Practical Law

A storm in a Chinese teacup?

The Hong Kong Court of Final Appeal’s (HK CFA) decision in Democratic Republic of the Congo and others v FG Hemisphere Associates LLC [2011] 4 HKC 151 (FG Hemisphere) has caused concerns, but those concerns are misplaced. A business considering whether Hong Kong will retain its position as a pre-eminent Asian arbitral seat should rest at ease.

Decision in FG Hemisphere

In FG Hemisphere, the respondents applied to the Hong Kong courts for leave to enforce two ICC arbitration awards in Hong Kong. The dispute arose out of an alleged breach of financing agreements between the Democratic Republic of Congo (DRC), a Congolese state-owned electricity company (SNE), and a construction company (Energoinvest). The DRC resisted enforcement on the grounds that, as a sovereign state, it was immune from the jurisdiction of the Hong Kong courts.

On final appeal, the HK CFA was asked to decide whether Hong Kong continued to follow the doctrine of restrictive immunity adopted in the UK or was now required to adopt absolute immunity in line with China.

The HK CFA held that the Basic Law required the doctrine of absolute immunity. This immunity could only be waived by the state through a waiver given “in the face of the court” and not by the arbitration agreement. As such, states enjoyed absolute immunity from the Hong Kong courts so that the arbitration awards could not be enforced in Hong Kong.

FG Hemisphere and arbitrations seated in Hong Kong

Where a business is contracting with a foreign state or a foreign state entity, FG Hemisphere does not prevent selecting Hong Kong as the arbitral seat. Sovereign immunity does not affect the jurisdiction of arbitral tribunals. This is because sovereign immunity flows from concerns about the compulsory exercise of jurisdiction by the courts of one state over another state. On the other hand, arbitration is predicated on the private, consensual and contractual agreement of the parties. This distinction means that sovereign immunity has no application to arbitral tribunals. Arbitral tribunals seated in Hong Kong would arguably be making an error of law if they declined jurisdiction because of sovereign immunity.

In practice, many businesses select Hong Kong as the arbitral seat because they are contracting with a Chinese counterparty. The question of whether a party is a foreign state or foreign state-entity is decided from the perspective of Hong Kong as an integral part of China. This means that China or Chinese state-owned enterprises are not entitled to claim sovereign immunity. However, they may be entitled to invoke crown immunity, which itself provides an absolute bar to the jurisdiction of Hong Kong courts.

If, during the arbitration, there is any need for assistance from the Hong Kong courts, the decision in FG Hemisphere will not prevent the Hong Kong courts rendering assistance. This is because it is understood that a properly drafted arbitration agreement will act as an implied waiver of sovereign immunity. Although this proposition was only addressed by the HK CFA in passing, Hong Kong’s intermediate appellate court, the Court of Appeal, endorsed this proposition more directly and its decision was not overturned on this point.

Conclusion

FG Hemisphere is unlikely to have any impact on businesses that choose to arbitrate claims against states in Hong Kong. The Hong Kong courts are likely to give effect to such an agreement, and to lend their assistance to the arbitration process where required. Businesses do not have any cause for concern in relation to their Hong Kong based arbitrations as a result of FG Hemisphere.