On Two Supposed Immunity Problems with Hong Kong Arbitration Awards

Author: Anselmo Reyes

Date Posted: January 28, 2013

The two problems which I have in mind arise from two relatively recent decisions of the Hong Kong Courts. The first is the decision of the Court of Final Appeal in Democratic Republic of the Congo and others v. FG Hemisphere Associates LLC. The second is the decision of Judge Stone at first instance in The "HUA TIAN LONG" (No.2).

FG Hemisphere

Energoinvest obtained an arbitration award against the Democratic Republic of the Congo (DRC). Energoinvest assigned the benefit of that debt to FG Hemisphere for valuable consideration.

FG Hemisphere applied to register the arbitration award in Hong Kong and enforce it as a judgment of the Hong Kong Court. FG Hemisphere sought to enforce the award by garnisheeing sums said to be payable to the DRC by (among others) China Railway Group Ltd. (CR). CR is a People's Republic of China ("PRC") company listed on the Hong Kong Stock Exchange. The sums were payable by CR to the DRC pursuant to agreements between DRC and the PRC governments for the development of the infrastructure of the DRC in return for the right to exploit certain mineral resources in the DRC.

FG Hemisphere obtained an ex parte injunction against CR, prohibiting it from paying the monies to the DRC pending resolution of FG Hemisphere's case. The question before the Hong Kong Court was thus whether the injunction should be discharged.

The DRC argued that the award was not enforceable in Hong Kong because of the doctrine of sovereign immunity. The DRC submitted that in the PRC (including Hong Kong) the principle was that a sovereign state enjoyed absolute immunity from the execution against it of a judgment or award. The DRC also maintained that it had not waived such immunity. It followed that the Hong Kong Court was bound to discharge the injunction and dismiss FG Hemisphere's claim.

FG Hemisphere contended that, under Hong Kong law, a sovereign state only enjoyed relative (not absolute) immunity. A foreign state was thus not immune where the judgment or award being executed against it arose out of a purely commercial transaction which the state had entered into with a third party. FG Hemisphere argued that all transactions relevant to its enforcement proceedings were purely commercial in nature and thus enforceable against the DRC.

FG Hemisphere failed at first instance where I held that the transactions upon which its claim was based were not of a commercial nature. I concluded that, regardless of whether the doctrine of sovereign immunity was absolute or relative, FG Hemisphere could not enforce the award in Hong Kong. I discharged the injunction.

The Court of Appeal reversed my decision by a majority (Yeung JA dissenting). The majority held that, under Hong Kong law, a state only enjoyed relative immunity from suit. The majority further held that it was arguable that the relevant transactions underlying FG Hemisphere's claim were of a commercial nature. They restored the injunction.

The Court of Final Appeal held by a majority (Bokhary PJ and Mortimer NPJ dissenting) that in the PRC the doctrine of sovereign immunity was absolute in scope. As a part of the PRC, Hong Kong was bound to follow that principle. The majority also found that the DRC had not waived the right to claim immunity merely by having participated in the arbitration. Accordingly, FG Hemisphere was not entitled to enforce the award against the DRC in Hong Kong and the injunction had to be discharged.

As a result of FG Hemisphere, there now appears to be a concern that an award (whether made in Hong Kong or elsewhere) will be unenforceable against a PRC state enterprise in Hong Kong, even when the award indisputably arises out of a pure commercial dispute between the enterprise and a third party.

If that is the perception, then it would be wrong.

Assume that a PRC state enterprise is an entity entitled to claim sovereign immunity under public international law. That claim could not be raised in Hong Kong to resist enforcement of an arbitration award against the enterprise. That is because sovereign immunity involves a foreign country X claiming immunity from suit or enforcement in the territory of a different country Y. At least 2 countries have to be involved. A foreign country raises a claim of sovereign immunity in the courts of another country.

That is not the situation in our example. In the latter, a PRC entity would be claiming immunity in a court within the PRC (of which Hong Kong forms part). Only a single country (the PRC) is involved. One cannot raise a claim of sovereign immunity in the courts of one's own country. The international law doctrine of sovereign immunity would simply not apply in such situation.

