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A range of new exceptions to foreign state immunity (including several with implications for arbitration) will be recognised in the People's Republic of China (PRC) and Hong Kong after the new PRC Foreign State Immunity Law (FSIL) came into effect on 1 January 2024.

The PRC previously followed the absolute doctrine of foreign state immunity, pursuant to which foreign states were immune from suit and execution in respect of all transactions and assets regardless of their nature (without any commercial exception).

The new FSIL implements a form of the more permissive "restrictive" doctrine of foreign state immunity, including a "commercial exception", which is applicable in many other jurisdictions including the USA, UK, India, Singapore, Australia, New Zealand and most member states of the European Union.

Immunity generally should not affect arbitration proceedings, because foreign states are unable to claim immunity from the jurisdiction of arbitral tribunals (which, unlike national courts, do not exercise sovereign authority over the parties). The new FSIL, nevertheless, has significant implications for arbitration-related court proceedings and the enforcement of arbitral awards in cases involving states and state entities.

Key developments

The impact on Hong Kong

Hong Kong is legally bound to follow the rules and policies of the PRC on foreign state immunity, as established by the ruling of the Hong Kong Court of Final Appeal in Congo v. FG Hemisphere (2011), which applied an interpretation given by the Standing Committee of the National People's Congress. The PRC Government has also indicated that Hong Kong and Macao should adopt the approach to foreign state immunity set out in the new law.

The Hong Kong courts can therefore be expected to apply the substance of the FSIL with effect from 1 January 2024 onwards.

National laws of the PRC such as the FSIL should moreover be formally implemented 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 Article 18 of Hong Kong's Basic Law. It remains to be seen what course of action the Hong Kong Government will take in this regard.

"It is clear that the Hong Kong courts must follow the new foreign state immunity regime adopted by the PRC pending any local implementing legislation," says Antony Crockett, a public international law specialist and partner in Herbert Smith Freehills' Hong Kong arbitration practice. "Questions will inevitably arise as to what precisely that means in the context of specific proceedings.  Parties and their lawyers will no doubt welcome any local legislative or judicial clarifications which are forthcoming in due course."

One of the most significant and welcome changes from a Hong Kong perspective is likely to be the possibility for express contractual waivers. Such waivers were previously ineffective as a matter of Hong Kong law, which required any waiver of immunity to be made "in the face of the court" at the time when the court was asked to exercise jurisdiction. That advance written waivers are now permissible (provided they meet the requirements of the legislation) is a notable development.

It is important to remember that the foreign state immunity regime applies only to foreign states and state entities and not to the PRC itself. As a matter of Hong Kong law, the PRC Government and institutional units under its control are entitled to crown immunity from the jurisdiction of the Hong Kong courts and execution against their assets, and contractual waivers of such immunity are not effective. Importantly, however, PRC commercial state-owned enterprises (SOEs) generally will not be entitled to crown immunity in Hong Kong (just as most foreign SOEs generally will not be entitled to foreign state immunity). 

It is clear that the Hong Kong courts must follow the new foreign state immunity regime adopted by the PRC pending any local implementing legislation."

Antony Crockett
Partner, Hong Kong

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Key provisions

Entitlement to immunity

  • The starting point under the FSIL is that "foreign states" enjoy immunity from the jurisdiction of the courts of the PRC (Article 3) and their property enjoys immunity from execution (Article 13). The term "foreign state" includes (i) the foreign state itself, (ii) organs or constituent parts of the foreign state and (iii) organisations or individuals who are authorised by the foreign state to exercise sovereign authority and carry out activities based on such authorisation (Article 2).
  • Importantly, this means that foreign (non-PRC) SOEs which carry out commercial activities and do not have sovereign functions are unlikely to be entitled to foreign state immunity.
  • In addition, even entities which prima facie fall within the definition of "foreign states" may still be deprived of immunity pursuant to one or more exceptions under the FSIL.

Exceptions to immunity from PRC court proceedings

  • Commercial exception (immunity from suit): 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 (Article 7).
  • 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 (Article 4). 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 (Article 5).
  • 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 (Article 12). If the dispute did not arise out of a commercial activity, it would be necessary to seek to utilise another exception (most likely express or implied waiver).

Exceptions to immunity from execution

  • Commercial exception (immunity from execution): A foreign state will not enjoy immunity from execution against its property within the territory of the PRC, where execution is for the purpose of enforcing a judgment or ruling of a PRC court (which can be expected to include judgments or rulings which recognise and permit the enforcement of arbitral awards and foreign judgments) and the property is used in commercial activities and connected to the proceedings (Article 14(3)).
  • 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 (Article 14(1)).
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The introduction of commercial exceptions to immunity from suit and execution in the FSIL is welcome news.”

