Hong Kong Court of Final Appeal clarifies law of sovereign immunity in Hong Kong, with important implications for contracts with State entities

In its provisional judgment in Democratic Republic of the Congo v. FG Hemisphere Associates the Hong Kong Court of Final Appeal (CFA) found that absolute sovereign immunity applies in Hong Kong, with no exception for purely commercial transactions or assets (as would be the case in a jurisdiction that favours the restrictive doctrine of sovereign immunity).  The judgment also makes it clear that immunity cannot be waived either expressly through a pre-dispute contractual waiver or by implication through a contractual court jurisdiction clause.  As a consequence, where a party is dealing with a State counterparty, we recommend that the Hong Kong courts should not be specified as the forum for the resolution of disputes.

In brief:

1. Sovereign immunity (either absolute or restrictive) should have no impact on the ability of an arbitral tribunal to assume jurisdiction over a State party.  This is because the theory of sovereign immunity is premised upon the principle that the courts of one State may not assume jurisdiction over another State without consent, and as arbitration is a contractual process and the status and authority of the arbitral Tribunal are derived from the contract between the parties, there is no question of the courts of a State assuming jurisdiction over another State.
2. It is likely that an arbitration clause will operate as an implied waiver of immunity from the supervisory oversight of the courts of Hong Kong over an arbitration seated in Hong Kong.
3. It is clear that an arbitration clause will not operate as an implied waiver of immunity from proceedings in the courts of Hong Kong to enforce any resultant arbitration award, or from execution against assets.  However, this applies regardless of whether the seat of arbitration is in Hong Kong or is in another jurisdiction.

As such, we do not believe that the judgment should affect the choice of Hong Kong as an arbitration seat when contracting with States and State entities – although it will affect the enforcement of any resulting award against the assets of States and State entities held in Hong Kong, irrespective of the seat of arbitration.

Democratic Republic of the Congo v. FG Hemisphere Associates FACV Nos. 5, 6 and 7 of 2010

To view our full briefing on the case, including detailed analysis of the CFA's judgment and its implications for dispute resolution in Hong Kong, click here.