In a landmark provisional judgment in Democratic Republic of the Congo v. FG Hemisphere Associates FACV Nos. 5, 6 & 7 of 2010, the Hong Kong Court of Final Appeal (CFA) has held by a majority of 3:2 that absolute sovereign immunity applies in Hong Kong, with no exception for purely commercial transactions or assets. Taken with the judgment of the Court of First Instance (CFI) in Intraline Resources SDN BHD v. The Owners of the Ship or Vessel “Hua Tian Long” HCAJ 59 of 2008 (click here) in relation to crown immunity in April 2010, the CFA’s judgment means that both sovereign immunity and crown immunity are absolute under the laws of Hong Kong. The CFA also confirmed that immunity cannot be waived through a pre-dispute contractual waiver, with important consequences for enforcement against State assets located in Hong Kong. However, and whilst the judgment raises a number of interesting political and constitutional issues, it should not affect the choice of Hong Kong as a leading seat of arbitration when contracting with States and State entities, particularly in PRC-related contracts.

Summary

  1. Sovereign immunity is premised upon the principle that the courts of one State may not assume jurisdiction over another State without consent (ie unless sovereign immunity is validly waived in accordance with the principles discussed below). Accordingly, sovereign immunity in the Hong Kong context will be relevant where the counterparty is a State other than the PRC or a non-PRC State entity. Crown immunity, on the other hand, is premised upon the principle that the courts of a State may not assume jurisdiction over that State (the crown) without its consent. Accordingly, in Hong Kong, crown immunity will be relevant if the counterparty is the PRC or a PRC State entity. Crown immunity does not apply to the Government of the Hong Kong SAR, against which actions can be brought under the regime set out in the Crown Proceedings Ordinance (Cap. 300).
  2. It is now clear that both sovereign immunity and crown immunity are absolute under the law of Hong Kong. There is no exception for transactions and assets which are of a purely commercial rather than a sovereign nature (in contrast to the “restrictive” doctrine of sovereign immunity which is applied by many jurisdictions). An entity entitled to immunity will be able to assert it in all transactions and in respect of all assets, regardless of their commercial or sovereign character. Whilst the position in relation to sovereign immunity is technically provisional pending the consideration by the Standing Committee of the National People’s Congress (SCNPC) of certain questions referred to it by the CFA under Hong Kong’s Basic Law, it seems likely that the interpretation to be rendered by the SCNPC will endorse the overall tenor of the CFA’s provisional judgment.
  3. The CFA in FG Hemisphere affirmed the earlier findings of the Court of Appeal (CA) in relation to waiver of sovereign immunity, holding that any waiver must be express and “in the face of the court” in order to be effective. In practice, this means that the waiver must be made at the time the court is to exercise jurisdiction. Predispute contractual provisions, such as a Hong Kong court jurisdiction clause or an express waiver clause, will not, therefore, suffice to constitute a waiver of immunity. Based upon the judgment of the CFI in Intraline, it appears likely that the same principles regarding waiver will apply to crown immunity as to sovereign immunity at any stage at which the doctrine may be invoked.
  4. Where a party is dealing with a State counterparty, we therefore recommend that the Hong Kong courts should not be specified as a forum for the resolution of disputes (although arbitration, including in Hong Kong, will be a viable option, as discussed below). In addition, it would be prudent not to place reliance upon express waiver of immunity clauses, although these should still be included in contracts with State counterparties wherever possible, since they will be effective in many other jurisdictions. Identifying whether or not an entity is part of the State or the crown, and therefore entitled to immunity, may not always be straightforward, and it may be necessary to seek specific advice on a case-by-case basis.
  5. Neither sovereign nor crown immunity will prevent an arbitral Tribunal seated in Hong Kong from assuming jurisdiction to hear a dispute. This is because arbitration is a contractual process and the status and authority of the arbitral Tribunal are derived from the contract between the parties. In the case of arbitration, there is therefore no question of the courts of a State assuming jurisdiction over any State, whether their own State (in the case of crown immunity) or a foreign State (in the case of sovereign immunity), and no immunity will be engaged.
  6. It is likely that an arbitration clause will operate as an implied waiver of immunity from the supervisory jurisdiction of the courts of Hong Kong over an arbitration seated in Hong Kong. An arbitration clause is generally accepted to act as an implied waiver of immunity under customary international law, and that position was endorsed in obiter remarks by the CA in its judgment in FG Hemisphere.
  7. In practice, therefore, the judgments of the CFA in FG Hemisphere and the CFI in Intraline should not affect the choice of Hong Kong as a seat for arbitration.
  8. The most significant impact of the FG Hemisphere and Intraline cases is in relation to enforcement and execution against State assets located in Hong Kong. The CFA confirmed in FG Hemisphere that an arbitration clause will not operate as an implied waiver of immunity either from enforcement proceedings in the Hong Kong courts or from execution or attachment against assets. In addition, because any effective waiver of immunity must be made “in the face of the court”, an express waiver clause will not be effective to waive immunity in respect of enforcement and execution either.
  9. The risk posed by immunity in respect of enforcement and execution will be relevant where State assets against which enforcement might be sought are located in Hong Kong, and particularly in cases in which they are the only such assets of the relevant State or State entity. However, the position will be the same regardless of the jurisdiction in which the relevant arbitral Award or court judgment was rendered. Accordingly, whilst immunity in respect of enforcement and execution is an important issue of which to be aware, it should not affect the choice of Hong Kong as a seat of arbitration.  

