Democratic Republic of Congo v FG Hemisphere Associates

DMC/Arbn/11/10

Hong Kong

Democratic Republic of Congo and others v FG Hemisphere Associates LLC

Hong Kong Court of Final Appeal: Bokhary, Chan and Riberio PJJ, Mortimer and Sir Anthony Mason NPJJ: FACV No.5, 6 and 7 of 2010: 8 June 2011

Mr Barrie Barlow SC, instructed by Messrs Orrick, Herrington & Sutcliffe, for the 1st appellant, the Congo

Mr Gerard McCoy SC and Mr Richard Zimmern, instructed by Messrs DLA Piper Hong Kong, for the 2nd to 5th appellants, the China Railway Groups Ltd and its 4 subsidiaries

Mr Benjamin Yu SC, Professor Vaughan Lowe QC, Ms Teresa Cheng SC and Mr Adrian Lai, instructed by the Department of Justice, for the 6th appellant, the Intervener

Lord Pannick QC, Professor Dan Sarooshi and Ms Zabrina Lau, instructed by Messrs Sidley Austin, for the respondent, FG

ARBITRATION: RECOGNITION OF FOREIGN AWARD OBTAINED AGAINST FOREIGN STATE: STATE IMMUNITY: WHETHER FOREIGN STATE CAN CLAIM ABSOLUTE IMMUNITY FROM SUIT IN HONG KONG AFTER 1997: WHETHER EXCEPTION FOR COMMERCIAL ACTIVITIES: WAIVER OF IMMUNITY

Summary

By a majority, the Hong Kong Court of Final Appeal held that as the issue of state immunity was within the realm of foreign affairs, the Court did not have the jurisdiction to decide on this issue. A reference had to be made to the Standing Committee of the National People’s Congress of China before a final decision could be made. Since then, the NPCSC has rendered its decision and the Court has held that it is bound by it. Accordingly, Hong Kong, as a local administrative region of China, has to follow the practice of China in adopting an absolute approach to state immunity. This means that a foreign state can enjoy an absolute immunity from suit before the Hong Kong courts, whether it is engaging in sovereign activities or commercial activities.

This note has been contributed by Ken To-ching Lee, LLB(Hons), PCLL (University of Hong Kong), BCL(Oxon) and barrister-at-law in Hong Kong. It was amended on 8 September 2011

Background

A Yugoslavian company, Energoinvest, entered into agreements with the Democratic Republic of Congo (“the DRC”) for the construction of hydro-electric projects in the DRC. In order to finance those projects, they entered into credit agreements, each of which contained an International Chamber of Commerce (“ICC”) arbitration clause.

The DRC defaulted on its repayment obligation under the credit agreements. Two sets of arbitration commenced between the DRC and Energoinvest in France and Switzerland in 2001. The DRC signed terms of reference by which they agreed to arbitration being conducted in accordance with the 1998 version of the ICC’s Rules of Arbitration. Rule 28.6 provided that by submitting to arbitration, the parties “shall be deemed to have waived their right to any form of recourse insofar as such waiver can validly be made.”

Arbitral awards (“the Awards”) were made in favour of Energoinvest in 2003, which then assigned the benefits of the Awards to FG Hemisphere Associated LLC (“FG”).

On the other hand, in 2001, the Chinese government and the DRC entered into a cooperation agreement under which China would finance and construct extensive infrastructure projects in the DRC in return for the right to exploit mineral resources. This was followed by a cooperation agreement (“the Agreement”) between the DRC and China Railway Group Ltd and its subsidiaries (“the CR Companies”). Under the Agreement, in return for participation in certain mining projects in the DRC, the CR Companies undertook the construction of roads, railways, hospitals and electric facilities, etc. The CR Companies would pay “Entry Fees” to the DRC in obtaining the mining rights.

Upon knowing of the Agreement, FG commenced proceedings in Hong Kong to enforce the Awards. After an ex parte hearing, FG obtained leave to enforce the Awards as judgments of the Hong Kong courts. An interim injunction was also obtained against the CR Companies to prevent payment of the Entry Fees to the DRC.