Contrast the position in FG Hemisphere where the DRC claimed immunity from suit in Hong Kong. A foreign country (the DRC) was claiming immunity from suit in the Court of another country (the PRC). Two countries were involved.

Is there anything one can do to make an award enforceable in Hong Kong against a foreign state which is entitled to claim sovereign immunity here? The problem of enforcing an award in such a situation would not be unique to Hong Kong, but would be inherent in any jurisdiction which follows the principle of absolute immunity.

The problem is perhaps best addressed at the start of an arbitration and not after an award has been made. At the beginning of an arbitration, a party seeking to obtain an enforceable award against a foreign state may apply to the arbitral tribunal for an interim measure under Model Law Art. 17 (s.35 of Hong Kong's Arbitration Ordinance (Cap.609)).

More specifically, the party could ask the tribunal for an order that the foreign state "provide a means of preserving assets out of which a subsequent award may be satisfied". In essence, the party would be seeking security for the due performance of any eventual award. For example, the party may request the tribunal to order that the foreign state deposit funds with a stakeholder who undertakes to deal with the funds in accordance with the tribunal's award.

There is of course no guarantee that the tribunal will grant the interim measure requested in every case. Even if it grants the measure, there is no certainty that the foreign state will comply with the tribunal's order to put up security. But at least in the latter instance the tribunal can make a peremptory order to penalise the foreign state for its non-compliance. The peremptory order may, for instance, possibly bar the foreign state from adducing evidence or making submissions in the arbitration, unless appropriate security for an award is provided.

Note, however, that a party A seeking security along the lines just suggested, may itself be required by the tribunal to put up counter-security in event that the final award is adverse to A and in favour of the foreign state

HUA TIAN LONG

This was an Admiralty action against a vessel belonging to the Guangzhou Salvage Bureau (GSB) of the Ministry of Communications. The plaintiffs alleged that GSB had breached a contract for the chartering of GSB's vessel. As security for its claim, the plaintiffs arrested GSB's vessel in Hong Kong.

GSB applied to set aside the arrest. It initially argued that it enjoyed sovereign immunity. But the judge (Stone J) quickly dismissed that contention, noting that "the concept has no application in the instant case, given that there is here no question of the impleading of a foreign sovereign state".

GSB submitted in the alternative that, as a PRC state entity, GSB enjoyed an immunity from suit which was analogous to the Crown immunity enjoyed by the British Government in Hong Kong prior to the handover of sovereignty to the PRC on 1 July 1997. GSB argued that, following the British handover of sovereignty over Hong Kong to the Central People's Government, Crown immunity did not disappear at common law. Instead, Crown immunity continued to apply by analogy to entities the Central People's Government.

The judge accepted this alternative argument.

The crux of the debate before the judge was over the effect of s. 3 of the Crown Proceedings Ordinance (Cap.300) (CPO) in Hong Kong. That provides that "a claim against the Crown … may be enforced as of right, and without the consent of the Governor, by proceedings taken against the Crown for that purpose in accordance with the provisions of this Ordinance". The question was whether CPO s.3 abolished the doctrine of Crown immunity when the CPO came into effect in 1957.

The judge took the view that "there were two 'Crowns' in Hong Kong" prior to 1 July 1997. One was "Her Majesty's Government in the then colony" and the other was "Her Majesty's Government in the United Kingdom".

The judge reasoned that the CPO only removed the immunity of the former Crown (that is, Her Majesty's Government in Hong Kong) but not the immunity of the latter Crown (that is, Her Majesty's Government in the United Kingdom). This was because the CPO was a law passed by a colonial legislature. Only the UK Parliament (the judge reasoned) had the power to curtail the immunity which the latter Crown enjoyed.

The judge concluded that, by analogy, the Central People's Government "in turn must enjoy the like Crown immunity hitherto accorded to the British Crown, as opposed to … the 'Colonial Crown'.

In the event, however, the GSB lost because the judge held that, on the facts, GSB had waived whatever immunity it might have had. GSB appealed to the Court of Appeal. However, the parties reached a settlement before the appeal came to be heard. There has not therefore been any pronouncement by the Court of Appeal on the continuance of Crown immunity in Hong Kong after 1 July 1997.

