Beijing’s View of State Immunity in Hong Kong

As reported in our previous newsletter the Court of Final Appeal’s decision that state immunity in Hong Kong is absolute, rather than restrictive, was “provisional” because it had to be referred to the Standing Committee of the National People’s Congress (“SCNPC“).

On 26 August 2011 the SCNPC formally ruled and confirmed that state immunity in Hong Kong is absolute.

To finalise the position, on 8 September 2011 the Court of Final Appeal accordingly followed the interpretation issued by the SCNPC. Consequently the Judgment that the Court of Final Appeal handed down on 8 June 2011 was also declared final.

So, we have now have some clarity but also some peculiarity.

Interestingly Li Fei, Deputy Director of the Legislative Affairs Commission of the SCNPC was reported in the South China Morning Post as stating that the interpretation will not affect Hong Kong’s business environment and that diplomatic immunity will not be taken advantage of by China’s state owned enterprises to evade debts in Hong Kong, as it only applies to foreign entities.

The peculiarity, therefore, is that a foreign state is immune from suit in Hong Kong, whereas, at least according to Mr. Li, the People’s Republic of China is not, nor are its state owned enterprises (“SOE“).

Furthermore, other writers have indicated that the large SOE that still dominate the Chinese economy are probably excluded from immunity because Chinese law states that such entities have separate legal character.

This commentary is consistent with the Hong Kong Court of First Instance ruling in Intraline v The Owners of the Ship or Vessel “Hua Tian Long” which found that SOE’s independent and autonomous management distinguishes them from companies that are merely under state control.

So state immunity is absolute, unless the state is the PRC.

State immunity can, however, be waived “in the face of” the Hong Kong Court. An agreement entered into by the defendant State (or its entity) in a contract in which the parties agree that the state or its entity waive all rights to immunity from the jurisdiction of the Hong Kong Courts will not be effective. This is because the provision does not waive immunity “in the face of” the Hong Kong Court.

On the other hand, a state which is sued in Hong Kong and which submits to the jurisdiction of the Hong Kong Court (for example by participating in the Court proceedings in Hong Kong) would be taken to have waived its immunity from suit.

Finally, the additional good news is that the ruling does not affect the jurisdiction of a Hong Kong arbitration tribunal over a state or SOE. It appears that all commentators agree that the immunity is immunity from suit in the Courts of Hong Kong, not immunity from the jurisdiction of an arbitral tribunal.

More complex issues arise in the context of the supervisory jurisdiction of the Courts of Hong Kong over an arbitration.

There is further considerable comfort to be taken from the fact that enforcement proceedings and execution proceedings, founded upon the fact that the state concerned is a party to the New York Convention on the Recognition and Enforcement Foreign Arbitral Awards in 1958 (“the New York Convention“), would still be possible in the Hong Kong Courts.

So, the lesson to be learned from this case appears to be that when entering into commercial relations with a state or a wholly state owned entity one should avoid a Hong Kong Court jurisdiction clause and rather adopt a Hong Kong arbitration clause.