The DRC and the CR Companies applied to set aside the leave to enforce the Awards. They disputed the jurisdiction of Hong Kong courts on the basis that the DRC enjoyed state immunity.

There were two main issues before the courts: (1) Whether the DRC enjoyed state immunity before the Hong Kong courts; and (2) Whether, in agreeing to arbitrate, and in particular agreeing to Rule 28.6, the DRC had waived its right to state immunity.

In relation to Issue (1), the DRC, the CR Companies, and the Secretary for Justice (who joined in the proceedings as an intervener) argued that, after the handover to China in 1997, Hong Kong should follow Chinese practice in adopting an absolute approach to state immunity (“the absolute approach”). This meant that a foreign state was immune from suit before the Hong Kong courts, whether or not it was exercising its sovereign power or was only engaging in commercial activities. Thus, the DRC would enjoy state immunity.

FG contended that after 1997, Hong Kong continued to follow the common law, and adopt a restrictive approach to state immunity (“the restrictive approach”). This meant that a foreign state was only immune from suit in Hong Kong when it was exercising its sovereign power, but not when it was engaging in commercial activities.

Judgment in the Court of First Instance [2009] 1 HKLRD 410

Reyes J upheld the DRC’s claim of state immunity. He held that even if the restrictive approach was adopted, the DRC was not engaging in routine commercial activities under the Agreement. The nature and scale of the undertakings were massive and ambitious, and they bore all the hallmarks of the exercise by states of sovereign authority in the interests of their citizens.

That effectively decided the case but Reyes J went on to support the restrictive approach. It was clear that before the handover in 1997, the common law of Hong Kong adopted the restrictive approach: see The Philippine Admiral [1977] AC 373, Trendtex Trading Corp v Central Bank of Nigeria [1977] 1 QB 529 and The I Congreso del Partido [1983] 1 AC 244. This approach was endorsed when the UK extended the application of the State Immunity Act 1978 (UK) (“the SIA”) to Hong Kong. After the SIA ceased to have effect in Hong Kong in 1997, the common law revived. Thus, after 1997, Hong Kong continued to adopt the restrictive approach. Such position was not inconsistent with the constitution of Hong Kong, the Basic Law. The Court was only deciding on the appropriate approach to state immunity. It was in no way conducting foreign affairs, or adjudicating on any acts of state.

He further held that in agreeing to arbitrate, in particular Rule 28.6, the DRC had only waived its right to object to arbitration. It had not waived its right to claim state immunity when the Awards came to be enforced as a judgment in Hong Kong.

FG appealed to the Court of Appeal.

Judgment in the Court of Appeal [2010] 2 HKLRD 66

By a majority (Stock VP and Yuen JA; Yeung JA dissenting), the Court of Appeal allowed FG’s appeal.

The majority agreed with Reyes J that Hong Kong continued to adopt the restrictive approach after 1997. However, they were of the view that the DRC was engaging in commercial activities, and state immunity did not apply. The proper approach was to look at the credit agreements underlying the Awards. That was clearly of a commercial nature as the DRC used them to finance the projects.

The minority was of the view that the issue of state immunity was one of foreign affairs. Thus, after 1997, Hong Kong was obliged to follow the Chinese practice of adopting the absolute immunity. Further, the DRC had not waived the right to claim state immunity.

The DRC, the CR Companies and the Secretary for Justice appealed to the Court of Final Appeal.

Judgment in the Court of Final Appeal

By a majority of 3:2 (Chan and Riberio PJJ, Sir Anthony Mason NPJ; Bokhary PJ and Mortimer NPJ dissenting), the Court of Final Appeal decided that before deciding on the issue of state immunity, a reference had to be made to the Standing Committee of the National People’s Congress of China (NPCSC, a body with some legislative power in China) pursuant to Article 158 of the Basic Law. The majority was of the view that state immunity, a principle based on the mutual acknowledgment of equality among sovereign states, was a matter in the realm of foreign affairs. Which branch of the government was competent to decide this issue depended on the constitutional arrangements of each jurisdiction. Under the constitutional arrangements of Hong Kong, the Chinese government was responsible for the conduct of foreign affairs in Hong Kong. Thus, the issue of state immunity would have to be referred to the NPCSC for a decision under Article 158 of the Basic Law.

