State immunity

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China Lexicon

ISSUES OF INTERNATIONAL LAW – particularly as they concern relations between states and the principles that govern them – rarely become relevant in commercial transactions. One situation in which these issues become relevant, however, is when a company or investor in one state enters into a commercial transaction with a state, or an arm or instrumentality of state, and subsequently seeks to sue the other state in a foreign court. In such a situation, the foreign court will need to determine whether the other state can be sued in its courts. This article considers the doctrine of state immunity and how it is interpreted and applied in various jurisdictions, including the UK, mainland China and Hong Kong.

WHAT IS THE DOCTRINE?

Under the doctrine of state immunity, a jurisdiction grants immunity to a foreign state from being sued in its courts or being subject to enforcement action in respect of its assets in that jurisdiction. The doctrine is based on the concept that a state should not be subject to the jurisdiction of another state without its consent, reflecting the need for comity or friendly relations between states (for another example of comity between states, see China Business Law Journal volume 8 issue 8: Cross-border insolvency).

The doctrine also reflects the reality that states in many jurisdictions around the world enjoy immunity in their own courts. The immunity that a state enjoys in its own jurisdiction is often referred to as ‘sovereign immunity’ or ‘crown immunity’ and extends not just to the state but also to the head of state personally. The nature and extent of sovereign immunity varies between jurisdictions. In some jurisdictions, such as Australia, the doctrine applies very narrowly and there is no automatic immunity enjoyed by the state. In other jurisdictions, such as the US, the doctrine is widely recognised and applies in respect of different levels of government (e.g. state and federal governments).

Although a distinction between ‘state immunity’ and ‘sovereign immunity’ is sometimes drawn on the basis that the former refers to the immunity enjoyed by states in foreign courts and the latter refers to the immunity enjoyed by a state in its own courts, the terms are often used interchangeably.

To date, issues relating to state immunity have been determined by the domestic law of each state and have not been influenced by international treaties. There is, however, an international treaty on state immunity that has not yet come into force. The United Nations Convention on Jurisdictional Immunities of States and their Property provides that it will come into force after 30 states have ratified or acceded to the convention. As of the date of writing, 28 states had signed the convention (including China) and 21 states had ratified the convention.

ABSOLUTE OR RESTRICTIVE?

In recognising and applying the doctrine of state immunity, jurisdictions around the world can be divided into those that recognise absolute immunity and those that recognised restrictive immunity. Under the doctrine of absolute immunity, a jurisdiction recognises that a foreign state enjoys immunity in all circumstances and in respect of all acts undertaken by the state, including commercial acts. Under the doctrine of restrictive immunity, a jurisdiction recognises that a foreign state only enjoys immunity in respect of the public acts of state, as distinct from commercial acts that would arise in the context of commercial transactions.

The doctrine of restrictive immunity reflects the view that states commonly enter into commercial activities and that it would be unfair to treat them differently in that context. As noted by Lord Denning in the Trendtex case that was decided in 1977: “In the last 50 years there has been a complete transformation in the functions of a sovereign state. Nearly every country now engages in commercial activities. It has its department of state – or creates its own legal entities – which go into the market places of the world. They charter ships. They buy commodities. They issue letters of credit. This transformation has changed the rules of international law relating to sovereign immunity. Many countries have now departed from the rule of absolute immunity. So many have departed from it that it can no longer be considered a rule of international law. It has been replaced by a doctrine of restrictive immunity.”

The majority of states now recognise restrictive immunity. Other states, including China, recognise absolute immunity.

The specific way in which the doctrine of restrictive immunity is recognised and applied depends on the domestic law of the relevant jurisdiction. In the UK, for example, the issues are governed by a piece of legislation called the State Immunity Act 1978. This provides that a foreign state is immune from the jurisdiction of the courts of the UK except as otherwise provided. (See Citation 1: Section 3 of the State Immunity Act)

引文一 Citation 1

英国《国家豁免法》

第三条 在英国履行的商业行为和合同

1. 国家在涉及下列情形的诉讼中,不得享有豁免:

(a) 国家参加的商业行为;或

(b) 国家根据合同所承担的义务(不论是否为商业行为)全部或部分在英国境内履行。

2. 如果争议双方均为国家,或者另有书面约定,本条不适用;如合同(非商业行为)是在有关国家境内缔结,其发生争议的义务受该国行政法管辖时,上述第(1)(b)项不适用。

3. 本条“商业行为”是指

(a) 任何提供货物或服务的合同;

(b) 任何贷款或其他提供资金和保证的行为,或有关此等行为的补偿,或其他金融债务;以及;

(c) 国家除行使主权外所参加或从事的任何其他行为或活动(不论是否为商业的、工业的、金融的、职业性的或其他类似性质的行为或活动);

但本条上述第(1)款的规定均不适用于国家与个人订立的雇用契约。

UK State Immunity Act

3 Commercial transactions and contracts to be performed in United Kingdom.

1. A State is not immune as respects proceedings relating to—

(a) a commercial transaction entered into by the State; or

(b) an obligation of the State which by virtue of a contract (whether a commercial transaction or not) falls to be performed wholly or partly in the United Kingdom.

