Hong Kong: State and Crown immunity in Hong Kong: practical considerations in selecting and drafting disputes clauses

State and Crown immunity have been hot topics in Hong Kong.  The Hong Kong Court of Final Appeal's ("CFA") preliminary decision in the Congo case¹ that foreign states have the right to absolute immunity in Hong Kong has been confirmed by an Interpretation issued by the PRC Central Government on 26 August 2011.² On 8 September 2011, the CFA issued a final judgment confirming that the principle of absolute immunity applies in Hong Kong.

State immunity does not apply, in Hong Kong, to the PRC and its entities.  However, the PRC and its entities enjoy Crown immunity (as did Her Majesty the Queen in the Right of the UK prior to "handover"), as was confirmed by the 2010 decision of the Hong Kong Court of First Instance in Hua Tian Long.³

The Hong Kong Government and its entities are, however, in a different position.  The Crown Proceedings Ordinance ("CPO") continues to permit civil proceedings against the Hong Kong Government and its entities.

Can Hong Kong still be used as a dispute forum in contracts involving state counterparties?

In most cases, yes.

The major impact of the Congo decision is that there is little point bringing proceedings against a foreign government in the Hong Kong courts.  This includes proceedings seeking recognition or enforcement of an arbitral award against a foreign government's assets located in Hong Kong.

Importantly, a Hong Kong arbitration clause involving a foreign state is effective.  There is a residual question over whether the Hong Kong courts will be able to exercise supervisory jurisdiction over an arbitration involving a foreign state or one of its entities: there are strong arguments indicating that participation in a Hong Kong arbitration would amount to a waiver of immunity in relation to the supervisory jurisdiction of the Hong Kong courts but the position is not clear.  That stated the courts residual supervisory powers are very limited under Hong Kong's new legislation.

Practical Steps

You should consider the following when selecting or drafting dispute clauses involving Hong Kong where a government entity is involved:

• For contracts with the Hong Kong Government or a Hong Kong Government enterprise.  Selection of either the Hong Kong Courts or an arbitration clause is fine.  The Hong Kong Government has, in effect, waived immunity from suit under the CPO. There is no waiver from execution proceedings, however the CPO includes provisions for payment of judgments etc by the Hong Kong Government.  A foreign entity may of course prefer arbitration rather than submission to the Hong Kong courts if the Hong Kong Government or one of its enterprises is the counterparty.
• For contracts with foreign governments or foreign state-owned enterprises ("SOEs").  Select arbitration and not submission to the Hong Kong courts.  If there are real concerns about the ability of Hong Kong courts exercising supervisory jurisdiction over a Hong Kong arbitration involving a foreign state, then you may prefer to select another New York Convention signatory country which adopts restrictive immunity as the place of arbitration.  This is unlikely to be an issue where the counterparty is a foreign SOE, provided it is independent from its government (see further below).  Do not select a country which is not a signatory to the New York Convention as the place of arbitration because there are likely to be significant problems with enforcement. To view a list of signatory countries, click here.
• For contracts with PRC Government and its state entities.  Do not adopt a Hong Kong court jurisdiction clause.  The PRC Government and its state entities will be entitled to assert immunity.  You can however select Hong Kong as the place of arbitration where assets are outside of the PRC.  Note there is some question over the ability of the Hong Kong courts to supervise an arbitration involving the PRC Government or one of its entities (discussed above).  If the assets are only in the PRC, then use a New York Convention state venue (but not Hong Kong) and then rely upon the PRC abiding by its treaty obligations.
• In all cases.  Include a waiver of immunity clause in your disputes clause, including possible waivers from both immunity from suit and immunity from enforcement.  Notwithstanding that these clauses will not be effective in Hong Kong before the Hong Kong courts, they may be effective in other jurisdictions which adopt a less restrictive approach to immunity.  Also, such waiver clauses could be effective in the future in Hong Kong if the PRC decides to adopt a doctrine of restrictive immunity.  In this context it is worth bearing in mind that, in 2005, China signed the UN Convention on Jurisdictional Immunities of States which endorses restrictive immunity. This treaty is not yet in force.
• How to assess whether the counterparty is part of a state. It is not always clear if an entity connected with a state is legally part of that state for the purposes of immunity.  In Hong Kong, case law provides some guidance for PRC state entities. The fact that a PRC entity carries on commercial enterprises does not mean it cannot claim immunity.  The "bright line" test is one of control, and the question to be asked is whether the entity in question is able to exercise independent powers of its own.  For example, if a PRC state entity requires authorisation from a ministry prior to entering into a particular contract (as was the case in Hua Tian Long) then the entity is likely to be entitled to immunity.  In contrast, an SOE established by the State-owned Assets Supervision Committee ("SASAC") is unlikely to be entitled to immunity: such entities have independent management, ownership of assets and capacity to independently assume civil liabilities.  For state entities connected with foreign governments it is likely that a similar "structural" approach will apply.  Such an approach is normally adopted in countries which follow the absolute state immunity doctrine, which Hong Kong now clearly does.

Finally, if you are dealing with a state or one of its entities, it is also worth checking to see if there is a bilateral investment treaty ("BIT") offering protection for foreign investments which might be used if things go wrong.  A typical BIT will provide for ICSID arbitration, though some provide for UNCITRAL ad hoc or ICC arbitration.  BITs will not provide remedies for all breaches of contract, but they may offer an avenue to recompense foreigners who have been treated unfairly by a state.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Footnotes

¹ Democratic Republic of the Congo v FG Hemisphere Associates LLC FACV Nos 5, 6 & 7 of 2010, 8 June 2011.

² See Interpretation of Paragraph 1, Article 13 and Article 19 of the Basic Law of the Hong Kong SAR by the Standing Committee of the National People's Congress.

³ Intraline Resources SDN BHD v The Owners of the Ship or Vessel "Hua Tian Long" [2010] 3 HKLRD 611.