Contracting with Government entities (Sovereign immunity)

A majority (3-2) of the Hong Kong Court of Final Appeal decided on 8 June 2011 in Democratic Republic of The Congo v FG Hemisphere Associates LLC that a doctrine of absolute sovereign immunity (with no exception for commercial transactions) applies in Hong Kong. This ruling is provisional, being subject to the interpretation of certain provisions of the Hong Kong Basic Law by the Standing Committee of the PRC National People's Congress.

It may be expected that the Standing Committee will adopt the doctrine of absolute sovereign immunity, and decide that the Hong Kong courts are bound to apply the rule or policy on state immunity determined by the Central People's Government.

The facts

The essential facts shortly stated are that the predecessor of the Democratic Republic of the Congo (DRC) obtained credit from a Yugoslavian company to finance construction of a hydro-electric facility and high-tension power lines. The borrowers defaulted and the creditor obtained arbitral awards against them. A US company dealing in "distressed assets" purchased these debts.

In the meantime, the PRC agreed with the DRC to finance and construct extensive infrastructure projects in return for the right to exploit certain DRC mineral resources. The agreements provided for payment of an "entry fee" of US$350 million to the DRC. This came to light as one of the participants was China Railway Group Limited, which is a PRC company listed on the Hong Kong Stock Exchange, and was obliged to issue a public announcement describing certain related agreements.

The US company sought to enforce the overseas arbitration awards in Hong Kong for US$104 million against the sums payable by China Railway Group Limited or its subsidiaries to the DRC.

Office of the Commissioner of the Ministry of Foreign Affairs

The Office of the Commissioner of the PRC Ministry of Foreign Affairs wrote 3 letters which were placed before the Court. The letters stated:

"The consistent and principled position of China is that a state and its property shall, in foreign courts, enjoy absolute immunity".

The Court noted the well-known rapid evolution of China's foreign policy in Africa and elsewhere over the last decade. It often involves international agreements for large-scale development projects such as the agreement for mineral rights in exchange for infrastructural development in this case. It follows that the PRC's foreign policy, which obviously differs from many other countries' foreign policy, requires it to invest heavily abroad on projects which may arguably be characterised as having "commercial" elements.

The 3rd letter from the Office of the Commissioner of the Ministry of Foreign Affairs stated:

"In fact, the regime of state immunity is an important aspect of relations between states…

If the Hong Kong Special Administrative Region were to adopt a regime of state immunity which is inconsistent with the position of the state, it will undoubtedly prejudice the sovereignty of China…

The consistent principled position of China to maintain absolute immunity on the issue of state immunity is not only based on the fundamental international law principle of 'sovereign equality among nations', but also for the sake of protecting the security and interests of China and its property abroad. If the principle of 'restrictive immunity'… were to be adopted in the Hong Kong Special Administrative Region, the states concerned may possibly adopt reciprocal measures to China and its property (which are not limited to the Hong Kong Special Administrative Region and its property), thus threatening the interests and security of the property of China abroad, as well as hampering the normal intercourse and co-operation in such areas as economy and trade between China and the states concerned."

The common law

Until 1975, the English courts (and the Hong Kong courts) applied the doctrine of absolute sovereign immunity. In 1981, the highest English court adopted the restrictive immunity theory. A supporting ground cited in that decision was that:

"[To] require a state to answer a claim based upon [commercial] transactions does not involve a challenge to or inquiry into any act of sovereignty… It is, in accepted phrases, neither a threat to the dignity of that state, nor any interference with its sovereign functions."

The Hong Kong Court of Final Appeal was prepared to accept that at the time of the handover in 1997, the restrictive immunity doctrine applied at common law.

The fundamental question was however whether, after China's resumption of the exercise of sovereignty in 1997, it is open to the Hong Kong courts to adopt a legal doctrine of state immunity which is different from the policy of absolute sovereign immunity practised by the PRC.

How could it be right?

The Hong Kong Court of Final Appeal quoted a 1924 UK House of Lords judgment which stated:

"If our sovereign recognizes… that another person is a sovereign, how could it be right for the Courts of our own sovereign to proceed upon an examination of that person's supposed attributes… and, refusing that claim, to deny to him the comity which their own sovereign had conceded?"

