Posts Tagged ‘Crown Immunity’

Who wears the crown? Immunity and the identification of the sovereign in Hong Kong

by Justin D'Agostino

Almost every country of the world has seen an enormous increase in the involvement of the State in economic activity over the past century. This trend is particularly pronounced in those economies, China foremost among them, in which the State takes an active role in commercial life. But can State owned entities and other private law vehicles in which the State holds a stake avail themselves of the sovereign immunity which attaches to the State itself? This question understandably causes headaches to businesses transacting with such entities on a daily basis, since the answer may have a significant impact upon the evaluation of the overall business risk of entering such transactions in the first place.

This issue has come to particular prominence in Hong Kong recently following judgments in the cases of Democratic Republic of the Congo v. FG Hemisphere Associates FACV Nos. 5, 6 & 7 of 2010 and Intraline Resources SDN BHD v. The Owners of the Ship or Vessel “Ha Tian Long” HCAJ 59 of 2008, holding that both sovereign immunity and crown immunity are absolute in this jurisdiction. Immunity will be relevant where a contract provides for dispute resolution by the Hong Kong courts or the counterparty has assets located in Hong Kong. The upshot is that if the counterparty is a State entity, it will be able to invoke its immunity to resist the assumption of jurisdiction over it by the Hong Kong courts, including enforcement proceedings in Hong Kong against its assets, regardless of whether the transaction or assets in question are sovereign or commercial in nature. (There is some good news –immunity will not operate as a bar to arbitration seated in Hong Kong, and is unlikely to affect the supervisory jurisdiction of the Hong Kong courts over arbitral proceedings.)

One of the consequences of an absolute (as opposed to a restrictive) doctrine of sovereign immunity, particularly in light of the restrictive rules on waiver of immunity which now apply in Hong Kong, is that the status of a contractual counterparty assumes central importance in determining whether or not it will be entitled to invoke immunity. Because absolute immunity makes no exception for purely commercial transactions or assets, the key question in determining whether immunity applies in a given case will be whether or not a particular entity is, or is not, a State or a State entity. Identifying the sovereign or the crown becomes paramount.

So which entities will be accorded sovereign or crown status in Hong Kong? The question to be asked is whether the entity is an “arm or alter ego”, or “part and parcel”, of the State, such that it should be identified with the State like a government department. In answering this question, the legal tests which will be applied in the cases of sovereign immunity and crown immunity are different, although in practice the results will often be the same. In order to apply the right test, the applicable immunity must first be identified. Sovereign immunity will apply where the counterparty is a foreign (i.e. non-PRC) State or State entity, whereas crown immunity will apply where the counterparty is the PRC State or a PRC State entity. Crown immunity is therefore most likely to be relevant to typical China-related contracts and transactions, although there may of course be exceptions.

In the case of sovereign immunity, the key factors in determining whether an entity is entitled to immunity are likely to be the function of the entity and the nature of the activities which it carries out (i.e. a “functional” test), although other factors may be taken into account. Where the entity carries out activities of a sovereign or governmental nature, it will be entitled to immunity, but where it carries out ordinary commercial trading activities, sovereign immunity is unlikely to apply. The control test (discussed next) may also be relevant, but is unlikely to be determinative.

In the case of crown immunity, control, rather than function and activities, will be the benchmark for the attribution of crown immunity (i.e. a “control” test). Crucially, whether the crown has control over the entity will depend upon whether the entity is able to exercise independent powers of its own. The control required is therefore of a “ministerial” nature rather than mere ownership giving rise to voting control – the relevant question is whether or not the entity concerned is controlled by, or must act on the direction of, a minister of State or a government department. This approach to control is also likely to apply where control is a factor taken into account in determining whether an entity is entitled to sovereign immunity.

