Two decisions by Hong Kong's Court of First Instance ("CFI"), Intraline Resources Sdn Bhd v The Owners of the Ship or Vessel "Hua Tian Long"1 ("Hua Tian Long"), and the Court of Final Appeal ("CFA"), Democratic Republic of the Congo and Others v FG Hemisphere Associates LLC("FG Hemisphere")2 , have put the spotlight on the applicability of the concepts of Crown immunity and State immunity in Hong Kong since the handover on 1 July 1997.
Crown immunity and State immunity are common law concepts though both were restricted by statute. The extent to which they survived and continue to be recognised in Hong Kong was addressed by the Courts in these two cases. The decisions in these cases are important for anyone contracting with the PRC, whether through their state-owned enterprises ("SOEs") or otherwise, or with foreign sovereign States.
Continuance of Crown immunity
The issue of Crown immunity was examined in Hua Tian Long. Under Crown immunity, the Crown is immune from the processes of its own courts such that the courts cannot make an order against the Crown. By the Crown Proceedings Ordinance (Cap. 300), the Crown in right of the then colony of Hong Kong was subject to the courts. But the Crown in the right of the UK was not. The CFI found that despite the change in sovereignty, in substance nothing had changed with regards to Crown immunity. So the PRC's Central People's Government enjoys immunity, but the government of the Hong Kong SAR does not.
The term 'Crown' includes an organ of the State, which is determined by the control which the Crown has over the organ and whether the organ can exercise independent powers of its own. Application of the control test is a necessary factual exercise and conducted on a case-by-case basis. It may result in a seemingly paradoxical situation where a State organ is found immune for certain purposes but not for others.
Absolute State immunity applies in Hong Kong
State immunity relates to the immunity a State has from prosecution in a foreign court. State immunity, as a common law concept, is split into absolute and restrictive immunity.
Absolute immunity recognises that sovereign acts are not matters upon which another sovereign's court should adjudicate. A foreign State cannot be sued unless it wishes to submit to the jurisdiction of the court. In FG Hemisphere, by a 3-2 majority, the CFA (led by Sir Anthony Mason NPJ, the former Chief Justice of Australia) held that Hong Kong is bound by the mainland's position that foreign sovereign States have absolute immunity from prosecution in its courts.
Restrictive immunity distinguishes between activities of a governmental or public nature carried out by a foreign State or one of its organs, and activities of a commercial nature. It is premised on the fact that governments engage in commercial activities in respect of which they should not enjoy immunity. It is mainly followed by developed nations such as the UK and USA. The PRC has repeatedly rejected the concept.
Like with Crown immunity, State immunity extends to organs of State. However, what constitutes an organ of State was not explicitly defined. The focus is rather on the nature of the transactions that an entity is undertaking. An entity may be run as an organ of the State and not as a commercial enterprise, but the way in which the entity is run may mean that it ultimately serves commercial ends.
Arbitration agreement is not a waiver of immunity
Under the common law, a State can waive its Crown immunity and State immunity in two ways:
1. Express waiver in the face of the court: submitting to the court's jurisdiction at the time the court is asked to exercise it; or
2. State-to-State treaty: the State can give an advance waiver by signing a treaty to waive immunity in particular cases.
The CFA made it very clear in FG Hemisphere that a contractual 'waiver of immunity' clause is not the equivalent of a treaty and does not amount to an advance waiver by a foreign State to immunity.
What action needs to be undertaken by parties to an arbitration agreement involving sovereign States?
Keep a 'waiver of immunity' clause in the contract: though not at present effective in Hong Kong courts, such a clause can still operate in overseas jurisdictions such as the UK. Further, given the PRC's economic development, it may find it advantageous in the future to move away from the absolute immunity concept to restrictive immunity. The state of the law in Hong Kong may change at any time such that by the time an action for enforcement comes before the Hong Kong courts, a waiver clause will be given effect.
Keep an international arbitration clause in the contract: an international arbitration clause will still be effective as a waiver of immunity from suit in a contract with a State before an arbitration tribunal. The doctrine of State immunity can only be invoked in proceedings before courts (NB, enforcement of an arbitral award may require an express waiver or waiver by treaty). It should also be kept in mind that most SOEs may not want to be seen to act on behalf of the CPG such as to invoke State immunity in courts for fear it will discourage foreign investors from conducting business with them.
Pick an appropriate seat for dispute resolution: given the exceptional fact pattern of the case, FG Hemisphere stands as authority for a very narrow proposition, that is, foreign State assets are immune from enforcement in Hong Kong and any attempt to sue them in Hong Kong courts is pointless. Further, given that few foreign States have significant assets located in Hong Kong, the decision in practice operates within a very narrow compass. Where a foreign State is involved, a Hong Kong or Chinese party should not select Hong Kong courts. A Hong Kong arbitration is probably fine; there is a residual issue about the ability of the courts to "supervise" such a reference. Alternatively, select a venue in another jurisdiction which is signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 and which adopts restrictive immunity.
Negotiate wisely with SOEs: the Hua Tian Long case, on the other hand, is of much broader application. Plainly PRC State entities enjoy immunity; the issue becomes to what extent SOEs or State invested entities also enjoy immunity. This is a fact sensitive issue, though the Court reiterated the 'bright line' test of 'control'; if the State exercises operational control over the entity it is likely an organ of State. Chinese State parties and SOEs tend to prefer onshore arbitral seats; Hong Kong being generally acceptable. The problem to be confronted is what to do when the counterparty is a PRC State entity or might be, under the 'control' test, deemed a PRC organ of State. In those circumstances, the courts would have no jurisdiction. It is unclear from Hua Tian Long what principles apply in determining whether the 'Crown' has waived its immunity. This will be a fact-sensitive exercise, but it appears that the principles in respect of waiver in State immunity apply. Therefore, in the absence of an express waiver in the face of the court (eg. bringing a counterclaim as occurred in Hua Tian Long), an arbitration agreement and submission to arbitration will not be effective as a waiver during the enforcement stage.
Disclaimer: Mallesons Stephen Jaques is licensed in China as a foreign law firm and, as is the case for all international law firms, we are not authorised to issue legal opinions on matters of Chinese law. This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
-  3 HKLRD 611
- FACV 5, 6 and 7 of 2010