Post 1997, Hong Kong has been in something of a quandary with regard to the issue of sovereign state immunity. On the one hand, the pre-1997 Common Law in Hong Kong acknowledged the doctrine of restrictive state immunity, that is, that a state could be sued when it has engaged in purely commercial transactions. On the other hand, the position in the People’s Republic of China has been consistent and unequivocal: Sovereign states enjoy absolute immunity from domestic courts of another sovereign state, the only exception being where the defendant state waives immunity before the forum state.

On August 26, this dilemma came one step closer to being resolved through the landmark case Democratic Republic of the Congo v FG Hemisphere Associates. The case concerns the attempt by US-based investment fund FG Hemisphere Associates to enforce two arbitral awards totaling US$123 million against DRC assets in Hong Kong. In June, the Hong Kong Court of Final Appeal, in a controversial judgment overturning the Court of Appeal, came to the view that the DRC enjoyed an absolute right of immunity notwithstanding what appeared to be an express waiver of immunity in the agreements signed by the DRC.

This was not the end of the matter, however, because the CFA then took advantage of Article 158 of the Basic Law and, for the first time, referred to the Standing Committee of the National People’s Congress under Article 158 of Hong Kong’s Basic Law.

Last week, the SCNPC released its draft response, which clearly states that Hong Kong must follow the PRC’s position, as the question of state immunity concerns foreign affairs. While this decision will not have a profound impact on Hong Kong’s "one state, two systems policy," because both Articles 13 and 19 of Hong Kong Basic Law defer responsibility to the PRC for matters of foreign and diplomatic affairs, it may well have practical repercussions in its commercial context.

What is clear from this case is that it will be increasingly difficult for those seeking to bring an enforcement action against a sovereign state’s assets in Hong Kong. The judgment calls into question whether even an express waiver of immunity clause by a sovereign nation in respect to enforcement will be effective; indeed it suggests that such a clause will not be.

This means that where there is no state-to-state treaty that applies to establish a waiver of the doctrine of state immunity, then a defendant state must expressly consent before the forum state to that state’s jurisdiction. This consent is needed at two stages: the jurisdiction stage and the execution stage. Consent at the latter stage seems highly unlikely in practice.

The decision does have only limited application in that it applies only to circumstances where a party seeks to enforce an arbitral award or court judgment against a foreign state’s assets held in Hong Kong.

It seems that a carefully worded agreement-to-arbitrate clause may still operate to remove state immunity in respect to the jurisdiction of the arbitral tribunal over the state.

It also appears that a Hong Kong award against the defendant state will continue to be enforceable against that state’s commercial assets in other jurisdictions that are signatories to the New York Convention and adopt restrictive immunity, such as the UK.

The decision does not affect the position in respect to enforcement against Chinese state-owned (crown) assets in Hong Kong, as sovereign immunity does not apply between the PRC and Hong Kong. Although the PRC government enjoys "crown immunity," common law principles on waiver of that crown immunity will apply that are not affected by this judgment.