Restrictive and absolute immunity

The judgment of the CFA in FG Hemisphere reversed the previous judgment of the CA of February 2010, which had held that the restrictive doctrine of sovereign immunity applied in Hong Kong (click here for Herbert Smith’s briefing on the CA’s judgment) despite the fact that the PRC itself favoured the absolute doctrine.  

The CFA stated that the “fundamental question” which fell to be determined was whether “it is open to the courts of the HKSAR to adopt a legal doctrine of state immunity… which is different from the principled policy practised by the PRC.”

In the view of the CFA, the answer to that question was “No”. It was the PRC’s “prerogative to decide on the scope of the immunity it is prepared to confer on other States”, and Hong Kong “lacks the very attributes of sovereignty which might enable a State or province to establish its own policy or practice of state immunity, independently of the policy or practice of the State of which it forms part”. In addition, Article 13(1) of the Basic Law, Hong Kong’s mini-constitution, provides that the Central People’s Government (CPG) of the PRC shall be responsible for matters of foreign affairs relating to Hong Kong, and Article 19(3) specifically carves out from the general jurisdiction of the Hong Kong courts over all cases in Hong Kong “acts of state such as defence and foreign affairs”. Accordingly, because the PRC adheres to the absolute doctrine of sovereign immunity, the CFA held that absolute immunity must also apply in Hong Kong.

Because its decision involved the interpretation of provisions of the Basic Law which were potentially determinative of the case, the Court referred certain questions relating to its interpretation of Articles 13 and 19 to the SCNPC for interpretation under Article 158 of the Basic Law. This is the first time that the courts of Hong Kong have sought such an interpretation (although the SCNPC has given interpretations of the Basic Law on three previous occasions). It is likely to be the final quarter of 2011 before the judgment of the CFA is finalised. However, given the firm stance on absolute immunity adopted by the CPG in evidence placed before the court in FG Hemisphere, it seems likely that the interpretation to be provided by the SCNPC will endorse the CFA’s provisional judgment.

There has been considerable discussion amongst commentators and the media of the impact of the request for interpretation upon judicial independence in Hong Kong. The CFA itself strongly rejected such arguments, stating that they failed to address the “central question whether the HKSAR can as a matter of constitutional principle, espouse a different state immunity doctrine” from the PRC, to which it had concluded the answer must be “No”. Indeed, the majority in the CFA was at pains to point out that “the only substantive or practical aspect of the common law doctrine [of sovereign immunity] likely to require consequential modification [in order to comply with the HKSAR’s constitutional status as part of the PRC, and the Basic Law] involves the rejection of a commercial exception in state immunity cases… The common law jurisprudence on matters such as waiver of state immunity and the interplay between such rules and other branches of the law including the law of arbitration will continue to require judicial determination in particular cases.”

Immunity from suit and immunity from execution

As both the CFA in FG Hemisphere and the CFI in Intraline made clear, sovereign and crown immunity may be invoked both when the courts of the forum State seek to assume jurisdiction and when execution is sought against assets. Separate waivers must be obtained at each stage. In practice, this means that immunity may be relevant at a number of distinct stages in the dispute resolution process:

  • Stage 1: immunity from the adjudicative jurisdiction of an arbitral Tribunal or the Hong Kong court.
  • Stage 2: immunity from the supervisory jurisdiction of the courts of Hong Kong over any arbitration with its seat in Hong Kong.
  • Stage 3: immunity from enforcement proceedings in the courts of Hong Kong.
  • Stage 4: immunity from execution and attachment of assets.  

The impact of the judgments in FG Hemisphere and Intraline upon each of these stages is discussed further below.

