The provisional ruling of the Hong Kong court is dependant on the interpretation of certain provisions of the Basic Law, (Hong Kong's constitution), relating to "acts of state" and "foreign affairs". These are crucial to the question of what sort of sovereign immunity applies in Hong Kong. The Hong Kong court is now seeking interpretation of those provisions by the Standing Committee of the National People's Congress of the PRC ("NPC"). This is the first time that Hong Kong courts have sought such interpretation from China after the handover in 1997.
Arbitral awards in commercial transactions involving other sovereign states cannot now be enforced in Hong Kong, but may well be enforceable in many other countries which recognise the concept of "restrictive" sovereign immunity.
PRC has always recognised "absolute immunity" whereas Hong Kong, prior to the handover to China in 1997, has recognised "restrictive immunity", following the position in England (which recognised a commercial exception to absolute immunity). The DRC argued that following the handover, Hong Kong should follow China and therefore absolute immunity applies. The PRC Government expressed the same view in three letters written by the Ministry of Foreign Affairs to the Hong Kong courts in this case. The CFA held that there is no scope for a municipality (lacking the attributes of sovereignty such as the HKSAR) to adopt a principle of state immunity different from that adopted by the State.
The CFA majority rejected an argument that the DRC impliedly waived its immunity by entering into the arbitration agreements resulting in the awards sought to be enforced. Those agreements contained a promise by the DRC to carry out the award and to waive any form of recourse. The majority held this contract does not involve relations between the DRC and other states.
Some commentators have expressed concern about the rule of law in Hong Kong, and its continued role as a pre-eminent arbitration venue. Despite this ruling, it is considered Hong Kong remains a proarbitration jurisdiction, the judiciary is still independent, and the judicial autonomy of the courts has not been compromised or harmed by reference to the NPC. Cases involving sovereign states are also rare.
The CFA did agree that a State could still waive its immunity, and set out how this might be effected as follows: "It is well-established at common law that a party seeking to enforce an arbitration award (or a judgment) against a foreign State on the basis of a waiver of state immunity must establish a waiver at two distinct stages. The impleaded State must have waived both its jurisdictional immunity from suit in the forum State, and the immunity of property from execution by the forum State's process". While this aspect might itself be altered by the reference to the NPC, we recommend that for the time being, lawyers should be invited to negotiate into all dispute clauses with States and their departments the type of dual express waiver summarised above.
Implement careful wording into contract disputes clauses, while recognising the risk that this is still under decision by the National Peoples Congress.