On 1 January 2024, Foreign State Immunity Law of The People's Republic of China ("FSIL") came into effect, changing and clarifying the position of sovereign immunity under the laws of Hong Kong and mainland China.
Before the FSIL, the sovereign immunity position under the laws of China was that a state and its property enjoyed absolute immunity in foreign courts, including immunity from jurisdiction and from execution. The courts in China had no jurisdiction over a foreign state or government, nor had they ever entertained any case in which a foreign state or government was sued as a defendant or any claim involving the property of any foreign state or government, irrespective of the nature or purpose of the relevant act or use of the property.
Now, the FSIL introduces key statutory exemptions from the immunity enjoyed by foreign states in PRC civil proceedings, many of which are similar to exemptions found in the United States Foreign Sovereign Immunities Act (which you can read more about here).
Exceptions to immunity from PRC court proceedings
(i) Commercial activities exemption — a foreign state will not enjoy immunity from suit before the PRC courts in respect of proceedings arising from "commercial activities" provided that those commercial activities (i) are conducted with an organisation or individual of any other state (which would include the PRC) and (ii) either take place within the territory of the PRC or (if not) produce "direct effect" in the territory of the PRC.
(ii) Express waiver (immunity from suit) — a foreign state will not enjoy immunity from suit where it has expressly submitted in writing to the jurisdiction of the courts of the PRC with respect to a particular matter or case, for example through a contract or treaty. It is also possible for a foreign state to implicitly waive immunity from suit, for example if it brings proceedings on the substance of a dispute.
(iii) Arbitration-related proceedings in commercial transactions — where an arbitration relates to a dispute arising out of a commercial activity between a foreign state and an organisation or an individual of any other state (including the PRC), a foreign state will not be able to claim immunity from suit in related court proceedings concerning the validity of the arbitration agreement, the recognition and enforcement of the award, the setting aside of the award and other matters related to arbitration prescribed by law to be reviewed by the court.
Exceptions to immunity from execution
(iv) Property for commercial use — property located in the PRC that is being used for "commercial activities" and is related to a PRC judgment will no longer be immune from judicial enforcement in the PRC.
(v) Express waiver (immunity from execution) — a foreign state will not enjoy immunity from execution where it expressly waives such immunity in writing, including by treaty or contract.
The evolution of the sovereign immunity position in Hong Kong is a bit complicated. Before July 1, 1997, Hong Kong courts applied a restrictive state immunity doctrine. However, since the resumption of Chinese sovereignty on July 1, 1997, Article 19, Paragraph 3 of the Basic Law has excluded matters of foreign affairs and defense from the jurisdiction of the municipal courts of Hong Kong.
As established by the leading case Democratic Republic of the Congo v. FG Hemisphere Associates [2011] HKCFA 41, Hong Kong is legally bound to follow the rules and policies of mainland China on foreign state immunity. In the Congo case, the majority followed an interpretation issued by the Standing Committee of the National People's Congress upon the request of the court to the effect that the doctrine of absolute state immunity, as then adopted by mainland China, was to be applied in Hong Kong.
In an announcement dated 4 September 2023, the Chinese authorities confirmed the Hong Kong SAR should follow the rules and policies in the FSIL. This means Hong Kong will have to shift from an absolute to a restrictive approach in applying foreign state immunity, opening up the possibility of suing foreign states for their commercial activities in Hong Kong.
Another welcome change in Hong Kong is the possibility of express contractual waivers, which were previously ineffective, as any waiver of immunity is required to be made "in the face of the court" at the time when the court was asked to exercise jurisdiction, as stated in the Congo case.
Since foreign states are not immune from suit in respect of arbitration-related court proceedings that arise out of commercial activities or investment disputes, creditors will be able to enforce awards from commercial or investment arbitrations against commercial assets of foreign states in both mainland China and Hong Kong by applying to recognise and register the awards as judgments, provided that the awards arise out of the foreign state's commercial activities.
Last but not least, it is important to note that Hong Kong law distinguishes the foreign state immunity regime which specifically applies to foreign states and their entities, from "crown immunity" under which the Chinese Government and its controlled institutions are immune from the jurisdiction of the Hong Kong courts and execution against their assets. In determining whether a Chinese state-owned enterprise (SOE) is entitled to crown immunity, a "control test" will be applied to ascertain the nature and degree of control that could be exercised by the Chinese authorities, as confirmed in the case TNB Fuel Services SDN BHD v. China National Coal Group Corporation [2017] HKCFI 1016. Accordingly, Chinese commercial state-owned enterprises (SOEs) generally do not enjoy crown immunity in Hong Kong, much like most foreign SOEs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