What are the results when these tests are applied to SOEs? Whilst each case must be treated on its own facts, it seems that where an SOE is purely engaged in activities of an ordinary commercial trading nature and is not subject to significant direction by a government minister or department, it will be unlikely to be entitled to immunity, even where it is majority or wholly-owned by a State. On the other hand, where an entity is engaged in activities of a governmental or public nature, potentially under the direction or oversight of a government department, it is much more likely to be entitled to immunity. It therefore appears that many, or even most, SOEs will not be entitled to sovereign or crown immunity in Hong Kong (a question for another day is whether the analysis would be different, at least under the functional test for sovereign immunity, in the case of a sovereign wealth fund, which could be argued to carry out functions of an inherently sovereign or governmental character directed towards public aims).

It would of course be prudent for businesses and their advisors to bear the tests above in mind at the pre-contractual stage when considering transacting with entities which might be entitled to immunity. Should a dispute arise in which one party attempts to invoke sovereign immunity in Hong Kong, however, it will ultimately be the Central People’s Government that has the final say on whether an entity is entitled to immunity. This is because Article 19(3) of Hong Kong’s Basic Law provides that the courts of Hong Kong shall have no jurisdiction in relation to acts of state such as defence and foreign affairs, which includes the decision as to whether or not to recognise an entity as a foreign sovereign. In such cases, the courts must obtain a binding certificate from the Chief Executive of the Hong Kong SAR, who will in turn obtain a certifying document from the CPG before issuing the certificate. There is clearly, therefore, potential for disputes as to the application of sovereign immunity to assume a political dimension.

There is no equivalent procedure in relation to crown immunity, and the decision remains that of the Hong Kong court (although the Court of First Instance in the Intraline case indicated that it would favour a procedure for certification by the CPG). In practice, it is likely that the courts will consider carefully any representations which they receive from the CPG in relation to the status of a PRC entity, albeit they will not be obliged to follow them.

Despite the very understandable concerns of the business community about the impact of absolute sovereign and crown immunity in Hong Kong when contracting with SOEs, the application of the legal tests for immunity should offer comfort that in many cases, immunity will not be applicable (provided, in the case of sovereign immunity, that any rulings by the CPG accord with the legal principles which would be applied by the courts). Obviously, even where an entity will not be entitled to immunity, it cannot be prevented from incurring the trouble and expense of taking the point, and that possibility, as well as the broader risk that immunity might apply, should be priced into the overall risk evaluation at the outset of a transaction.

Justin D’Agostino and Martin Wallace, Herbert Smith

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Arbitration in Hong Kong: Immune from immunity?

by Justin D’Agostino

In a landmark provisional judgment in Democratic Republic of the Congo v. FG Hemisphere Associates FACV Nos. 5, 6 & 7 of 2010, the Hong Kong Court of Final Appeal (CFA) has held by a majority of 3:2 that absolute sovereign immunity applies in Hong Kong, with no exception for purely commercial transactions or assets. Taken with the judgment of the Hong Kong Court of First Instance (CFI) in Intraline Resources SDN BHD v. The Owners of the Ship or Vessel “Hua Tian Long” HCAJ 59 of 2008 in relation to crown immunity in April 2010, the CFA’s judgment means that both sovereign immunity and crown immunity are absolute under the law of Hong Kong. The CFA also confirmed that immunity cannot be waived through a pre-dispute contractual waiver, with important consequences for enforcement against State assets located in Hong Kong. However, and whilst the judgment raises a number of interesting political and constitutional issues, it should not affect the choice of Hong Kong as a leading seat of arbitration when contracting with States and State entities, particularly in PRC-related contracts. In this blog, we take a look at the practical implications of this important judgment, including its impact on arbitral proceedings seated in Hong Kong and potential risks when seeking enforcement against State assets situated in Hong Kong.

Sovereign immunity is premised upon the principle that the courts of one State may not assume jurisdiction over another State without consent (i.e. unless sovereign immunity is validly waived in accordance with the principles discussed below). Accordingly, sovereign immunity in the Hong Kong context will be relevant where the counterparty is a State other than the PRC or a non-PRC State entity. Crown immunity, on the other hand, is premised upon the principle that the courts of a State may not assume jurisdiction over that State (the crown) without its consent. Accordingly, in Hong Kong, crown immunity will be relevant if the counterparty is the PRC or a PRC State entity. (Crown immunity does not apply to the Government of the Hong Kong SAR, against which actions can be brought under the regime set out in the Crown Proceedings Ordinance (Cap. 300)).

