Prior to the change over of sovereignty over Hong Kong from the United Kingdom to China, which occurred on July 1, 1997, one of the areas of concern was whether the Hong Kong judicial system could stand up to its new sovereign in cases where China had a strong economic or political interest, as well as cases near the border line of foreign affairs and defense, two areas reserved to China under Articles 13 and 19 of the Basic Law, Hong Kong’s mini-constitution. For the most part, since 1997 up to the present, Hong Kong courts have admirably maintained their independence and, to be fair, the new sovereign, China, has often shown restraint with respect to Hong Kong judicial matters.
FG Hemisphere Case
A recent case, FG Hemisphere Associates LLC v Democratic Republic of the Congo, CACV 373/2008 and CACV 43/2009, where a ruling was announced in February 2010 by the Court of Appeal of Hong Kong, is an example of one country, two systems operating and is a strong performance by the Hong Kong Judiciary. Since the Hong Kong Court of Appeal is the SAR’s intermediate appellate court, a decision by Hong Kong’s highest appellate court, the Court of Final Appeal, is possible, and indeed likely, down the road. Nevertheless, the opinion of the Court of Appeal in the FG Hemisphere case is instructive.
The case involves two 2003 arbitration awards made in France and in Switzerland against the Democratic Republic of the Congo (“DRC”). The original plaintiff was a Yugoslavia company, Energoinvest; FG Hemisphere is an assignee of Energoinvest’s awards. FG Hemisphere, a Delaware company, specializes in investing in emerging markets and distress assets. The total of both awards exceeds US$34 million, and, with interest, and less certain recoveries accomplished by FG Hemisphere in other jurisdictions, the amount payable stands at US$102,656,647.96.
Hong Kong became involved when it came to FG Hemisphere’s notice that a massive investment program in the DRC was being undertaken by Chinese state-owned companies. Under this program, these companies would acquire mineral exploitation rights for which sizeable entry fees were payable by them to the government of the DRC. The Chinese group included three companies incorporated in Hong Kong, each a wholly owned subsidiary of the China Railway Group Limited, a state-owned company established in the PRC, whose shares are listed on the Hong Kong and Shanghai’s stock exchanges. FG Hemisphere’s effort was first to freeze the payment of the entry fees to the DRC and then to seize them.
FG Hemisphere’s initial effort resulted in a decision by the Court of First Instance that the entry fees did not constitute a commercial transaction. The court found that the transaction was a cooperative venture became two sovereign states, China, and the DRC. Accordingly, the court ruled in December 2008 that it had no jurisdiction because of sovereign immunity. The case at hand is the appeal from this decision.
The centerpiece of the Court of Appeal decision is an analysis of the doctrine of sovereign immunity under Hong Kong law. From 1978 until the change in sovereignty, the Hong Kong law on sovereign immunity was stated in the State Immunity Act of 1978 of the UK, which was extended to Hong Kong by the State Immunity (Overseas Territories) Order 1979. The analysis is complicated by the PRC’s resumption of sovereignty with the effect that, except for statutes enumerated in an Annex to the Basic Law, UK statues ceased to have effect in Hong Kong as of July 1997. Accordingly, the court determined that Hong Kong law on sovereign immunity is the Common Law and eventually concluded that the Common Law recognizes the doctrine of restrictive sovereign immunity. Broadly, under the doctrine of restrictive immunity, a state can be sued for its commercial activities. Historically, China has been a leading proponent, along with a number of African countries, of the doctrine of absolute sovereign immunity. That is, states simply cannot be sued without their consent in the courts of another state. The Secretary for Justice of the Hong Kong Special Administrative Region had intervened in the FG Hemisphere case for the purpose of pointing out the Chinese’s views on absolute immunity and to advise the court that under the Basic Law, the immunity of states from judicial process was a matter of foreign affairs and, therefore, to be decided by China, the sovereign. In addition, China’s Ministry of Foreign Affairs also provided two letters to the court setting forth the view that China adhered to the doctrine of absolute sovereign immunity.
In a closely reasoned, 2-1 opinion that runs some 67 pages, the Court of Appeal concluded that the resolution of FG Hemisphere’s claims in a Hong Kong court was not a matter of Chinese foreign affairs. Rather, the court concluded that Hong Kong law applied and that the doctrine of restrictive immunity was the law of Hong Kong. The court went on to consider whether the DRC could have been said to have waived whatever immunity it might have by submitting to arbitration, and decided that submission to arbitration did not constitute a waiver with respect to the jurisdiction of the Hong Kong courts to consider an application for leave to enforce the resulting arbitral awards. The court continued the injunctions and remitted portions of the case to the trial court for a determination as to whether some of the entry fees due to the PRC might be intended to be used for sovereign purposes, a question not previously considered.
The FG Hemisphere case should be reassuring to those concerned about the independence of Hong Kong’s judiciary, more than a decade into Chinese rule. The case is a classic example of old school, common law judicial analysis, which includes a thoughtful rejection of two representations by China’s Ministry of Foreign Affairs, as well as arguments of the Hong Kong Government in favor of the Chinese position. While further developments are possible and a further appeal to the Court of Final Appeal is likely, as things now stand, the FG Hemisphere case is a good example of Hong Kong’s judicial system operating as it was designed.