HONG KONG TO APPLY COMMERCIAL EXCEPTION TO STATE IMMUNITY FOLLOWING LANDMARK CHANGE IN PRC LAW

Foreign states will no longer be immune from suit or execution in Hong Kong in respect of certain commercial activities and assets, with effect from 1 January 2024.

Hong Kong follows the same approach to foreign state immunity as the PRC, as confirmed in the well-known Congo case in 2011.  The PRC has previously adopted the "absolute" doctrine of foreign state immunity (which does not include any exception for commercial activities).  On 1 September 2023, however, the PRC adopted a new Foreign State Immunity Law which will apply the "restrictive" doctrine of immunity, in line with many other jurisdictions (reported in detail here).  The PRC government has confirmed that Hong Kong and Macau should follow the rules and policies set out in the new law.

This is a positive development for Hong Kong as a dispute resolution forum, although its significance for some types of proceedings and parties is likely to be more limited than for others:

• Arbitration proceedings.  It was already the case (and the new law does not change the fact) that foreign states were unable to claim immunity from the jurisdiction of Hong Kong-seated arbitral tribunals (because arbitral tribunals, unlike national courts, do not exercise the sovereign authority of one state over another state).
• Supervisory jurisdiction.  Foreign states were already unlikely to be able to claim immunity from the supervisory jurisdiction of the Hong Kong courts in relation to arbitration proceedings (based on obiter comments made by the Hong Kong Court of Appeal in the Congo case endorsing the concept that an arbitration clause operates as an implied waiver of such immunity, which were not disturbed by the Court of Final Appeal).  The new law includes an express exception to immunity for various arbitration-related proceedings arising out of commercial activities between a foreign state and individuals and organisations of another state.
• Stated-Owned Enterprises ("SOEs").  Commercial SOEs which do not carry out sovereign functions, and are able to exercise powers of their own independent of state control (as opposed to mere ownership), are already unable to claim immunity from suit or execution in Hong Kong.  Importantly, this applies to both foreign SOEs and PRC SOEs (with some differences of emphasis between the relevant legal tests).

The most significant changes to Hong Kong law will be as follows (further details are available on our Asia Disputes Notes blog here):

• Commercial transactions and assets.  It will be possible to sue foreign states in the Hong Kong courts in relation to certain commercial transactions and execute against certain commercial assets of foreign states (in each case, the threshold test being whether the transaction or assets relate to "commercial activities").  No waiver of immunity by the foreign state (whether in advance, or at the time of the proceedings) will be necessary where the commercial exception applies.
• Express waivers.  Advance contractual waivers of immunity (as well as waivers by international treaty) from both suit and execution will be possible (although a waiver of immunity from suit will not give rise to a deemed waiver of immunity from execution, and parties should therefore take care to ensure that the scope of any contractual waiver expressly includes immunity from execution as well as suit).  Previously, contractual waivers of immunity were ineffective as a matter of Hong Kong law and immunity had to be waived "in the face of the court" at the time when the court was asked to exercise jurisdiction.  Given how commonly such provisions are included in contracts with states and state entities, this is a significant development.

These changes significantly expand the scope to enforce both arbitral awards and court judgments (whether made in Hong Kong or in other jurisdictions) against foreign states in Hong Kong.  Taken together with the ability to sue foreign states in the Hong Kong courts in a much wider range of circumstances than was previously possible, they enhance Hong Kong's attractiveness as a dispute resolution forum.

National laws of the PRC such as the new Foreign State Immunity Law may be applied in Hong Kong either by way of promulgation (effectively a declaration by the Chief Executive that the law applies verbatim) or by way of local legislation with appropriate adaptations, pursuant to the procedure set out in Article 18 of Hong Kong's Basic Law.  Further developments will be reported on this blog.

This article has been updated since it was originally published to reflect additional points of detail and our latest analysis.