It is now clear that both sovereign immunity and crown immunity are absolute under the law of Hong Kong. There is no exception for transactions and assets which are of a purely commercial rather than a sovereign nature (in contrast to the “restrictive” doctrine of sovereign immunity which is applied by many jurisdictions). An entity entitled to immunity will be able to assert it in all transactions and in respect of all assets, regardless of their commercial or sovereign character. Whilst the position in relation to sovereign immunity is technically provisional pending the consideration by the Standing Committee of the National People’s Congress (SCNPC) of certain questions referred to it by the CFA under Hong Kong’s Basic Law, it seems likely that the interpretation to be rendered by the SCNPC will endorse the overall tenor of the CFA’s provisional judgment.

The CFA in FG Hemisphere affirmed the earlier findings of the Court of Appeal (CA) in relation to waiver of sovereign immunity, holding that any waiver must be express and “in the face of the court” in order to be effective. In practice, this means that the waiver must be made at the time the court is to exercise jurisdiction. Pre-dispute contractual provisions, such as a Hong Kong court jurisdiction clause or an express waiver clause, will not, therefore, suffice to constitute a waiver of immunity. Based upon the judgment of the CFI in Intraline, it appears likely that the same principles regarding waiver will apply to crown immunity as to sovereign immunity at any stage at which the doctrine may be invoked. Where a party is dealing with a State counterparty, it is therefore advisable not to adopt a Hong Kong court jurisdiction clause – although arbitration, including in Hong Kong, will be a viable option, as discussed below. In addition, it would be prudent not to place reliance upon express waiver of immunity clauses, although these should still be included in contracts with State counterparties wherever possible, since they will be effective in many other jurisdictions. Identifying whether or not an entity is part of the State or the crown, and therefore entitled to immunity, may not always be straightforward, and it may be necessary to seek specific advice on a case-by-case basis.

The question of sovereign or crown immunity, and therefore of waiver, does not, strictly speaking, arise in relation to the jurisdiction of an arbitral Tribunal. Arbitration is a consensual process derived from a private contract between the parties, and the authority of the arbitral Tribunal flows from that contract. The adjudication of a dispute by an arbitral Tribunal does not, therefore, involve the exercise of jurisdiction by the courts of a State over any State, whether their own State (in the case of crown immunity) or a foreign State (in the case of sovereign immunity). As the CFA stated in FG Hemisphere, “when a State enters into an arbitration agreement with a private individual or company, that act does not constitute a submission to any other State’s jurisdiction. It involves merely the assumption of contractual obligations vis-à-vis the other party to the agreement.” Therefore, no immunity will be engaged by the assumption of jurisdiction by an arbitral Tribunal. It is therefore strictly a misnomer to refer to an arbitration clause as constituting an implied waiver of immunity from the arbitration proceedings themselves, although they are nevertheless commonly characterised in this way (including, for example, in the judgment of the CA). What is clear is that sovereign and crown immunity will not apply to the arbitration proceedings themselves. In this regard, section 34 of Hong Kong’s new Arbitration Ordinance (Cap. 609) expressly preserves the principle of “kompetenz-kompetenz”, which holds that it is for the arbitral Tribunal (and not, for example, the courts of the seat) to rule upon its own jurisdiction.

Although the CFA did not itself express an opinion on the question of whether or not an arbitration clause will amount to an implied waiver of the supervisory jurisdiction of the courts of Hong Kong over an arbitration seated in Hong Kong or otherwise, it cited a leading work on State immunity by Lady Hazel Fox CMG QC, an eminent commentator on this area, which concludes that “the exception for arbitration agreements operates… to remove state immunity from the first stage of arbitration in which the national courts exercise supervisory powers.” That conclusion had itself been quoted and approved (albeit in obiter remarks) by the CA, an endorsement which was not disturbed by the judgment of the CFA. It is therefore strongly arguable that the law of Hong Kong accords with customary international law on this issue and an arbitration clause will amount to an implied waiver of immunity in respect of the supervisory jurisdiction of the Hong Kong courts. Furthermore, court proceedings in support of arbitration are relatively rare in practice, and most arbitrations proceed from beginning to end without requiring the input of domestic courts. Moreover, in several important aspects of arbitral procedure, Hong Kong’s new Arbitration Ordinance (Cap. 609) shifts responsibility for functions which have traditionally been part of the supervisory role of the courts to the Hong Kong International Arbitration Centre (HKIAC) (for example, in relation to determining the number of arbitrators, appointing arbitrators and appointing mediators), further narrowing the circumstances in which it will be necessary to invoke the supervisory jurisdiction of the courts.