The general rule: waiver of immunity must be express and “in the face of the court

The CFA noted in FG Hemisphere that Hong Kong has no legislative regime for sovereign immunity equivalent to the State Immunity Act 1978 in the United Kingdom (which had applied in Hong Kong prior to the resumption of sovereignty by the PRC in 1997), and held that “The common law rules therefore apply and they are very chary about implying any waiver”. Quoting with approval the authorities which require an express “submission in the face of the Court”, the CFA held the common law rule to be “consonant with elementary good sense by requiring an unequivocal submission to the jurisdiction of the forum State at the time when the forum State’s jurisdiction is invoked against the impleaded State.” Although the CFA was referring specifically to jurisdiction in relation to enforcement proceedings, it is clear from the authorities that the same would apply to the jurisdiction of the Hong Kong courts at the adjudicative stage, and that neither a Hong Kong court jurisdiction clause nor an express waiver clause would be effective to provide the courts of Hong Kong with jurisdiction or to waive immunity at any of the above stages.

Implied waiver of immunity through an arbitration clause

Notwithstanding its clear endorsement of the common law position on express waiver, the CFA nevertheless drew attention to the fact that an arbitration clause may act as an implied waiver of sovereign immunity depending upon the law of the seat of the arbitration. Although the CFA refrained from stating expressly the position under the law of Hong Kong, the judgments of the CFA and the CA together provide useful indications in this regard. It is important for these purposes to distinguish between immunity in the context of the arbitral Tribunal and immunity from the supervisory jurisdiction of the courts of the seat over the arbitration.

Immunity from the jurisdiction of the court or arbitral proceedings (“Stage 1”)

For the reasons already discussed, it will not be possible to obtain an effective waiver of immunity from the jurisdiction of the courts of Hong Kong through either a Hong Kong court jurisdiction clause or an express waiver clause. It is therefore advisable when dealing with State counterparties not to adopt a Hong Kong court jurisdiction clause.

In contrast, the question of sovereign or crown immunity, and therefore of waiver, does not, strictly speaking, arise in relation to the jurisdiction of an arbitral Tribunal. Arbitration is a consensual process derived from a private contract between the parties, and the authority of the arbitral Tribunal flows from that contract. The adjudication of a dispute by an arbitral Tribunal does not, therefore, involve the exercise of jurisdiction by the courts of a State over any State, whether their own State (in the case of crown immunity) or a foreign State (in the case of sovereign immunity). As the CFA stated in FG Hemisphere, “when a State enters into an arbitration agreement with a private individual or company, that act does not constitute a submission to any other State’s jurisdiction. It involves merely the assumption of contractual obligations vis-à-vis the other party to the agreement.” Therefore, no immunity will be engaged by the assumption of jurisdiction by an arbitral Tribunal. It is therefore strictly a misnomer to refer to an arbitration clause as constituting an implied waiver of immunity from the arbitration proceedings themselves, although they are nevertheless commonly characterised in this way (including, for example, in the judgment of the CA). What is clear is that sovereign and crown immunity will not apply to the arbitration proceedings themselves.  

In this regard, section 34 of Hong Kong’s new Arbitration Ordinance (Cap. 609) expressly preserves the principle of “kompetenz-kompetenz”, which holds that it is for the arbitral Tribunal (and not, for example, the courts of the seat) to rule upon its own jurisdiction.

Immunity from the supervisory jurisdiction of the courts of Hong Kong over the arbitration (“Stage 2”)

Although the CFA did not itself express an opinion on the question of whether or not an arbitration clause will amount to an implied waiver of the supervisory jurisdiction of the courts of Hong Kong over an arbitration seated in Hong Kong or otherwise, it cited a leading work on State immunity by Lady Hazel Fox CMG QC, an eminent commentator on this area, which concludes that “the exception for arbitration agreements operates… to remove state immunity from the first stage of arbitration in which the national courts exercise supervisory powers”. That conclusion had itself been quoted and approved (albeit in obiter remarks) by the CA, an endorsement which was not disturbed by the judgment of the CFA. It is therefore strongly arguable that the law of Hong Kong accords with customary international law on this issue and an arbitration clause will amount to an implied waiver of immunity in respect of the supervisory jurisdiction of the Hong Kong courts. Furthermore, court proceedings in support of arbitration are relatively rare in practice, and most arbitrations proceed from beginning to end without requiring the input of domestic courts. Moreover, in several important aspects of arbitral procedure, Hong Kong’s new Arbitration Ordinance (Cap. 609) shifts responsibility for functions which have traditionally been part of the supervisory role of the courts to the Hong Kong International Arbitration Centre (HKIAC) (for example, in relation to determining the number of arbitrators, appointing arbitrators and appointing mediators), further narrowing the circumstances in which it will be necessary to invoke the supervisory jurisdiction of the courts.