2. This section does not apply if the parties to the dispute are States or have otherwise agreed in writing; and subsection (1)(b) above does not apply if the contract (not being a commercial transaction) was made in the territory of the State concerned and the obligation in question is governed by its administrative law.

3. In this section “commercial transaction” means—

(a) any contract for the supply of goods or services;

(b) any loan or other transaction for the provision of finance and any guarantee or indemnity in respect of any such transaction or of any other financial obligation; and

(c) any other transaction or activity (whether of a commercial, industrial, financial, professional or other similar character) into which a State enters or in 
which it engages otherwise than in the exercise of sovereign authority;

but neither paragraph of subsection (1) above applies to a contract of employment between a State and an individual.

Although Section 3 exempts foreign states from immunity in respect of commercial transactions, Section 13(2) provides general immunity from enforcement action in respect of the assets of the foreign state. This general immunity is subject to various exceptions, including where the foreign state has given express consent and where the enforcement process is in respect of property owned by the foreign state that is in use, or intended for use, for commercial purposes.

Despite the operation of Section 3 and the exceptions to the general immunity from enforcement, it is common practice in commercial transactions that involve a foreign state for the foreign state to include an express waiver of immunity in the contract to make the position clear.

MAINLAND CHINA AND HONG KONG

The question of state immunity was the central issue in a case decided by the Hong Kong Court of Final Appeal in 2011 called FG Hemisphere Associates LLC v Democratic Republic of the Congo & Ors (the Congo case).

In the Congo case, the Democratic Republic of Congo and its state-owned electricity company defaulted in their debt obligations to a European energy company that had constructed a hydro-electric power plant in the Congo. The company was awarded damages under an arbitral award and subsequently assigned its rights under the arbitral award to FG Hemisphere, a US company that traded in distressed debt. FG Hemisphere subsequently sought to have the arbitral award recognised and enforced by the courts in Hong Kong.

In a majority 3-2 decision, the Court of Final Appeal held that the courts of the Hong Kong Special Administrative Region could not adopt a legal doctrine of state immunity that was different from the position on state immunity that was recognised by the People’s Republic of China. Although Hong Kong had recognised the doctrine of restrictive immunity prior to the return of sovereignty to the People’s Republic of China in 1997, the question of state immunity was a matter that concerned the management and conduct of foreign affairs, which was a power that was reserved to the central people’s government under the Basic Law of Hong Kong. Accordingly, before rendering a final judgment in the case, the court was subject to a duty under Article 158(3) of the Basic Law to refer the matter to the Standing Committee of the National People’s Congress for an interpretation.

The standing committee subsequently issued an interpretation, which confirmed that Hong Kong must apply and give effect to the doctrine of absolute immunity as recognised in mainland China. Relevantly, in a speech to the press, the deputy director of the Legislative Affairs Commission of the Standing Committee and the drafter of the interpretation noted that the doctrine of state immunity did not apply to Chinese state-owned enterprises as they had assumed the legal status of a company.

The position of state-owned enterprises was recently confirmed in June this year when the court of first instance held that a PRC state-owned enterprise could not claim state immunity in proceedings to enforce an arbitral award against it. In the case, TNB Fuel Services Sdn Bhd v China National Coal Group Corporation, the court referred to a letter issued by the Hong Kong and Macao Affairs Office of the State Council, which stated as follows: “…a state-owned enterprise is an independent legal entity, which carries out activities of production and operation on its own, independently assumes legal liabilities, and there is no special legal person status or legal interests superior to other enterprises…save for extremely extraordinary circumstances where the conduct was performed on behalf of the state…the state-owned enterprises of our country when carrying out commercial activities shall not be deemed as part of the Central Government, and shall not be deemed as a body performing functions on behalf of the Central Government.”

It will be interesting to see whether a PRC state-owned enterprise is ever successful in claiming state immunity in Hong Kong on the basis of the limited exception identified above.

葛安德 Andrew Godwin
葛安德
Andrew Godwin

A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre.  Andrew’s new book is a compilation of China Business Law Journal‘s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com.