Whilst there is, of course, an unquantifiable risk that a State counterparty might take this point in any proceedings before the Hong Kong courts in support of an arbitration, Hong Kong remains a very attractive seat. This is particularly so in relation to PRC-related contracts, since Hong Kong is a readily acceptable venue for PRC counterparties who may otherwise be reluctant to agree an offshore seat. In practice, therefore, the judgments of the CFA in FG Hemisphere and the CFI in Intraline should not affect the choice of Hong Kong as a seat for arbitration.

The most significant impact of the FG Hemisphere and Intraline cases is in relation to enforcement and execution against assets belonging to a State or a State entity located in Hong Kong. The CFA confirmed in FG Hemisphere that an arbitration clause will not operate as an implied waiver of immunity either from enforcement proceedings in the Hong Kong courts or from execution or attachment against assets. In addition, because any effective waiver of immunity must be made “in the face of the court” , an express waiver clause will not be effective to waive immunity in respect of enforcement and execution either. The risk posed by immunity in respect of enforcement and execution will be relevant where State assets against which enforcement might be sought are located in Hong Kong, and particularly in cases in which they are the only such assets of the relevant State or State entity. However, the position will be the same regardless of the jurisdiction in which the relevant arbitral Award or court judgment was rendered. Accordingly, whilst immunity in respect of enforcement and execution is an important issue of which to be aware, it should not affect the choice of Hong Kong as a seat of arbitration. In addition, the combined effect of the FG Hemisphere and Intraline judgments upon dispute resolution in Hong Kong should not be overstated: the issue of sovereign or crown immunity will only apply in the case of contracts with States and State entities, and not those with purely commercial counterparties. With a modern arbitration regime under the new Arbitration Ordinance (Cap. 609), one of the leading arbitral institutions in the HKIAC, and reliable, supportive courts, Hong Kong continues to be an attractive venue for arbitration – particularly when dealing with PRC counterparties.

Justin D’Agostino
Partner
Herbert Smith, Hong Kong

Martin Wallace
Registered Foreign Lawyer
Herbert Smith, Hong Kong


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The Immunity of the PRC Government in Hong Kong: Obtain Waivers or Waive Goodbye

by Justin D'Agostino

Everyone is looking at China at the moment, and rightly so. It’s a very exciting place to be. Many MNCs are already here and many others are determined to get a piece of the action. But where there’s business, there are disputes. And where there’s international business, there’s arbitration.

There is no doubt that the position of the Hong Kong SAR is such that it is uniquely placed to offer foreign parties looking to invest in mainland China (and Chinese parties) a forum for dispute resolution that is more accessible than the mainland itself. Hong Kong continues to enhance its reputation. In November 2008, the ICC opened its first Asian office in Hong Kong of the Court’s Secretariat, in response to increasing demand in the region for its services. And the Hong Kong International Arbitration Centre, which celebrates its 25th Anniversary later this year, recently adopted revised and very modern Arbitration Rules, has seen its caseload increase substantially in recent years and, earlier this year, recruited a new Secretary-General.

Thus, a recent case in Hong Kong on Crown immunity has proved somewhat controversial. The judgment (and a separate judgment on Sovereign Immunity) is particularly important to anyone entering into contracts with Chinese government parties and who might seek to bring proceedings (including by way of arbitration) in Hong Kong or to enforce any judgment or award in Hong Kong.

