Worldwide: Mainland China, Hong Kong And Macau To Apply Commercial Exception To State Immunity

The PRC has passed a new Foreign State Immunity Law which will apply the "restrictive" approach to foreign state immunity with effect from 1 January 2024. As a result, foreign states will not be granted immunity from suit or execution in the PRC in respect of commercial activities. The PRC government has indicated that the same approach should apply in Hong Kong and Macau (and references in this post to the PRC should be read accordingly).

The adoption of the new law is a watershed moment for state immunity rules in the PRC, which was previously a strong adherent of the absolute doctrine of immunity (which does not provide any exception for commercial activities). The PRC joins many other jurisdictions in adopting the restrictive approach (including the USA, the UK, India, Singapore, Australia, New Zealand and most member states of the European Union).

The new regime will make it possible to sue foreign states in the PRC courts in a much wider range of circumstances than was previously the case, and significantly expands the scope to enforce arbitral awards and court judgments against foreign states in the PRC.

Key features

The most significant changes introduced by the new law are as follows (and a detailed analysis can be found here):

• Commercial transactions and assets. It will be possible to bring court proceedings against foreign states in relation to commercial transactions and execute against commercial assets of foreign states (in each case, the key test being whether the transaction or assets relate to "commercial activities"). No waiver of immunity by the foreign state (whether in advance, or at the time of the proceedings) will be necessary.
• Arbitration-related proceedings. The new law includes an express exception to immunity for arbitration-related court proceedings arising out of commercial activities (including proceedings in relation to the validity of an arbitration agreement and the recognition, enforcement or setting aside of an arbitral award).
• Express waivers. Advance contractual waivers of immunity (as well as waivers by international treaty) from both suit and execution will be effective, although a waiver of immunity from suit will not give rise to a deemed waiver of immunity from execution, and parties should therefore take care to ensure that the scope of any contractual waiver expressly includes immunity from execution as well as suit.
• Implied waivers. A foreign state will be deemed to accept the jurisdiction of a PRC court in a variety of circumstances, for example because it brings a lawsuit or participates in a lawsuit as a defendant and raises a substantive defence or counterclaim. No implied waiver will arise simply because a foreign state participates in a lawsuit in order to claim immunity, its representatives appear as witnesses before a PRC court, or it consents to the application of PRC law in any matter.
• Specified categories of dispute. A foreign state will not have immunity from suit in respect of: claims under certain types of labour or service contract which are wholly or partially performed within the territory of the PRC (with certain exceptions); personal injury and property damage claims in respect of acts committed in the PRC; certain types of property dispute including in relation to immoveable property located in the PRC, the donation, bequest or inheritance of moveable or immoveable property by the state, and the management of trust property or bankruptcy property; and certain types of intellectual property cases.
• Reciprocity. Where a foreign state grants to the PRC and its property a level of immunity which is lower than that set out in the law, the principle of reciprocity will apply. Accordingly, this provision will only ever operate to reduce, not increase, the protection afforded to a foreign state.

It is also important to note that the new law does not affect the existing position in relation to:

• Arbitration proceedings. It is already the case that arbitration proceedings are not directly affected by foreign state immunity, because arbitral tribunals, unlike national courts, do not exercise the sovereign authority of one state over another state.
• State-owned enterprises ("SOEs"). Commercial SOEs which do not carry out sovereign functions are unable to claim immunity from suit or execution in the PRC. This is consistent with the definition of "foreign state" in the new law, which is confined to the foreign state itself, organs or component parts of the foreign state (such as a government department), and organisations or individuals which (i) are authorised by the foreign state to exercise sovereign power and (ii) carry out activities based on such authorisation.

Implications for Hong Kong

Hong Kong follows the same approach to foreign state immunity as the PRC, as confirmed in the landmark case of Democratic Republic of the Congo v. FG Hemisphere Associates LLC (FACV Nos 5, 6 & 7 of 2010). The Hong Kong Court of Final Appeal in that case followed an interpretation of Hong Kong's Basic Law provided by the Standing Committee of the National People's Congress ("SCNPC"), to the effect that the principles of state immunity should apply uniformly within the whole territory of the PRC.

The restrictive doctrine of immunity should therefore apply in Hong Kong once its adoption by the PRC takes effect from 1 January 2024. In a media interview immediately following the promulgation of the new law, an official of the Legislative Affairs Commission of the SCNPC confirmed that Hong Kong (as well as Macau) should follow the state immunity rules and policies set out in the new law once they come into force.

This is a positive development for Hong Kong as a dispute resolution forum (as explained in our previous briefing here). It will now be possible to sue foreign states in the Hong Kong courts in relation to commercial transactions and to execute against commercial assets of foreign states. In addition, advance contractual waivers of immunity (as well as waivers by international treaty) from both suit and execution will be effective. Previously, contractual waivers of immunity were ineffective as a matter of Hong Kong law and immunity had to be waived "in the face of the court" at the time when the court was asked to exercise jurisdiction. Given how commonly such provisions are included in contracts with states and state entities, this is a significant development.

Comment

This is the first time the PRC's policy on state immunity has been comprehensively set out in a legal instrument, providing welcome clarity and accessibility in relation to this important issue.

Although the PRC signed the UN Convention on Jurisdictional Immunities of States and Their Property (which applies the restrictive doctrine of immunity) in 2005, it has not ratified the Convention and the Convention has not yet entered into force. In the Congo case (mentioned above), the Central People's Government (whose position on immunity was set out in letters submitted to the Hong Kong court on its behalf) stated that the signature by the PRC of the Convention did not change the PRC's adherence to the doctrine of absolute immunity. It remains to be seen whether the PRC will proceed to ratify the Convention in light of the new law adopting the restrictive doctrine.

As a practical point, it may be advisable for parties entering into commercial contracts with foreign states and state entities (including contracts which provide for disputes to be resolved by arbitration) to include a provision confirming that the contract is of a commercial nature and arises out of commercial activities. Such a provision may assist parties' prospects of being able to rely upon the commercial activities exception and (where relevant) the exceptions in relation to arbitration-related proceedings before the PRC courts.

This article has been co-authored by Herbert Smith Freehills (in relation to Hong Kong law) and Herbert Smith Freehills Kewei, a joint operation between Herbert Smith Freehills LLP and Kewei Law Firmbased in the Shanghai Free Trade Zone (in relation to PRC law).

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.