The common law doctrine of Crown immunity evolved from the medieval concept that "the king can do no wrong". As a matter of general principle, it would seem odd that such a doctrine should now extend by analogy to a modern-day government whose authority does not rest (whether as a matter of history or ideology) on any notion of "kingship".

Nonetheless, even if one may have doubts as to the correctness of Judge Stone's conclusion, one cannot get around the fact that there is a judgment to the apparent effect that PRC government entities enjoy immunity from suit in Hong Kong. Although not binding as a first instance decision, the judgment has persuasive value as precedent.

But, on the assumption that "HUA TIAN LONG" was rightly decided, to what extent does the judgment apply to commercial arbitrations and the enforcement of awards?

First, it should be noted that the jurisdiction of the Hong Kong Court arose because the vessel was arrested while in Hong Kong waters. Otherwise, there was nothing to connect the plaintiff's action with Hong Kong. The plaintiffs intended to charter the vessel for work on offshore Malaysian and Vietnamese projects. Ownership of the vessel apart, GSB does not seem to have had any other presence in Hong Kong.

Second, Judge Stone distinguished between:

(1) entities which are direct emanations of the Central People's Government and which are discharging state functions as such emanations; and,

(2) entities which enjoy a distinct legal personality from the Central People's Government and which undertake commercial activities independently of that Government.

The judge confined the application of Crown immunity to the first category of entity. The judge observed that an entity within the second category "from the perspective of 'Crown immunity,' clearly is not part of such 'Crown'".

It follows from this that a PRC state-owned corporation engaged in commercial activity in Hong Kong would not enjoy Crown immunity. The corporation would have a separate legal personality and, although its shares may be held by the state, the corporation would not be discharging state functions.

Contrast the GSB which (the judge found) is a department of the Ministry of Communications. Through its ownership and use of the vessel (the largest floating derrick floating crane-barge based in Asia), the GSB discharges the state functions of marine rescue and salvage which are among the responsibilities delegated by the Central People's Government to the Ministry. Neither the GSB nor the Ministry have a separate legal personality from that of the Government.

In those specific premises, Judge Stone concluded that the GSB fell within the first category of entity and enjoyed Crown immunity.

Third, Art. 22 of Hong Kong's Basic Law provides:

"All offices set up in the Hong Kong Special Administrative Region by departments of the Central Government or by provinces, autonomous regions, or municipalities directly under the Central Government, and the personnel of these offices shall abide by the laws of the Region".

I read this to mean that, where an entity falling within the first category identified by Judge Stone has set up an office or presence in Hong Kong, then that entity is bound to abide by Hong Kong laws.

It should accordingly be possible to sue such entity in the Courts here and a plea of Crown immunity would not be available to the entity. This is because compliance with Court orders for damages or other relief in connection with the breach of commercial obligations is very much a part of the Hong Kong law which those entities are required by the Basic Law to observe.

Fourth, Arbitration Ordinance s. 6 states that the Arbitration Ordinance "shall apply to the Government and Offices of the Central People's Government in the Hong Kong Special Administrative Region".

Read together with Art. 22 of the Basic Law, s.6 makes it plain that, whether or not the doctrine of Crown immunity has survived, where an entity within the first category identified by Judge Stone has set up an office in Hong Kong, such office must abide by the provisions of the new Arbitration Ordinance. Those provisions would include Arbitration Ordinance s.73 making an award "final and binding" on a party. In other words, an office of the Central People's Government office having a physical presence in Hong Kong should not be able to rely on Crown immunity as a basis for non-compliance with an award.

Given the foregoing, it would seem that, whatever its ambit post-July 1997, Crown immunity would have little application in arbitration matters. Where an entity of the Central People's Government has established a Hong Kong office, that office may arguably be sued pursuant to Basic Law Art. 22 and Arbitration Ordinance s.6. Even if "HUA TIAN LONG" were valid in its reasoning, it would only matter (as far as arbitration is concerned) in the limited case where one is dealing with a direct emanation of the PRC Government (such as the GSB) which has no established office in Hong Kong.