Landmark Congo Decision May Hinder Enforcement of Arbitral Awards in Hong Kong Against Sovereign States

It was recently reported that the Hong Kong Court of Final Appeal handed down a controversial judgment holding that the Democratic Republic of Congo (DRC) enjoyed an absolute right of immunity, despite what appeared to be an express waiver of immunity in the agreements signed by the DRC (click here for the full story).


SNR Denton reports the following background information: “Post 1997, Hong Kong has been in something of a quandary with regard to the issue of sovereign state immunity. On the one hand, the pre-1997 Common Law in Hong Kong acknowledged the doctrine of restrictive state immunity, that is, that a state could be sued when it has engaged in purely commercial transactions. On the other hand, the position in the People's Republic of China [PRC] has been consistent and unequivocal: Sovereign states enjoy absolute immunity from domestic courts of another sovereign state, the only exception being where the defendant state waives immunity before the forum state.”

On August 26, 2011, this dilemma came to the fore in the case Democratic Republic of the Congo v. FG Hemisphere Associates, which involves an attempt by US-based investment fund FG Hemisphere Associates to enforce arbitral awards against Hong Kong-based assets of the DRC. In June, the Hong Kong Court of Final Appeal, in a controversial judgment overturning the Court of Appeal, came to the view that the DRC enjoyed an absolute right of immunity, notwithstanding what appeared to be an express waiver of immunity in the agreements signed by the DRC. The Court then referred the matter to the Standing Committee of the National People’s Congress, which affirmed the Court’s conclusion: the DRC enjoys absolute immunity from the domestic courts of Hong Kong, the only exception being where the DRC waives immunity.

The challenges that this decision poses to investors applies not only when dealing with states holding assets in Hong Kong, but also when assets are being held anywhere in mainland China. Because the Standing Committee of the National People’s Congress affirmed the CFA’s ruling, it would presumably similarly instruct courts located anywhere on mainland China to dismiss suits brought against sovereign states for the enforcement of arbitral awards when such states protest the jurisdiction of the courts of the PRC, regardless of what agreements the states have signed.

This is negative news for companies doing business with states (or state agencies). It likely means states could protect all of their funds and other assets in Hong Kong and mainland China and then sign whatever waivers as to sovereign immunity they wish, but when it comes to enforcing judgments awarded against them, simply not pay out refuse the jurisdiction of the courts of mainland China and Hong Kong at the hour of enforcement. The courts of China and Hong Kong will then dismiss the matters, given their policy of absolute sovereign immunity. Investors should be aware that, if a state does not pay out its judgment willingly, going to Hong Kong or mainland China for enforcement will bear little fruit.

The DRC is not a state party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which requires courts of contracting states to recognize and enforce arbitral awards made in other contracting states. Yet even if it were, it appears that the outcome of Democratic Republic of the Congo v. FG Hemisphere Associates would not have been different, since the Standing Committee of the National People’s Congress based its decision on a public policy view recognizing absolute sovereign immunity, the only exception being when a defendant state waives immunity before a foreign state’s courts, and under Art. 5(2)(b) of the New York Convention, a state my refuse to enforce a foreign arbitral award if doing so contravenes its public policy.

For these reasons, this decision should raise concerns for companies doing business with states holding assets in Hong Kong and mainland China. Should such companies ever wish to enforce a judgment against such assets, they will face the same challenges that FG Hemisphere Associates confronted.