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 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.
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
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
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."
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.
The CFA decision means that absolute
state immunity 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.
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A separate question arises in relation to sovereign immunity
from execution against state assets, which was not considered by the CFA in
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.
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.