvest commenced arbitrations against them. The arbitrations took place in Paris and Zurich and, in each case, the tribunal made substantial awards in favour of Energoinvest. In 2004, FG Hemisphere Associates LLC (FG) purchased Energoinvest's rights in the arbitration awards and the underlying debts.

In 2007, Zaire's successor state, the Democratic Republic of Congo, and a group of Chinese state enterprises entered into a Memorandum of Agreement for a scheme under which the Chinese companies would finance and construct infrastructure projects in the Congo. One of the companies publicly announced that a $221 million 'entry fee' would be paid to the Congo. FG sued the state in Hong Kong's courts on the basis that this $221 million had become a Congolese asset in Hong Kong.

The question was whether, given the doctrine of state immunity, the Congo could be sued in Hong Kong's courts. At first instance, Justice Saw of the Hong Kong High Court found that it could be. The Congo challenged this finding, and Justice Reyes agreed and set aside Justice Saw's orders. On further appeal, the Court of Appeal restored Justice Saw's order in a 2:1 decision. The Congo then appealed to Hong Kong's highest court, the Court of Final Appeal.1

The decision of the Court of Final Appeal

The Court of Final Appeal had three questions to determine.

  • First, is the state immunity that is available in the courts of Hong Kong absolute or restrictive such that it excludes commercial activities undertaken by a state?
  • Secondly, if the Congo did have immunity, had it waived that immunity by entering into an arbitration agreement or by submitting to arbitration?
  • Thirdly, was the court required to refer any questions to the Standing Committee of the National People's Congress (the standing committee) in Beijing? Hong Kong's constitution, known as the Basic Law, provides that if Hong Kong's courts need to interpret provisions of the Basic Law that concern affairs which are the responsibility of China's Central People's Government (CPG) or concern the relationship between the CPG and Hong Kong, and if the interpretation will affect the judgments given, then the courts shall seek an interpretation from the standing committee.

The majority (comprising Justices Chan, Ribeiro and Sir Anthony Mason) held that the absolute theory of immunity applied to Hong Kong, that the Congo had not waived that immunity, and that four questions (set out later) should be referred to the standing committee. Justices Bokhary and Mortimer vigorously dissented on all three points.

Question 1: Absolute or restrictive immunity?

All members of the court accepted that the common law of the United Kingdom applied in its entirety to Hong Kong prior to the United Kingdom passing sovereignty over Hong Kong to China on 1 July 1997, and that the drafters of Hong Kong's new constitution, known as the Basic Law, intended Hong Kong's laws to remain unchanged as far as possible.2 They further accepted that before 1 July 1997, the common law of the United Kingdom had abandoned absolute immunity in favour of restrictive immunity.3 The question, then, was how – if at all – Hong Kong's legal position changed after the handover.

The majority held that, on 1 July 1997, Hong Kong took on the Chinese policy of absolute state immunity. It found that a state's policy as to state immunity applies uniformly to the whole state ('one state, one immunity').4 The majority acknowledged that, generally speaking, the common law before the handover continued to apply in Hong Kong, but found that it was modified so as not to contravene the Basic Law and so as to bring it into conformity with Hong Kong's status as a special administrative region of China. This required the common law to be modified such that restrictive immunity was replaced with absolute immunity. The majority also found that, because the Basic Law excluded the Court of Final Appeal's jurisdiction over 'acts of state such as . . . foreign affairs', the court was bound to follow the Chinese government's policy on state immunity.5

Question 2: Did the Congo waive its immunity?

The majority found that Congo had not waived its immunity. FG had submitted that, if the Congo did have absolute immunity, it had waived it by entering into credit agreements that included arbitration clauses. Alternatively, FG submitted, the Congo had waived its immunity by signing terms of reference by which it agreed to the arbitrations being conducted in accordance with the 1998 ICC rules of arbitration. Rule 28.6 of those rules provides that, by submitting the dispute to arbitration under the rules 'the parties undertake to carry out any Award without delay and shall be deemed to have waived their right to any form of recourse insofar as such waiver can validly be made' (emphasis added).

The majority found that, when a state enters into an arbitration agreement with a private individual or corporation, it submits only to the arbitrators' jurisdiction and not to the jurisdiction of any state (except possibly to the states which exercise supervisory jurisdiction over the arbitration – in this case France and Switzerland).6 All that an award in one's favour provides is a right to apply for leave to enforce that award. If the non-state party seeks then to enforce the award in a court, the state may even at that stage invoke its immunity. Relying on the House of Lords' decision in Duff Development v Kelantan, the majority found that courts should only find that immunity has been waived where the state has expressly waived it before the court.7 In this case, the Congo had, to the contrary, actively asserted its immunity.

Question 3: Should questions be referred to the standing committee?

Hong Kong jealously guards its autonomy and, until now, the court has never elected to refer questions of interpretation to the standing committee in Beijing. However, the majority found that, in this case, it was required to refer the following four questions to the standing committee because it was necessary to determine the questions to resolve the case and the questions concerned the affairs of the CPG:

  • Does the CPG have power to determine the policy of China on state immunity?
  • If so, are the courts of Hong Kong bound to follow that policy?
  • Does such a determination by the CPG fall within the meaning of 'acts of state such as defence and foreign affairs'?
  • Is the common law in force before 1 July 1997 to be applied subject to such modifications as are necessary to ensure that it is consistent with the policy on state immunity as determined by the CPG?8

The standing committee is yet to provide its interpretation.

Conclusion

The majority's findings were made subject to the standing committee's interpretation of the Basic Law and, accordingly, may be altered after the interpretation has been received. However, given the CPG's strong policy of absolute immunity, it seems unlikely that the standing committee will disagree with the court's interpretation.

The court's decision is not limited to enforcement of arbitral awards. Subject to any contrary decision by the standing committee, absolute state immunity will also apply to claims brought directly against foreign states in Hong Kong courts and to applications to enforce foreign judgments against states in Hong Kong. Those contracting with a state entity should be aware that they are unlikely to be able to enforce awards, judgments or claims generally against the state entity in Hong Kong or mainland China unless the state entity expressly waives immunity in the courts of those jurisdictions. As a result it is important to ensure so far as possible that the state has assets in a jurisdiction that does not apply the doctrine of absolute immunity. This can be difficult as assets can be moved between jurisdictions. It may also be worth seeking a sovereign guarantee that the state may be less likely to renege. However, even a sovereign guarantee may be little comfort where a claim is pursued against a successor state as was the case with the Congo.

Footnotes
  1. Democratic Republic of the Congo and Others v FG Hemisphere Associates LLC FACV5/2010.
  2. At [76], [212].
  3. At [62]-[72] and [323].
  4. At [321]-[322].
  5. At [324]-[331].
  6. At [377]-[378].
  7. At [384]-[391].
  8. At [394]-[407].

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