Court of First Instance decision
Court of Final Appeal decision
Companies that do business with governments or nationalised companies will have more difficulty in enforcing judgments or arbitral awards in Hong Kong following a recent court decision. The Court of Final Appeal has ruled that sovereign immunity applies to states even when they are contracting in a purely commercial capacity. The court ruling also casts doubt on the effectiveness of agreements by state-owned enterprises not to rely on sovereignty immunity waiver clauses.
The case involved an obscure dispute between the Democratic Republic of Congo, a US-based investment fund and a state-owned company in China. At stake was Hong Kong's prized reputation for judicial independence under the 'one country, two systems' model implemented on the handover from British rule in 1997. What makes the ruling so controversial is that Democratic Republic of the Congo v FG Hemisphere Associates marks the first time that the Court of Final Appeal has asked China to interpret Hong Kong's constitution, the Basic Law. The ruling is provisional, pending China's response. Controversially, the Chinese Foreign Ministry sent three letters to the lower courts in the course of the case, stating that no foreign government can be sued in the Hong Kong's courts.
The case arose out of attempts by a US investment fund, FG Hemisphere Associates LLC, to enforce two arbitration awards - worth over US$123 million - against assets belonging to the Democratic Republic of Congo in Hong Kong. The assets in question were moneys that were due to be paid to the Democratic Republic of Congo and a company that it owned, La Générale des Carrières et des Mines, by the Hong Kong-listed China Railway Group in exchange for the right to mine the Democratic Republic of Congo's copper and cobalt resources. The Democratic Republic of Congo claimed that the Hong Kong courts had no jurisdiction to grant enforcement because of the doctrine of sovereign immunity.
Of the two types of sovereign immunity, China has always recognised absolute immunity - that is, the policy of not exercising jurisdiction over a foreign state in the courts of the home country. However, before 1997 Hong Kong recognised restrictive immunity, which operated as an exception to the principle, and whereby a party to a commercial transaction could seek redress in the courts of Hong Kong. China is a signatory to the 2004 UN Convention on Jurisdictional Immunities of States and Their Property, which acknowledges the doctrine of restrictive immunity, but it has yet to ratify the convention.
The origins of the dispute go back to the 1980s, when a Yugoslav company, Energoinvest, was contracted by the Democratic Republic of Congo to build a hydroelectric plant and electrical infrastructure. The Democratic Republic of Congo defaulted and Energoinvest sold its debt to FG Hemisphere. FG Hemisphere had managed to collect US$2.8 million in various jurisdictions around the world before attempting to enforce the awards in Hong Kong.
FG Hemisphere originally obtained an order that allowed it to enforce the awards as a judgment of the Hong Kong court. The Democratic Republic of Congo applied to set aside the order on the basis that the Hong Kong courts had no jurisdiction to adjudicate, as the Democratic Republic of Congo enjoyed absolute state immunity. The secretary for justice was granted leave to intervene in the proceedings on the basis that the case was in the public interest.
Court of First Instance decision
The Court of First Instance held that the transaction was a cooperative venture in the public interest between two sovereign states; as such, sovereign immunity did not apply. The Court of Appeal held by a two-to-one majority that the transaction was a commercial venture to which the doctrine of restrictive immunity applied, meaning that FG Hemisphere could proceed to enforce the awards in Hong Kong.
Court of Final Appeal decision
The Court of Final Appeal held by a three-to-two majority that, at common law, it is for the sovereign state to determine the principle of state immunity which it applies in its relations with other sovereign states. There is no scope for a municipality such as the Hong Kong Special Administrative Region to adopt a principle of state immunity other than that adopted in China. Justices Patrick Chan, Robert Ribeiro and Anthony Mason, in the majority, held that subject to the determination of the Standing Committee of the National People's Congress, the Hong Kong courts must adopt the doctrine of absolute immunity in order to be consistent with China's approach. In so doing, the majority sided with China's Foreign Ministry. In one of its letters the ministry claimed that the application in Hong Kong of restrictive immunity "would prejudice the sovereignty of China". The ministry stated that:
"The courts in China have no jurisdiction over, nor in practice have they ever entertained, any case in which a foreign state or government is sued as a defendant or any claim involving the property of any foreign state or government, irrespective of the nature or purpose of the relevant act of the foreign state or government and also irrespective of the nature, purpose or use of the relevant property of the foreign state or government. At the same time, China has never accepted any foreign courts having jurisdiction over cases in which the state or Government of China is sued as a defendant, or over cases involving the property of the state or Government of China. This principled position held by the Government of China is unequivocal and consistent."
The court held that the Basic Law reinforces this position. Article 13 allocates responsibility for foreign affairs to China's Central People's Government. Article 19(3) stipulates that the Hong Kong courts have no jurisdiction over "acts of state, such as defence and foreign affairs", and that they must determine questions of fact that concern acts of state in accordance with a certificate issued by the chief executive, based on a certifying document from the Central People's Government. The court concluded that the Central People's Government's determination of China's policy of state immunity as a policy of absolute immunity is an "act of state, such as defence and foreign affairs" within the meaning of Article 19(3), and that the Hong Kong courts therefore have no jurisdiction over the determination of such policy.
Although the common law previously in force continues to apply in Hong Kong under Article 8 of the Basic Law, it does so subject to such modifications, adaptations, limitations or exceptions as are necessary to bring its rules into conformity with Hong Kong's status as a special administrative region of China and to avoid inconsistency with the Basic Law.
In the minority, Justice Bokary wrote: "It has been known that the day would come when the court has to give a decision on judicial independence. That day has come." Dismissing Congo's appeal against the claim would have been the result "required by the independent judicial application of the law".
The judgment could set a precedent that would affect other companies which seek to enforce judgments or arbitral awards against state-run businesses with assets in Hong Kong. Most contracts concerning states or state-owned enterprises include an express provision whereby the state expressly waives claims to sovereign immunity; the judgment will call into question the effectiveness of such clauses. The agreements signed by the Democratic Republic of Congo included a promise to carry out any arbitration award and to "have waived recourse insofar as such waiver can validly be made". This ruling suggests that even express waiver of immunity clauses will not be considered sufficient to constitute waiver of sovereign immunity.
More broadly, the decision, according to some legislators, drives a dangerous opening into the Basic Law, potentially allowing the Standing Committee to enlarge the areas over which the Hong Kong courts have no jurisdiction. The next step is the decision of the committee itself, which meets every two months. The next meeting is in August 2011 and the decision could come as early as then.
For further information on this topic please contact Paul Li or Nigel Sharman at Simmons & Simmons by telephone (+852 2868 1131), fax (+852 2810 5040) or email ([email protected] or [email protected]).