The Hong Kong Court of Appeal (CA) was recently asked to assist with enforcement of Swiss arbitral awards against state-related entities. In considering the applications, the Hong Kong courts had to consider whether a foreign state which is not a party to the New York Convention waives state immunity by referring a dispute to arbitration in a New York Convention country.
The CA also had to address whether, as a Special Administrative Republic of China, Hong Kong follows the general common law approach to the doctrine of state immunity from jurisdiction and execution (the restrictive doctrine), or whether it is bound by the PRC position – that unless waived, states are immune from adjudication of the courts of other states.
This article examines the CA’s decision in FG Hemisphere Associates LLC v Democratic Republic of Congo and the position of state immunity in Hong Kong. This is important for all entities dealing with states in respect of arbitration proceedings where the state is not a signatory to the New York Convention.
In the 1980s, a Yugoslav company, Energoinvest, entered into construction contracts to be carried out in the Democratic Republic of Congo (the DRC). The DRC entered into credit agreements with Energoinvest whereby the DRC was financed by Energoinvest for a large percentage of the works’ cost. The DRC defaulted on its repayment obligations, and Energoinvest began arbitration proceedings, which took place in Switzerland (a New York Convention country) and resulted in two final awards in favour of Energoinvest, amounting to US$ 11.725 million and US$22.525 million respectively plus interest.
In November 2004, Energoinvest assigned the entire benefit of principal and interest payable by the DRC under the awards to FG Hemisphere Associates LLC (FG) (a US distressed debt fund). FG recovered part of the arbitral awards through enforcement proceedings in other jurisdictions.
“FG claimed that the Entry Fees were payable to the DRC by the Hong Kong companies”
The New York Convention requires courts of contracting states (the majority of developed countries) to give effect to arbitration agreements and to recognise and enforce awards made in other contracting states, subject to specific limited exceptions. However, as the DRC is not a signatory to the New York Convention, enforcement of the awards in the DRC was not a viable option. Therefore, FG sought to find assets belonging to the DRC in a New York Convention signatory state, with a view to bringing enforcement proceedings in that country.
FG commenced enforcement proceedings against the DRC in Hong Kong in 2008 targeting the fees contingently payable by Chinese state-owned (Hong Kong incorporated) companies to the DRC as “Entry Fees” (the Entry Fees) under a Cooperation Agreement and a Joint Venture Agreement between, amongst others, the DRC and the China Railways Group. China is a party to the New York Convention and thus Hong Kong is too, by virtue of its status as a Special Administrative Region of China. FG claimed that the Entry Fees were payable to the DRC by the Hong Kong companies and that as a debt from the Hong Kong companies, these fees constituted an asset of the DRC within Hong Kong. By this time, given the interest over the intervening years, the DRC was indebted to FG in the sum of around US$102 million.
FG argued that as the debt (an asset) was situated in Hong Kong, the Hong Kong court was entitled to, and should order, that the amounts payable to the DRC by the Chinese companies should be paid to FG in satisfaction of the award. In doing so, it was relying on the powers of the Hong Kong court to enforce a New York Convention foreign award as if the award were a judgment of the Hong Kong court and the Hong Kong court’s powers to garnishee moneys due from a third party to a judgment debtor.
The position of sovereign immunity in Hong Kong
Sovereign immunity is the customary international law that, subject to certain exceptions, a state is immune from the jurisdiction of the courts of another state. The general rule is applied to varying degrees in different states. The UK position on sovereign immunity applied in Hong Kong prior to 1997 (handover to the PRC) and stipulated that a foreign state is generally immune from the jurisdiction of other states’ courts and arbitration tribunals, subject to certain exceptions such as acts of a private or commercial nature. This is known as a “restrictive” approach to sovereign immunity. The PRC adheres to the “absolute” theory of sovereign immunity which provides that a state always enjoys immunity from jurisdiction and from execution and cannot be subject to the jurisdiction of a foreign court (whether in relation to commercial acts or otherwise), save where it expressly waives such protection.
Since the PRC regained sovereignty in Hong Kong, the position regarding sovereign immunity has remained unclear. Hong Kong and the PRC operate a “one state, two systems” approach under which Hong Kong has its own common law regime, separate from PRC law, except that the PRC governs Hong Kong foreign affairs/relations.
“Since the PRC regained sovereignty in Hong Kong, the position regarding sovereign immunity has remained unclear”
In FG Hemisphere, the PRC’s Ministry of Foreign Affairs issued two letters as evidence of the fact that the PRC still follows the absolute immunity approach to sovereign immunity.
Court of Appeal
The primary issue on appeal was whether the DRC enjoyed absolute immunity from both suit and execution. The CA stated that as a matter of principle, submission of the DRC to ICC arbitration did not constitute a waiver of immunity to the Hong Kong courts’ jurisdiction to consider an application for leave to enforce the arbitral awards, nor did it constitute a waiver of immunity against execution. However, overturning the Court of First Instance’s decision, the CA held (by a majority) that, rather than absolute immunity, the DRC enjoyed restrictive immunity as this continues to apply in Hong Kong after the handover on 1 July 1997 by virtue of the common law system, save to the extent that it is inconsistent with the Basic Law and with local legislation enacted on or after 1 July 1997. As the fees were commercial debts, the CA gave leave to FG Hemisphere to enforce the arbitral awards and restored the injunction against the DRC from receiving payment of the Entry Fees.
The decision has been appealed. We await the Court of Final Appeal hearing with interest, but currently, the position in Hong Kong is that the common law position of restrictive immunity forms part of Hong Kong law, despite the PRC’s position.
The case highlights the need for clear waivers of sovereign immunity in transactions with states which waive immunity in any forum and relates to both the contract itself and the enforcement of any consequent judgment or award. An agreement to arbitrate, where the arbitral body’s rules contain a sovereign immunity waiver, may not be sufficient to waive immunity, particularly where the counterparty is not itself a New York Convention signatory.
Ruth Cowley is a partner and Miranda Joseph is a trainee solicitor in the dispute resolution team. They are based in Hong Kong.