FG Hemisphere Associates v. Democratic Republic of the Congo.

Author:Wei, Shen
Position:Sovereign immunity waiver

Sovereign immunity--restrictive theory--commercial arbitration--waivers of immunity--New York Convention--Hong Kong--China

FG Hemisphere Associates v. Democratic Republic of the Congo. [2011] 14 H.K.C.F.A.R. 395.

Court of Final Appeal of the Hong Kong Special Administrative Region, June 8, 2011.

In June 2011, the Hong Kong Court of Final Appeal (CFA), Hong Kong's de facto supreme court, handed down its judgment in FG Hemisphere Associates v. Democratic Republic of the Congo.' The CFA decided that, since the reversion of Hong Kong to the People's Republic of China (China or PRC) on July 1, 1997, sovereign states have enjoyed absolute immunity in the courts of Hong Kong, which cannot be waived in predispute contractual documents. Because China's Supreme People's Court and other Chinese courts rarely rule on public international law issues, this decision has especial significance for understanding China's position on the issue of sovereign immunity.

The case stems from a suit brought in Hong Kong by a Delaware-incorporated "vulture fund" (or distressed debt fund), FG Hemisphere Associates (FG), which sought to enforce two awards against the Democratic Republic of the Congo (DRC) in arbitrations held in Paris and Zurich, respectively. FG had acquired the rights to the two arbitral awards (totaling more than US$34 million) in November 2004. The awards were originally secured against the Congolese state by Energoinvest, a Yugoslav state-owned company, which had agreed to construct a hydroelectric facility and electric transmission lines in the DRC in the 1980s. To finance the project, Energoinvest extended credit to the DRC and its state-owned electric company, Societe Nationale d'Electricite. In time, the electric company defaulted on a US$30 million payment to Energoinvest. The credit agreement contained an International Chamber of Commerce (ICC) arbitration clause, pursuant to which Energoinvest referred its claims to arbitration. The DRC and the electric company had signed terms of reference by which they agreed to arbitration in accordance with the 1998 ICC Rules of Arbitration. The DRC chose not to attend the arbitration hearings, but the electric company participated in them.

On April 30, 2003, each arbitral tribunal made a substantial award of principal and interest in favor of Energoinvest against the DRC and the electric company jointly and severally. Neither respondent challenged either award in any jurisdiction. In 2004, Energoinvest transferred the entire benefit of the principal and interest payable by the DRC and the electric company under the two arbitral awards to FG, whose main business is to invest in emerging markets, including by acquiring and recovering distressed debts, particularly those of defaulting states. FG managed to recover US$3.3 million under the two awards through enforcement proceedings in Belgium, Bermuda, and South Africa.

To satisfy the DRC's remaining liability under these awards, FG claimed against certain "mining entry fees" in the amount of US$9.25 billion that were payable by China Railway Group (Hong Kong) Ltd., a state-owned enterprise in China, to La Generale des Carrieres et des Mines (Gecamines), a Congolese state-owned mining company. China Railway Group, a company listed in Hong Kong and Shanghai, together with another Chinese company, Sinohydro Corp. Ltd., had previously entered into a joint venture agreement with Gecamines. Under that agreement, the DRC would be paid US$221 million by subsidiaries of China Railway Group as part of the entry fees for rights to a mining project in the DRC.

To obtain satisfaction under the two arbitral awards, FG made an ex parte application to the Hong Kong High Court and, on May 15,2008, was granted, inter alia, (1) leave to enforce the awards against the DRC in the same manner as judgments, and (2) interim injunctions restraining the China Railway Group subsidiaries from paying the DRC US$104 million as entry fees, both of which rulings were eventually confirmed by the Hong Kong Court of Appeal. (2)

The critical issue in the proceeding was the nature and scope of state immunity, that is, whether the DRC should be held to enjoy full sovereign immunity from FG's claims in Hong Kong. If the common law notion of "restrictive sovereign immunity" applies in Hong Kong, a traditional common law jurisdiction, the DRC could be held liable for damages in the context of a commercial dispute. By contrast, under the "absolute immunity" doctrine traditionally applied in China, the courts would not have jurisdiction to adjudicate even commercial matters that name another state as a defendant, unless the state has waived its immunity. If that approach were taken, FG's effort to recover against debts owing to the DRC would fail.

The PRC has never recognized a commercial exception. Instead, it has practiced absolute immunity, for itself and other states. As a matter of fact and law, Chinese courts have no jurisdiction over, nor in practice have they ever entertained, any suit against a foreign state or government, or any claim involving the property of a foreign state or government. In the same vein, China has never accepted the jurisdiction of any foreign courts over suits against the state or government of China, or cases involving the property of the state or government of China.

China's principled position thus differs from the position of the United Kingdom (UK) that sovereign states enjoy only restrictive...

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