A recent judgment of the Hong Kong Court of Final Appeal (“HKCFA”) in Democratic Republic of the Congo v FG Hemisphere Associates LLC has held, by a majority of three to two, that foreign States enjoy absolute immunity from jurisdiction in Hong Kong. The judgment is a detailed and important statement of the doctrine of immunity followed in Hong Kong, as well as a significant case on the constitutional relationship between Hong Kong and the People’s Republic of China (“PRC”).
In 2004, FG Hemisphere Associates LLC (“FGH”), a so-called “vulture fund” dealing in distressed assets, obtained the rights in two arbitration awards given against the Democratic Republic of the Congo (“DRC”). FGH sought to enforce the arbitration awards against various assets belonging to the DRC in Hong Kong. The DRC acknowledged service for the purposes of disputing jurisdiction. The dispute raised two issues to be determined by the courts of Hong Kong. The first concerned the nature of sovereign immunity: which doctrine of immunity, “absolute” or “restrictive”, is followed in Hong Kong? The second issue concerned waiver: had the DRC waived its immunity before the Hong Kong courts?
Absolute Immunity in Hong Kong
Public international law recognises two distinct doctrines on sovereign immunity. According to the first, a foreign State is entitled to absolute immunity from local jurisdiction. According to the second, sovereign immunity is “restrictive”: it does not extend to transactions described as “commercial” or “jure gestionis”. As the Court of Appeal judgment below noted, there is a trend in both common law and customary international law towards the doctrine of restrictive immunity. Nevertheless, a number of States, notably the PRC, continue to follow the doctrine of absolute immunity.
Until 1997, Hong Kong was administered by the United Kingdom. By extension of the UK Sovereign Immunity Act of 1978 (“SIA”) to Hong Kong, the doctrine of restrictive immunity applied in Hong Kong. On 30 June 1997, the PRC assumed control, and now governs Hong Kong pursuant to the Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China (“Basic Law”). The Basic Law does not on its face deal with the scope of sovereign immunity in Hong Kong.
At first instance it was held that the doctrine of restrictive immunity applied in Hong Kong, but that the transaction in question was not commercial in character. The Court of Appeal also found that Hong Kong applied restrictive immunity. It held that, since the Basic Law did not cover the issue, sovereign immunity was governed by the common law rules. Restrictive immunity had been part of the common law prior to the legislative extension to Hong Kong of the SIA (which put restrictive immunity in statutory form); after the SIA ceased to apply to Hong Kong in 1997, the common law position was revived.
The HKCFA reversed the decision of the Court of Appeal. It found that there was no scope for Hong Kong to apply a doctrine of sovereign immunity at odds with the position followed by the PRC. Hong Kong lacked “the very attributes of sovereignty” that would allow it to pursue its own policy of sovereign immunity independently of the policy of the PRC. Accordingly, the doctrine of sovereign immunity adhered to in Hong Kong, as in the PRC as a whole, was found to be one of absolute immunity.
This conclusion was, however, adopted on a provisional basis; the HKCFA referred the issue to the Standing Committee of the National People’s Congress. On 26 August 2011, the Standing Committee affirmed the HKCFA’s approach.
No Waiver of Immunity
The HKCFA affirmed that the DRC had not waived its immunity from jurisdiction or from enforcement proceedings. The issue of waiver of immunity in Hong Kong, the HKCFA found, was governed by the common law. The relevant common law rules required an “unequivocal submission” to the jurisdiction of the forum State at the time when jurisdiction was invoked. Hence an agreement to arbitrate, or any other pre-dispute contract, the HKCFA held, was not sufficient to constitute a waiver of immunity before the Hong Kong courts. The DRC’s agreement to submit its dispute to arbitration could not, therefore, amount to a waiver of its sovereign immunity before the Hong Kong courts.
The HKCFA further affirmed, in line with common law authority, that waiver of sovereign immunity must occur at two distinct stages. At the first stage, the impleaded State must waive its jurisdictional immunity from suit. At the second stage, the impleaded State must waive the immunity of its property from execution.
Implications of the Judgment
The judgment of the HKCFA is an important statement on the doctrine of sovereign immunity followed in Hong Kong. The judgment has a number of implications and raises some complex issues.
First, the HKCFA’s judgment confirms that sovereign immunity is absolute under the law of Hong Kong. There is no exception for transactions of a putatively “commercial” nature. Identifying whether a counterparty is part of a State (and therefore absolutely immune from jurisdiction in Hong Kong) is often a difficult issue, on which clients should obtain specialist legal advice.
Second, the judgment confirms that questions of sovereign immunity do not arise in relation to the submission to the jurisdiction of an arbitral tribunal. An agreement to arbitrate is not affected by a plea of sovereign immunity; indeed, the Court of Appeal determined that an agreement to arbitrate bars a plea of sovereign immunity in arbitral proceedings. This finding was not overturned by the HKCFA.
Third, the judgment of the HKCFA does not disturb the Court of Appeal’s finding that the immunity of a State party to an international commercial arbitration will be limited to permit Hong Court courts to exercise a supervisory jurisdiction in support of the arbitration agreement and arbitral proceedings.
Fourth, the HKCFA confirms, in line with established common law, that immunity from enforcement is not waived by State parties by signing an arbitration agreement. Waiver of immunity from enforcement can take place in front of the relevant forum.
Fifth, the HKCFA left some uncertainties in relation to whether an agreement to arbitrate constitutes a waiver of immunity from enforcement in circumstances where the State is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (“New York Convention”). The Court of Appeal suggested that a State party to the New York Convention, in agreeing to an arbitration clause, implicitly waives immunity from enforcement in Hong Kong. As the DRC is not a party to the New York Convention, the HKCFA did not consider the issue; nor did it comment on the Court of Appeal’s approach. This is a question of some complexity and uncertainty and awaits a future decision.