Whilst there is, of course, an unquantifiable risk that a State counterparty might take this point in any proceedings before the Hong Kong courts in support of an arbitration, Hong Kong remains a very attractive seat. This is particularly so in relation to PRC-related contracts, since Hong Kong is a readily acceptable venue for PRC counterparties who may otherwise be reluctant to agree an offshore seat. In practice, therefore, the judgments of the CFA in FG Hemisphere and the CFI in Intraline should not affect the choice of Hong Kong as a seat for arbitration.  

Waiver of immunity from enforcement proceedings (“Stage 3”) and execution (“Stage 4”)

The CFA held clearly in FG Hemisphere that an arbitration clause will not act as an implied waiver of the jurisdiction of the courts of Hong Kong in relation to the enforcement of an arbitral Award (which Lady Fox also concludes is the position at customary international law). Under Hong Kong common law, any waiver of immunity from enforcement proceedings or from execution must be express and in the face of the court.

It is notable that in this case the State counterparty which claimed immunity, the Democratic Republic of the Congo (DRC), was not party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (NYC). In rejecting the argument that an arbitration clause amounted to an implied waiver of immunity from the jurisdiction of the Hong Kong courts in respect of enforcement proceedings, the CA stated that it would have been different had the DRC been party to the NYC, because the NYC contains a representation that each State party may enforce arbitral Awards against each other State party. Whilst this has led to speculation that an arbitration clause may suffice to waive immunity from enforcement in Hong Kong where the State counterparty is a party to the NYC, this point remains to be tested in a future case. One hurdle that would need to be overcome in establishing such a proposition is the argument that the NYC arguably imposes upon State signatories only an obligation to recognise and enforce arbitral Awards, and does not constitute a representation that those States consent to the enforcement against them of all arbitral Awards.

Sovereign immunity and crown immunity

The CFI in Intraline did not question the submissions of the parties that the same principles which govern the waiver of sovereign immunity should govern waiver of crown immunity. On that basis, and given that both doctrines are now absolute, it is possible as a general rule to apply the same principles on waiver to both types of immunity. It is nevertheless useful to be mindful of which immunity may apply in given circumstances, since the distinction may still be relevant in some circumstances (for example, in relation to the detailed rules on what constitutes part of the sovereign or the crown).

Where a counterparty is a State or State entity and disputes are to be resolved in Hong Kong and/or the State counterparty has assets which are located in Hong Kong, either sovereign or crown immunity will be relevant, depending upon the identity of the counterparty.

As discussed above, sovereign immunity in the Hong Kong context will be relevant where the counterparty is a State other than the PRC or a non-PRC State entity. Crown immunity, on the other hand, (which was held by the CFI in Intraline to apply in absolute form in Hong Kong) will be relevant if the counterparty is the PRC or a PRC State entity. The Government of the Hong Kong SAR does not benefit from crown immunity, since actions can be brought against it under the regime set out in the Crown Proceedings Ordinance (Cap. 300).

In the case of each of sovereign immunity and crown immunity, identifying whether an entity is part of the State or the crown, and therefore entitled to immunity, may not always be straightforward, and it may be necessary to seek specific advice on a case-by-case basis.  

The impact on dispute resolution in Hong Kong

The combined effect of the judgment of the CFA in FG Hemisphere and the judgment of the CFI in Intraline upon dispute resolution in Hong Kong should not be overstated.

The issue of sovereign or crown immunity will only apply in the case of contracts with States and State entities, and not those with purely commercial counterparties. Where an immunity does apply, Hong Kong jurisdiction clauses should not be adopted (since the immunity, if applicable, will be effective to prevent the courts of Hong Kong from assuming adjudicative jurisdiction), but the cases should not affect the choice of Hong Kong as a seat of arbitration. It is clear that an arbitration clause will provide the arbitral Tribunal with adjudicative jurisdiction over any dispute, and there are also compelling grounds to expect that an arbitration clause will amount to a waiver of immunity in respect of the supervisory jurisdiction of the Hong Kong courts.

If an arbitration clause is adopted, it is only in relation to enforcement proceedings and execution against assets that the combination of absolute immunity and the ineffectiveness of express waiver clauses will cause difficulties. However, it should be noted that such issues will apply regardless of where the arbitral Award or court judgment which is the subject of enforcement was rendered, and so should not affect the choice of Hong Kong as a seat of arbitration. Moreover, in many cases the counterparty will have assets in other jurisdictions, many of which may adopt a restrictive immunity regime or a more permissive approach to express waivers, in which case enforcement in Hong Kong may be unnecessary.

With a modern arbitration regime under the new Arbitration Ordinance (Cap. 609), one of the leading arbitral institutions in the HKIAC, and reliable, supportive courts, Hong Kong continues to be an attractive venue for arbitration – particularly when dealing with PRC counterparties.