The historic position is interesting. Crown Immunity subsists as part of the common law of Hong Kong. This is not particularly surprising once you consider Hong Kong’s history. Following the handover in 1997, when Hong Kong was returned to China upon expiry of the famous lease the privilege of Crown Immunity went largely unnoticed. That was until the novel judgment in Intraline Resources SDN BHD v. The Owners of the Ship or Vessel “Hua Tian Long” HCAJ59/2008. The Hong Kong Court of First Instance decided that the English common law doctrine still subsists in Hong Kong after the handover. The privilege has transferred to the Central People’s Government of the PRC (CPG). As a consequence, the Hong Kong courts now lack the legal basis to challenge any act, whether functional or commercial in nature, of an agency of the CPG. In short, Government Agencies of the People’s Republic of China can claim absolute immunity from suit when sued in Hong Kong even for commercial acts.

The case involved a vessel – apparently the largest floating derrick crane-barge based in Asia – which had been promised to a Malaysian-owned engineering company to work on offshore oil platform projects. The owner of the vessel, the defendant in the action, claimed that it was ultimately owned by the CPG and that it should therefore enjoy Crown and/or Sovereign Immunity.

The Sovereign Immunity point was rejected, since the whole premise of such a doctrine is that no state can claim jurisdiction over the affairs of another and Hong Kong and the PRC are not separate states. (See the recent case of FG Hemisphere Associates LLC v. Democratic Republic of the Congo and Others CACV 373/2008 and CACV 43/2009, which is very interesting on the subject of Sovereign Immunity and its restrictive application to non-government entities in Hong Kong, although is, we understand, the subject of an appeal.)

However, the CFI in Hong Kong was clear in its views as to the applicability of Crown Immunity in the Hua Tian Long case. It was held that at all times Crown Immunity remained an attribute of the British Crown’s sovereignty over her colonies (including Hong Kong) and the establishment of the new constitutional order following the handover did not alter this position. In colonial times, Hong Kong courts lacked the legal basis to challenge acts of the British Crown. While statute enabled certain proceedings to be brought against the British Government in Hong Kong, it did not remove the privilege of Crown Immunity available to the British Government in the United Kingdom. Crown Immunity originated from the concept that there was not supposed to be equality between a ruler and those that are ruled, represented by the maxim “the sovereign can do no wrong”. The CFI decided that, under the constitution of the PRC, the Hong Kong SAR was an entity of the CPG and thus Crown Immunity applies to the CPG.

The upshot of all of this makes for interesting work for legal practitioners. In short, PRC Government agencies currently have absolute Crown Immunity in Hong Kong. This applies to both functional acts of state and acts of a commercial character. In practice, this means that unless they grant express waiver of immunity or such an entity submits to the jurisdiction of the Hong Kong courts or an arbitral tribunal seated in Hong Kong, say by actively participating in proceedings, they cannot be sued in Hong Kong or have judgments or arbitral awards executed over assets in Hong Kong. This is far from ideal for parties doing business with such state agencies. The potential solution of course is that contracts with these parties must contain express waivers of Crown Immunity over suit and execution. Alternatively, parties need to look at bringing such proceedings (or commencing arbitration) in other jurisdictions both in respect of the substantive proceedings or in relation to enforcement.

One obvious question in dealing with all of this is the extent to which it is possible to determine whether a contracting party is likely to be an entity of the CPG. This may be far from easy to ascertain, and there is no clear guidance on the extent to which this applies. In fact, it remains an open question and one which is likely to be decided on a case by case basis.

As ever when contracting with businesses in this region, it is a good idea to undertake as much due diligence as possible, and to do so as early as possible. In Hua Tian Long, the court considered evidence regarding the fact that the defendant crane owner had no shareholders; was registered with the State Administration of Industry and Commerce; and was under the control of the Ministry of Communications. The way in which an entity was set up; how it is able to run its business; and which Ministry of the PRC Government oversees it, are all relevant questions. From experience, it is not always possible to answer all of these questions, but it worth giving them some serious consideration at the time a contract is entered into. If in doubt, make sure you give that dispute resolution clause a bit more thought!

Justin D’Agostino
Partner
Herbert Smith, Hong Kong

Sarah Munro
Senior Consultant
Herbert Smith LLP, Shanghai


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