Hong Kong: Hong Kong Court of Appeal Confirms That Foreign States Do Not Benefit From Absolute Immunity

On February 10, 2010, the Court of Appeal for the Special Administrative Region of Hong Kong ("HKSAR") delivered a landmark decision that will be welcomed by the international business community.  The majority decision rejected the argument that a foreign state had absolute immunity against the recognition and enforcement of arbitral awards in favour of an investor. This confirms the distinct character of the rules and principles of law applied before the courts of the Special Administrative Region of Hong Kong in matters relating to international commerce, as compared to the rules applicable to the mainland of the People's Republic of China ("PRC"). In this regard, it also confirms the constitutional jurisdiction of the courts of Hong Kong in matters of foreign state immunity.

At stake was the validity of enforcement proceedings instituted in aid of execution of two arbitral awards issued by the International Chamber of Commerce ("ICC") against the Democratic Republic of Congo ("DRC"). The proceedings were initiated by FG Hemisphere and Associates LLC ("FGH"), the assignee of the two awards. The two arbitral awards were recognized and leave to enforce was granted by a judge of the Hong Kong Court of First Instance during the initial ex parte phase of the proceedings, restraining a consortium of Chinese state corporations from making payments to the DRC under a cooperation agreement. However, the recognition and enforcement proceedings were then set aside by another judge after an inter partes hearing. The sum of money subject to the enforcement, over US$100,000,000, was part of a larger amount of some $350,000,000 payable as "entry fees" under a set of agreements whereby the Chinese consortium would pay money to the DRC over a period of time and construct infrastructure in exchange for mineral rights in the DRC. 

The decision of the Court of Appeal discusses several important issues of general interest in the field of arbitration and state immunity. Above all, it provides an answer to a crucial question for foreign investors in Hong Kong: what impact does the change of sovereignty have on the autonomy and distinctiveness of the Hong Kong legal system in matters of international commerce?

Reversing the decision rendered by a judge of the Hong Kong Court of First Instance, the Court of Appeal held by a majority that the DRC could not invoke foreign-state immunity from jurisdiction to prevent the courts of Hong Kong from recognizing the two arbitral awards, as the awards were based on a commercial transaction with the DRC and therefore fell within the commercial exception to state immunity under the international law doctrine of restrictive immunity.

The Court of Appeal also held in its majority ruling that a foreign State could not invoke immunity to prevent execution on its property if the State intended to use that property for non-public (or commercial) purposes, again under the doctrine of restrictive immunity. The question of whether the property in this particular case was intended for a commercial purpose was remitted to the Court of First Instance to be determined on a full evidentiary record.

One of the special features of this case was the intervention by the executive of the PRC, represented by the Secretary of Justice of the HKSAR, who argued in appeal that the rules of absolute immunity as they apply elsewhere in the PRC supersede any rules of restrictive immunity that may have otherwise applied in Hong Kong.

Another interesting feature of this case was the fact that, with the repeal of the UK statutes following the handover of Hong Kong, a statutory void had been created with respect to the question of applicable rules regarding state immunity. It was the first occasion in over 35 years that a court in Hong Kong had an opportunity to determine the content of the common law on the issue of state immunity.

Findings of the Court of Appeal

In a majority decision, the Court of Appeal held that the law of Hong Kong in relation to foreign-state immunity could only be properly determined by reference to the common law of Hong Kong, unless mainland Chinese legislation on the same subject matter was stipulated to have effect in Hong Kong, which was not the case. 

The Court came to the conclusion that customary international law adheres to the restrictive immunity doctrine, and therefore, Hong Kong common law should reflect customary international law to the extent that no inconsistency is created with such an adoption. The Court further held that there was no inconsistency between the maintenance of this rule and the Basic Law, the latter being the constitutional instrument governing the division of powers and laws between Hong Kong and mainland China.

Once the Court determined that the restrictive immunity doctrine was applicable, it had to determine whether the DRC could still benefit from immunity from the jurisdiction of the Hong Kong courts in respect of the recognition of the two ICC arbitral awards in favour of FGH. The Court concluded that the DRC had no such immunity, holding that the two ICC arbitral awards should be recognized under the commercial exception to foreign-state immunity. It found that the transaction underlying those arbitral awards fell within the commercial exception, being financing agreements between a private entity and the DRC, whereby electrical infrastructure was built for the DRC, with financing made available to the DRC by the original counterparty in order to facilitate payment for the works.

As for the issue of the DRC's immunity from the execution of the two ICC arbitral awards, the Court of Appeal concluded that the Court of First Instance had applied the wrong test since one must not look at the circumstances pursuant to which the foreign State becomes owner of the property that is the subject of execution, but rather one must look at the actual or intended use of the property. If the property in question is to be used for a commercial purpose, the foreign State will not have the benefit of immunity. In the present case, the Court found that FGH had established a good príma facie case regarding the intended use for commercial purposes of at least US$100 million out of a total of US$350 million payable by the Chinese companies to the DRC. Accordingly, the Court directed that an inquiry be conducted by the Court of First Instance in order to conclusively ascertain the intended purpose of the money payable by the Chinese companies.

Conclusion

Given the breadth of its review of the development of the law on foreign-state immunity across many jurisdictions, the Hong Kong Court of Appeal's judgment will be a key case in this area. It should be noted that at the heart of the reasoning of the majority was the importance attached to the maintenance of the expectations of "individuals, businesses and nations from all over the world" when conducting their affairs in Hong Kong, a centre of international commerce. This sends a clear message that, in matters of international commerce, stability and predictability should prevail in the establishment of legal relationships.

Ogilvy Renault LLP represents FG Hemisphere in Canada and has acted as counsel to FG Hemisphere in its worldwide efforts to obtain satisfaction of the two arbitral awards against the DRC and the Société nationale d'électricité.

About Ogilvy Renault

Ogilvy Renault LLP is a full-service law firm with close to 450 lawyers and patent and trade-mark agents practicing in the areas of business, litigation, intellectual property, and employment and labour. Ogilvy Renault has offices in Montréal, Ottawa, Québec, Toronto, and London (England), and serves some of the largest and most successful corporations in Canada and in more than 120 countries worldwide. Find out more at www.ogilvyrenault.com.

Voted best law firm in Canada two years in a row.
2008 and 2009 International Legal Alliance Summit & Awards.

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