After seeking interpretation from the Standing Committee of the National People’s Congress, the Hong Kong Court of Final Appeal held in Democratic Republic of the Congo and Others v FG Hemisphere Associates LLC FACV5/2010 that foreign states were to enjoy absolute immunity before the courts in Hong Kong.

State Immunity

State immunity is based on the concept that all states recognise each other as equal sovereigns. The court of one state will not exercise its jurisdiction if the party to be sued is a foreign state. This principle is known as absolute immunity under the common law.It is, however, subject to some exceptions one of which arises when the foreign state voluntarily submits to the jurisdiction of another state. Developed countries such as the United Kingdom have adopted one further exception to this strict rule. The foreign state will be stripped off its immunity if it is being sued in respect of a commercial transaction or a contract to be performed wholly or partly in the forum state, i.e. the state other than the one which claims state immunity. Such variation is known as restrictive immunity.

On the other hand, the People’s Republic of China has at all times granted absolute immunity to other countries and claims the same for itself. The Hong Kong courts had adopted the UK position on state immunity before the handover, i.e. the doctrine of restrictive immunity. However no local legislation has been enacted on state immunity after the handover and the Hong Kong position was unclear before Democratic Republic of the Congo and Others v FG Hemisphere Associates LLC FACV5/2010 was heard by the Court of Final Appeal.

Background

In 1980s a Yugoslavian company (“Energoinvest”) provided financing to the predecessor of the Democratic Republic of the Congo (“DRC”) for construction of its power infrastructure. DRC defaulted on payment. Energoinvest sued DRC and obtained two arbitral awards against DRC in Paris and Zurich. In 2004 FG Hemisphere, an investment fund company incorporated in Delaware, purchased from Energoinvest the right to enforce the arbitral awards against DRC. FG Hemisphere issued proceedings against DRC in Hong Kong and sought to enforce the arbitral awards.

In the present proceedings Chinese state-owned enterprises China Railway Group Limited and Sinohydro Corporation Limited (the “China Rail Group”) were about to make payments to DRC under a joint venture agreement.FG Hemisphere contended that these payments represented an asset of DRC and obtained an order to freeze the payments by China Rail Group.

Issue

The Hong Kong courts were asked to construe the nature and scope of state immunity as applying to foreign states which are being sued in Hong Kong.

Judgment

The Court of First Instance and Court of Appeal both ruled in favour of FG Hemisphere and held that since the doctrine of restrictive immunity being part of the common law survived after the handover, FG Hemisphere had the right to enforce the arbitral award against DRC.

However by a majority of 3 to 2, the Court of Final Appeal overturned the decision of the lower courts and ruled that Hong Kong should follow PRC’s policy on state immunity and, if so, DRC could not be sued in Hong Kong by FG Hemisphere.

Reasons for the Decision

The majority considered the common law and the Basic Law in resolving the potentially conflicting position of the principle of state immunity in Hong Kong and the PRC.

At common law the sovereign state determines the principle of state immunity and its application to other states. As a municipal region Hong Kong has no say on this matter and should follow the position in the PRC.

According to the Basic Law, the Central People’s Government of PRC (“CPG”) is responsible for acts of state such as foreign affairs. The policy of absolute state immunity as determined by the CPG is an act of state and Hong Kong courts do not have jurisdiction over the matter. Hong Kong courts must give effect to the policy of absolute state immunity.

Furthermore, the common law position on state immunity after the handover ought to be preserved subject to modifications to make it consistent with the policy of the CPG. That means the policy of absolute state immunity in the PRC should be adopted in Hong Kong in its entirety.

The Court of Final Appeal sought interpretation from the Standing Committee of the National People’s Congress as to whether the laws on state immunity previously in force in Hong Kong continued to survive after the handover and whether Hong Kong courts must abide by the policy on state immunity determined by the CPG.

According to the interpretation made on 26th August 2011 by NPCSC, Hong Kong must adopt the PRC’s policy of state immunity in its entirety.The DRC was given absolute state immunity and therefore could not be sued in the HKSAR. Following the interpretation, the Court of Final Appeal handed down a final judgment on 8th September 2011 to the effect that the HK courts have no jurisdiction over DRC in the present proceedings and all the claims against DRC were dismissed as a result. FG Hemisphere’s claim was, therefore, unsuccessful.

Remarks

This decision raises an alarm to those who do business with foreign states or their state owned enterprises. The Court of Final Appeal did not discuss whether state immunity could be extended to state-owned enterprises. It is unequivocal that a state like DRC can be immune from proceedings in Hong Kong courts, but problems of whether state-owned enterprises can also claim state immunity are left unresolved.