State immunity in Hong Kong

China’s National People’s Congress Standing Committee (Standing Committee) has responded to a request by Hong Kong’s Court of Final Appeal for interpretation of the region’s Basic Law. The question, raised in the case of Democratic Republic of Congo v FG Hemisphere Associates LLC (Congo case), was whether mainland China’s doctrine of absolute sovereign immunity, which makes no exception for commercial transactions, applies in Hong Kong. The Standing Committee’s unanimous response confirms that Hong Kong will be required to follow the mainland’s position. This interpretation is as anticipated by Deacons’ publications of June and August 2011.

Private parties dealing with a foreign state are advised to take the Standing Committee’s interpretation into account in negotiations. Unless provided for in a relevant treaty, a foreign state cannot be forced to submit to the jurisdiction of a Hong Kong court to resolve a commercial dispute. In addition, a majority in the Congo case held that a state cannot contractually waive its immunity in advance of proceedings.

In negotiating the terms of a contract with a foreign state, a private party may consider a number of options to reduce the risk of immunity being invoked, including providing for disputes to be settled in a jurisdiction where the doctrine of absolute state immunity does not apply, or where a contractual waiver would be recognised.

To what extent does state immunity apply to PRC state-owned or state-affiliated entities? As reported in the South China Morning Post, Mr. Li Fei, the vice-chairman of the Standing Committee’s Legislative Affairs Committee, has stated that the immunity laws do not apply to Chinese state-owned enterprises as they have assumed the legal status of a company. That said, it remains unclear what is the position as regards state-affiliated entities, which may not be operating entirely independently, such as sovereign wealth funds.