Among other quoted judgments was that of the United States Supreme Court in 1945, stating that:

"Every judicial action exercising or relinquishing jurisdiction over the vessel of a foreign government has its effect upon our relations with that government… The judicial seizure of the property of a friendly state may be regarded as such an affront to its dignity and may so affect our relations with it, that it is an accepted rule of substantive law governing the exercise of the jurisdiction of the courts that they accept and follow the executive determination…"

"Political expediency"

The United States Congress enacted the Foreign Sovereign Immunities Act 1976 to transfer primary responsibility for deciding "claims of foreign states to immunity" from the State Department to the courts, on the premise that "decisions on claims by foreign states to sovereign immunity are best made by the judiciary on the basis of a statutory regime which incorporates standards recognized under international law."

As one Judge of the US Supreme Court said:

"…political considerations sometimes led the [State] Department to file 'suggestions of immunity in cases where immunity would not have been available under the restrictive theory'."

In another case, a Judge has commented:

"If the courts consult the executive on such questions what may begin by guidance as to the principles to be applied may end in cases being decided irrespective of any principle in accordance with the view of the executive as to what is politically expedient."

The Hong Kong Court of Final Appeal said:

"[The PRC's policy of absolute immunity] is not a capricious policy or one which fluctuates as a matter of "political expediency". Consulting its own interests in the light of its own foreign policy, the PRC favours in principle the solution of disputes which involve foreign States through diplomatic channels and similar means, rather than submitting such disputes to the compulsory, and necessarily less flexible, jurisdiction of a municipal court"

and quoted from a 1921 judgment that:

"If by any misadventure the authorized representative of a sovereign state should claim property not really belonging to the state it appears to me that the remedy is by diplomatic means between states, not by legal proceedings against an independent sovereign."

The Court further noted that the English State Immunity Act 1978 empowers the executive to give a certificate that binds the courts as conclusive evidence on certain matters, and to restrict or extend the immunities conferred on a foreign State by the Act if it should appear to the government that such privileges exceed those accorded by the law of that State to the United Kingdom.
Judicial independence The Court said that the letters from Office of the Commissioner of the Ministry of Foreign Affairs did not seek to dictate to the courts how state immunity cases should be decided. The letters were to be treated as determining "facts of state".
Having had such facts of state authoritatively established, it falls to the courts to decide whether the common law on state immunity needs to be modified to give effect to the HKSAR's constitutional status under the Basic Law.

The Court quoted from a learned Professor who said:

"…it is the Executive which conducts foreign affairs, and it is the judiciary which is expected not to embarrass the Executive…"

The fundamental question

The Court decided that the conferring or withholding of state immunity is a matter which concerns relations between states, forming an important component in the conduct of a nation's foreign affairs. It is for States to define their own practice of state immunity. It is self-evident that any attempt by a region to adopt a divergent state immunity policy would embarrass the State in its conduct of foreign affairs. Under the Basic Law, the Central People's Government is responsible for foreign affairs. Accordingly, the common law in Hong Kong has to be modified to conform with the state immunity policy of the PRC.

Further, the Basic Law provides that the Hong Kong courts have no jurisdiction over "acts of state such as defence and foreign affairs". The Court decided that the determination by the PRC of the rule of state immunity to be applied in the HKSAR courts is an "act of state such as … foreign affairs".

Some implications

The courts will continue (as they did before the handover) to look to the executive to be informed on such facts as whether a particular entity is recognized as a sovereign state, whether a particular party claiming immunity is recognized as a department or other emanation of a sovereign state, whether state immunity has been regulated by some bilateral or multilateral convention, and so forth.

An example cited by the Court is a case concerning the United States' assertion of extra territorial jurisdiction in criminal matters in an anti-trust case. That case made board statements suggesting that the policy of the executive could properly be consulted on any matter where the court was informed by the government that it considered its sovereignty would be prejudiced.

It may be noted that the Hong Kong Court of First Instance decided last year that the immunities from legal processes previously enjoyed by the British Crown in Hong Kong are now enjoyed by the PRC and entities controlled by it.

Waiver (is there a way out?)

The Court ruled that no prior agreement between the parties could bind the State to waive immunity. The only mode in which a sovereign can submit to a court's jurisdiction is by a submission in the face of the court, as, for example, by appearance to a writ. It is only at the time when the court is asked to rule on the matter that the State can elect whether it will submit to the jurisdiction.