Further, the majority expressed the provisional view that, as a local administrative region of China, Hong Kong could not depart from the practice adopted by the Chinese government regarding state immunity. Thus the restrictive approach adopted under the common law could not survive the handover in 1997. After 1997, Hong Kong should follow the absolute approach, and the DRC should enjoy immunity from suit in Hong Kong.

On the question of waiver, the majority rejected FG's argument that the waiver of immunity should not be limited to the foreign state's submission to the forum court's jurisdiction when the forum state's jurisdiction is invoked: A Company Ltd v Republic of X [1990] 2 Lloyd's Rep 520. The fact that the foreign state had agreed to arbitrate in one jurisdiction did not mean that it agreed to submit to the jurisdiction of the courts in another jurisdiction for the purpose of enforcing any arbitral award: Duff Development Co Ltd v Government of Kelantan [1924] AC 797. Thus, on the facts, by agreeing to Rule 28.6, the DRC had not waived its right to claim state immunity from suit before the Hong Kong courts.

As for the minority, Bokhary PJ was of the view that the issue of state immunity was one of common law, and not a matter of executive discretion. It should be decided by courts independently. This was in contrast to the question whether a foreign state should be recognised, which was solely a matter for the executive. Thus, no reference to the NPCSC was needed. Bokhary PJ agreed with Reyes J that the restrictive approach adopted by the common law revived after the SIA ceased to take effect in 1997. This was consistent with the general approach of the international community in adopting the restrictive approach, and was more consonant with justice. As the credit agreements underlying the Awards were of commercial nature, the DRC did not enjoy state immunity. In any event, the DRC’s submission to arbitration in a commercial dispute would constitute a waiver of any immunity from suit in foreign jurisdictions.

Mortimer NPJ agreed with the judgment of Bokhary PJ. He particularly emphasised that the intention behind the Basic Law was the continuation of the common law system in Hong Kong after 1997. The provisions therein should be interpreted in such a manner, and the restrictive approach continued to apply in Hong Kong even after 1997. This was vital for the maintenance of business confidence as well as the independency of the judiciary. Hong Kong courts never had the jurisdiction to decide on foreign affairs, and yet decisions had continued to be rendered on state immunity. Thus, the issue of state immunity was one that the courts were capable of deciding, and no reference to the NPCSC was necessary.

Comment

Two points are to be noted about the present case.

Firstly, for readers who are not familiar with Hong Kong constitutional law, the decision reached by the Court of Final Appeal (CFA) on state immunity in its judgment in June 2011 (noted above) was, strictly speaking, provisional. The CFA could only make final orders to dispose of the case after the NPCSC had made a ruling on the issue.

Since then, the NPCSC has rendered its decision on 26 August 2011 (see http://www.info.gov.hk/gia/general/201108/30/P201108300217.htm). It reasoned that “state immunity concerns whether the courts of a state have jurisdiction over foreign states and their properties”, and “directly relates to the state’s foreign relations and international rights and obligations”. Thus, as the issue of sovereign immunity falls within the realm of foreign affairs, the Chinese government has the power to decide on this issue, and Hong Kong courts are bound to follow the PRC practice in adopting the absolute approach. Subsequently on 8 September 2011. the Court of Final Appeal formally disposed of the case by allowing the appeal by the DRC and the CR companies.

Secondly, although the majority of the CFA expressly left open the question whether assets of foreign states are immune from execution in Hong Kong (see para.412 of judgment), commercial parties should note that China adopts an absolute approach not only to a foreign state’s immunity from suit, but also to its immunity from execution. Thus it is very likely that Hong Kong is bound to adopt an absolute approach to immunity from execution as well. Further, the common law only regards a foreign state as capable of waiving its immunity before the courts and not in prior written agreements. Commercial parties should be aware of this risk before entering into contracts with foreign states, particularly when enforcement against assets in Hong Kong is likely.

Whether this state of affairs will change in the long term will depend on when China ratifies the UN Convention on Jurisdictional Immunities of States and Their Property 2004 (which it has already signed) and extends its application to Hong Kong. At present, the Convention still lacks the sufficient number of signatories to come into effect.