Weina Ye
International Partner, Kewei

Practical tips

The effective management of sovereign risk in contracts with states and state entities requires careful planning and analysis at the pre-contract stage. Best practices include the following:

Counterparty due diligence

Before signing a contract with a state or state entity, it is important to establish with as high a degree as certainty as possible whether they are or are likely to be entitled to immunity in relevant jurisdictions.

In the case of a state or state organ such as a government ministry, the position is of course clear.  When the counterparty is an entity affiliated with, controlled by or acting on behalf of a state, it is essential to identify the ownership, control, functions, and purpose of the entity to then be in a position to conduct a legal analysis as to its entitlement to immunity in relevant jurisdictions.

Where possible, the location of assets should also be mapped and an analysis conducted as to the ability to enforce against those assets under the immunity laws of the relevant jurisdictions.

Arbitration as a preferred dispute resolution method 

It will often be preferable to resolve disputes with states and state entities by arbitration rather than court litigation. This is because immunity from suit should not apply in the arbitration context and it should therefore be possible to obtain an arbitral award which could then in principle be enforced in most jurisdictions around the world. However, this is subject to their rules on foreign state immunity and possible arguments as to implied waiver of immunity where the relevant states are party to the New York Convention.

Understand the limitations of the commercial exceptions

“The introduction of commercial exceptions to immunity from suit and execution in the FSIL is welcome news,” according to Weina Ye, International Partner at Herbert Smith Freehills Kewei in Shanghai.  “Parties should nevertheless be aware that both exceptions are subject to important limitations. The commercial exception to a foreign state’s immunity from suit is only available to individuals or organisations of another foreign state, and there is a territorial requirement which requires that the relevant commercial activities must take place or produce 'direct effect' in the PRC. The exception to immunity from execution is only available in respect of property which is 'connected to the proceedings', and the precise meaning and legislative intent of this phrase is likely to benefit from further clarification in due course.”

These factors are likely to increase the importance of contractual waivers of immunity in contracts with states and state entities which have a PRC nexus.

Contractual tools

Waiver clauses are an important method to limit the risks associated with foreign state immunity.  However, they require precise drafting, and a careful consideration of the specific requirements of the immunity laws of relevant jurisdictions, in order to be effective. They should never be treated as mere boilerplate provisions.

It is clear that international practice has been carefully considered during the drafting of the new FSIL."

Kathryn Sanger
Partner, Hong Kong

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As a general point, it is important to clearly waive immunity from both suit and execution, and it is best practice to express these waivers separately for the sake of clarity. It is also good practice to include statements that the relevant transaction and (where relevant) specific assets are commercial in nature.

In order to be effective in the PRC or Hong Kong, moreover, a contractual waiver of immunity from suit will need to use language which makes clear that the foreign state or state entity explicitly submits to the jurisdiction of the PRC or Hong Kong courts in relation to disputes arising out of the relevant contract (for example, in the form of an exclusive or non-exclusive jurisdiction clause). A "freestanding" waiver expressed in general terms and without an express submission to jurisdiction appears unlikely to be effective.

As Kathryn Sanger explains: “This is similar to the position under the UK State Immunity Act 1978 and relevant case law decided under it, pursuant to which a waiver of immunity from the jurisdiction of the UK courts will only be effective if it can be construed as a submission to the jurisdiction of those courts. It is clear from this and other provisions that international practice has been carefully considered during the drafting of the new FSIL."

This article has been co-authored by Herbert Smith Freehills (in relation to Hong Kong law) and Herbert Smith Freehills Kewei, a joint operation between Herbert Smith Freehills LLP and Kewei Law Firm based in the Shanghai Free Trade Zone (in relation to PRC law).

 


Key contacts

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Kathryn Sanger

Partner, Co-Head of Private Capital, Asia, Hong Kong

Kathryn Sanger
Antony Crockett photo

Antony Crockett

Partner, Hong Kong

Antony Crockett
Weina Ye photo

Weina Ye

International Partner, Kewei, Shanghai

Weina Ye
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Martin Wallace

Professional Support Consultant, Hong Kong

Martin Wallace
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Joris Bertrand

Registered Foreign Lawyer (England and Wales), Hong Kong

Joris Bertrand

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