On 8 June 2011, Hong Kong's highest court, the Court of Final Appeal ("CFA"), handed down its long-awaited judgment on the issue of State immunity in the "the Congo Case1".

The decision has caused a stir amongst the business, legal and political communities as it broke ground on Hong Kong's constitutional law, as well as having an impact on doing business with foreign governments in Hong Kong. The main issue was whether a foreign State could be sued in Hong Kong's courts - to recover debts from a business deal. In handling the matter, however, the judiciary was forced to discuss matters relating to the independence of Hong Kong's legal system.

The facts of the case involve a U.S. vulture fund seeking to recover debts from the Democratic Republic of the Congo ("DRC") in the Hong Kong courts. Having brought arbitration proceedings in France and Switzerland, the fund was seeking to enforce those arbitral awards in the Hong Kong courts, on the basis that the DRC had assets in Hong Kong. The DRC sought to assert State immunity from proceedings in the Hong Kong courts.  

State Immunity and the Jurisdiction of Hong Kong's courts

State immunity has a long history under domestic and international law, and is based on States recognizing each other as equal sovereigns and therefore adopting the policy of not exercising jurisdiction over a foreign State in their courts. Many common law jurisdictions (including Hong Kong pre-1997) recognize the principle of "restrictive" immunity, where immunity is granted to foreign States subject to an exception for commercial transactions. In contrast, the PRC recognizes "absolute" state immunity, which does not provide for any exceptions.

During proceedings in the lower courts, the PRC government2 wrote to the Hong Kong government3 stating its position - that of "absolute" immunity. It further asserted that the Hong Kong court did not have jurisdiction over this matter, it being an "act of state such as defence and foreign affairs", and that any application by Hong Kong of an inconsistent position would prejudice the overall interests of China.

In last week's ruling, pursuant to Article 158(3) of the Basic Law, the CFA sought an interpretation from the Standing Committee of the National People's Congress ("NPC") on those issues. Nevertheless, pending receipt of the NPC's interpretation, the CFA made a provisional ruling that, consistent with the PRC policy, foreign States, such as the DRC, are afforded "absolute" immunity from being sued in the Hong Kong courts.

Waiver of State Immunity by Agreement to Arbitration

A separate issue was whether the DRC had waived its right to State immunity by its agreement to arbitrate and its participation in arbitration proceedings. How could the DRC, in a commercial deal, agree to submit to arbitration and the enforcement of any arbitral award but subsequently, assert State immunity to avoid that promise?

On the facts of the case, the DRC's words and conduct were held insufficient to constitute an implied waiver of immunity or a submission to the courts' jurisdiction at the time when Hong Kong's jurisdiction was invoked against the DRC. While this decision calls into question whether or not State immunity can be effectively waived by way of a commercial agreement, the court's comments4 certainly highlight the importance of having a well drafted arbitration agreement and, where appropriate, express and specific waivers.

What are the implications of this case?

In light of the CFA's provisional decision (subject to the NPC interpretation) that foreign States are entitled to "absolute" immunity from proceedings in the Hong Kong courts, companies should prepare to take appropriate steps if and when doing business with foreign States. This may include:  

  • Drafting watertight clauses on arbitration, jurisdiction and waiver;
  • Taking security at the outset;
  • Adjusting the commercial terms to apportion risk appropriately.  

In relation to Hong Kong's status as a recommended forum for arbitration proceedings, this decision is of little or no effect, as Hong Kong awards will still be enforceable under the New York Convention and enforcement of awards against commercial entities is unaffected. This decision applies only to enforcement of awards in Hong Kong against foreign States, which understandably involves issues of sovereignty.  

Lastly, as a brief comment on Hong Kong's rule or law: the decision of the CFA to seek an interpretation from the NPC is a decision taken in line with Hong Kong's constitutional laws. Unlike previous cases, where the NPC's interpretation was requested by the executive branch of the government, this referral was made by the judiciary itself, by giving effect to the Basic Law independently.