Sovereign Immunity Absolute in Hong Kong

Sovereign Immunity Absolute in Hong Kong

Fulbright Briefing

Democratic Republic of the Congo v FG Hemisphere Associates LLC (FACV Nos, 5, 6 & 7 of 2010)

The Hong Kong Court of Final Appeal (the CFA) recently issued its judgment in Democratic Republic of the Congo v FG Hemisphere Associates LLC regarding the ability of states to claim sovereign immunity in the Hong Kong courts.  In a majority decision, the CFA ruled that foreign states enjoy absolute immunity from jurisdiction[1] in Hong Kong and that there is no exception in relation to activity and assets of a commercial nature.  The case also raises important constitutional questions regarding the autonomy of the Hong Kong legal system from Mainland China.

BACKGROUND

The case arises from attempts by FG Hemisphere Associates (FGH), a vulture fund specialising in the recovery of sovereign debt, to recover funds from the Democratic Republic of Congo (the Congo) due from the construction of a hydro-electric facility undertaken by a Yugoslavian company, Energoinvest, in the 1980s. FGH sought to enforce two arbitration awards in Hong Kong against fees due to the Congo by China Railway Group.

Leave to enforce the awards was granted to FGH in 2008, but the Congo successfully applied to set aside that order, arguing that it enjoyed absolute sovereign immunity before the Hong Kong courts. On appeal by FGH, the Hong Kong Court of Appeal found that Hong Kong recognised the doctrine of restrictive (as opposed to absolute) sovereign immunity, such that sovereign immunity did not extend to activity and assets of a commercial nature.  This decision was appealed to the CFA.

THE CFA'S DECISION

Absolute or restrictive immunity?

Mainland China applies a doctrine of absolute immunity, as distinct from the common law doctrine of restrictive sovereign immunity practiced in Hong Kong at the time of the handover of the territory from Britain to China in 1997.  The CFA was therefore required to determine whether this inconsistency was reconcilable under the Basic Law of Hong Kong which guarantees the autonomy of the Hong Kong judiciary and legal system for a minimum of 50 years from the handover, subject to certain limitations.

The majority of the CFA relied upon articles 13 and 19 of the Basic Law which provide that the Chinese Central Government shall be responsible for foreign affairs relating to Hong Kong and that the Hong Kong courts have no jurisdiction over "acts of state such as defence and foreign affairs". They held that, since China applies a doctrine of absolute sovereign immunity, so must Hong Kong lest "a divergent state immunity policy [between Hong Kong and China] embarrass and prejudice the State in its conduct of foreign affairs."

Was immunity waived?

The majority were not persuaded by the argument that the Congo had nonetheless waived its right to state immunity by agreeing to arbitration in accordance with the ICC Arbitration Rules.  The ICC Rules provide that "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." The CFA considered that such a pre-dispute undertaking was insufficient to waive immunity. As the Summary of the Majority Judgement states, "a voluntary submission [must] be unequivocal and made at the time when the courts of the forum State are being asked to exercise their jurisdiction against the foreign State in question."[2]

Further steps

Article 158(3) of the Basic Law requires that the CFA refer to the National People's Congress of the PRC (the NPC) matters within the responsibility of the Chinese Central Government or concerning the relationship between the Chinese Central Government and Hong Kong.  The CFA concluded that issues arising from the interpretation of articles 13 and 19 of the Basic Law should therefore be referred to the NPC. Accordingly, the CFA's decision is provisional, although expected to be confirmed by the NPC in due course.

OBSERVATIONS

The CFA decision means that absolute state immunity[3] now applies unequivocally in the Hong Kong courts and cannot be waived by a pre-dispute arbitration agreement. This has obvious consequences for post-arbitration enforcement strategy, particularly whether or not to seek to enforce against state-held assets in Hong Kong. However, such considerations arise regardless of the arbitral venue, and would arise whenever enforcement of an award is sought against state-owned assets in Hong Kong, whether the arbitration was held in Hong Kong, Singapore, London or elsewhere. Accordingly, such considerations should not affect Hong Kong's position as a leading venue for international arbitration, particularly for disputes with a Chinese or Asian element.

Some commentators have suggested that as a consequence of the CFA's decision, foreign states which have entered into arbitration agreements are also immune from the supervisory jurisdiction of the Hong Kong courts in relation to arbitrations sited in Hong Kong. This concern is likely to prove misplaced.  The Hong Kong courts should continue to exercise supervisory jurisdiction over arbitrations sited in Hong Kong, even where the state party does not actively take part in the arbitration.  The decision of the Court of Appeal in this case expressly confirmed that an arbitration clause operated as a waiver of immunity with respect to the court's supervisory jurisdiction over the arbitration, and this finding (which is in accordance with customary international law) was not overturned by the CFA.  Accordingly, the CFA's decision should have no impact on Hong Kong's position as a pre-eminent international arbitration seat.

Visit the Fulbright & Jaworski Publications page for more analysis of International & Foreign Law issues.

For more information about LexisNexis products and solutions connect with us through our corporate site.



[1]A separate question arises in relation to sovereign immunity from execution against state assets, which was not considered by the CFA in this case.

[2]As the Congo is not a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the CFA did not need to consider whether being a party to the New York Convention amounted to a waiver of state immunity, an issue which had been touched upon in the earlier decision of the Court of Appeal.

[3]FGH v Congo deals exclusively with the immunity of foreign states. Chinese-state owned entities cannot rely upon state immunity as they are not foreign to Hong Kong. The question of whether China and Chinese-state owned entities can instead rely upon crown immunity in Hong Kong is the subject of another case before the Hong Kong Court of Appeal, Intraline Resources v Hua Tian Long.