The Court of Final Appeal of the Hong Kong Special Administrative Region has handed down its much anticipated judgment in Democratic Republic of the Congo and Ors v FG Hemisphere Associates LLC. The decision provides clarity on the current status of state immunity under Hong Kong law.

Prior to the 1997 resumption of Chinese sovereignty, Hong Kong’s common law provided for a restrictive state immunity, which does not apply to commercial transactions. PRC law, on the other hand, is absolute state immunity. In Democratic Republic of the Congo and Ors v FG Hemisphere Associates LLC, the Congolese government asserted its immunity from the proceedings. The central issue of the case is which doctrine of state immunity – restrictive or absolute – applies in Hong Kong.

Background

The dispute arose from a 1980s agreement for the construction of energy infrastructure in the Democratic Republic of the Congo by Yugoslavian company Energoinvest DD. This project was funded through credit that Energoinvest DD provided to the Democratic Republic of the Congo and state-owned electricity company, Société Nationale ď Electricité – both of which defaulted on repayments. As per the agreements between the parties, the matter was referred to arbitrations, which the Democratic Republic of the Congo did not attend, and awards were made against the Democratic Republic of the Congo and Société Nationale ď Electricité. Energoinvest DD later assigned this debt to FG Hemisphere Associates LLC.

More recently, China Railway Group and several of its subsidiaries participated in a Chinese consortium that entered into a joint venture agreement with a state-owned Congolese mining company. The agreement included the payment of US$221 million in mining entry fees to the Congolese government.

Learning of the deal, FG Hemisphere sought to receive these entry fees towards satisfaction of the outstanding arbitral award. FG Hemisphere made a successful ex parte application to the High Court to enforce the arbitral awards against the Democratic Republic of the Congo, and obtained interim injunctions to prevent payment of entry fees by China Rail’s subsidiaries to the Congolese government. This decision was later overturned after an inter partes hearing.

FG Hemisphere successfully appealed this decision in the Court of Appeal, where the Congolese government unsuccessfully asserted state immunity from the proceedings. The majority (Stock VP and Yuen JA) held that, in line with Hong Kong common law, state immunity is restrictive, rather than absolute, and the Democratic Republic of the Congo had no immunity in commercial proceedings. Had the prevailing state immunity been absolute, the Court of Appeal majority held that it had been waived by the Democratic Republic of the Congo.

Judgment

The matter was then appealed to the Court of Final Appeal, with the Hong Kong Secretary for Justice as the sixth appellant, joining the proceedings as intervener. The Court of Appeal decision was overturned by the majority decision of Justices Chan PJ, Ribeiro PJ and Sir Anthony Mason NPJ, who ruled that the Democratic Republic of the Congo had not waived its immunity before the courts of Hong Kong, and found the SAR could not have a doctrine of state immunity that was inconsistent with that of the People’s Republic of China, therefore necessitating that the doctrine of state immunity adhered to in Hong Kong must be that of absolute immunity.

Justice Bokhary PC and Justice Mortimer NPJ delivered dissenting judgments that found restrictive state immunity applied in Hong Kong. Mortimer NPJ said that the 1997 Basic Law provided for the continuation of the common law in Hong Kong, and that as the SAR’s stance on state immunity had not been modified by local or PRC legislation, Hong Kong’s common law on restrictive sovereign immunity continued to apply. Both judges also deemed that had absolute immunity been the doctrine in Hong Kong, the Democratic Republic of the Congo would have waived the immunity through participating in the proceedings.

The Congolese government was represented by Barrie Barlow SC, instructed by Orrick, Herrington & Sutcliffe. Gerard McCoy SC and Richard Zimmern appeared for China Railway and its subsidiaries, instructed by DLA Piper Hong Kong. Benjamin Yu SC, Professor Vaughan Lowe QC, Teresa Cheng SC and Adrian Lai appeared on behalf of the Secretary for Justice. FG Hemisphere was represented by Lord Pannick QC, Professor Dan Sarooshi and Zabrina Lau, instructed by Sidley Austin.

Impact of judgment

Legal commentators have welcomed this decision by the Court of Final Appeal. “Whilst this issue has proved legally challenging and one which divided both the court of appeal and the CFA, the recent decision brings clarity to the position of sovereign immunity in Hong Kong," said Chris Dobby, a partner in Hogan Lovells’ Hong Kong litigation and arbitration practice. Hogan Lovells senior partner Allan Leung believed the impact of the decision would be that "The drafting of the arbitration agreement would become even more important. As waiver of state immunity has to be unequivocal, express provision has to be included agreeing not to challenge ‘jurisdiction.’”

The long- term impact of this decision is yet to be seen. Despite the considerable interest generated, the orders made by the Court of Final Appeal do not amount to a final judgment. Before making a final ruling in this matter, the court is required by Article 158(3) of the Basic Law to refer questions relating to the interpretation of Articles 13 and 19 of the Basic Law – which relate to foreign affairs and the relationship between the Central Authorities and the Region – to the Standing Committee of the National People’s Congress for interpretation.

Matters referred to the SCNPC include whether the Central people’s Government has the power to determine the PRC’s approach to state immunity, and if this is the case, whether Hong Kong courts are required to follow the PRC’s stance on state immunity. The Hong Kong Court of Final Appeal is also seeking clarification on whether Articles 13 and 19 of the Basic Law require the Hong Kong common law stance on state immunity pre-handover to be potentially adapted and applied in a manner consistent with the PRC’s stance on state immunity.

Following the receipt of the eagerly anticipated Standing Committee interpretation, the matter will be restored to the list and finalised by the Court of Final Appeal. Mark Lin, a Hong Kong-based litigation and arbitration partner at Hogan Lovells, commented, “Subject to confirmation by the SCNPC, the provisional decision of the CFA puts an end to any uncertainty as to the status of a sovereign state's absolute immunity under Hong Kong's constitutional law. Certainty is good for commerce.”