The Hong Kong courts are stirring up fears about legal immunity. Ben Lewis explains

One of Hong Kong's major appeals as a base for international companies doing business in Asia has been recourse to its British-established common law courts. But recent Hong Kong rulings have raised the unsettling possibility that a whole class of potential defendants may have legal immunity from claims.

These are government parties. And, while it is hardly surprising that sovereigns themselves can claim immunity in courts, the long reach of government into the private market in Asia means there are a host of potentially immune state actors that are difficult to identify at first glance.

In 2008, Intraline Resources, a Malaysian engineering company, brought a breach of contract suit against Guangzhou Salvage Bureau (GZS), a Chinese operator of rescue boats. One of these boats, the Hua Tian Long, was arrested on Intraline's request when it entered Hong Kong waters. Intraline – which was represented by Charles Sussex and Christopher Chain of Holman Fenwick Willan – claimed the boat had failed to materialise for an oil project it was supposed to assist with in Malaysia and Vietnam.

The Hong Kong court of first instance ruled last year that, since GZS is controlled by China's Ministry of Communications, it has the right to crown immunity in Hong Kong. Crown immunity is the protection government entities have against being sued in their own territory. Since the British ceded Hong Kong to China in 1997, goes the reasoning, the British state's right to immunity in the territory transferred to China, too.

Fortunately for the plaintiffs, the court also ruled that GZS had waived this right, as it had actively participated in the proceedings, and had waited a year to assert immunity. The ship owner, which is represented by Teresa Cheng and Adrian Lai of DLA Piper, has launched an appeal, saying it did not delay in claiming immunity. Nevertheless, the ruling in Intraline v The Owners of the Ship or Vessel "Hua Tian Long" has sparked widespread concern.

A major worry is that it is not always obvious which companies are controlled by governments, explains Colin Dodd, a construction law partner in the Hong Kong arm of Clayton Utz. A lot of private-seeming Chinese companies have a link to the state which could lead them to claim crown immunity, he says. But identifying these links through due diligence is a tricky feat. "There's no hard and fast test you can apply," says Dodd.

Thankfully, the large state-owned enterprises (SOEs) that still dominate the Chinese economy are probably excluded from immunity. Chinese law itself states that SOEs have separate legal character, and the court in Intraline held that SOEs' independent and autonomous management puts them into a different category from companies that are merely under state control.

untouchableThis latter category is hard to define – but it might be massive. A recent study from China's Tsinghua University found that more than 70% of listed Chinese companies "are ultimately controlled by Chinese Government through various control structures with different control strength." This control is exerted "either directly or through several intermediate corporations," the researchers found.

The stakes have never been higher. Thanks to another recent decision by Hong Kong's highest court, the scope of state immunity has been greatly expanded. Hong Kong courts, like those in the UK, US and other Western jurisdictions, had previously excluded commercial activities from claims to sovereign immunity. But, on 8 June, the Hong Kong court of final appeal ruled in FG Hemisphere Associates v Democratic Republic of Congo that sovereign immunity applied absolutely, just as in mainland China.

The case involved a $100m (£64m) claim by a New York distressed debt fund against Congo over two 1980s arbitrations awards the fund had purchased from a Yugoslavian engineering firm. By filing a suit in Hong Kong, the fund hoped to intercept payments due to Congo by the China Railway Group.

Three judges of the court of final appeal's panel of five ruled that Hong Kong was bound by the law governing its handover from British to Chinese rule to follow the latter's standard by extending absolute immunity to the Congolese and other governments.

Orrick Herrington & Sutcliffe's Robert Pe, who acted for Congo, says the judges had little choice. Their "very well reasoned, well crafted" judgment follows the law by recognising that immunity is a matter of "foreign affairs", and therefore beyond the court's scope, says Pe. Sidley Austin partner Charles Allen, who 
acted for FG Hemisphere, 
declined to comment.

Still, James Berger, a New York litigator at Paul Hastings, says the FG Hemisphere ruling could undermine Hong Kong's efforts to establish itself as Asia's arbitral seat of choice. Companies will be put off by a lack of judicial assistance in aid of arbitral proceedings against foreign states, he believes.

But Paul Starr, a partner in Australian firm Mallesons Stephen Jaques' Hong Kong office, thinks the opposite is true. He notes that the judges explicitly stated that parties to a Hong Kong arbitration could agree to waive claims of crown or sovereign immunity.

"The loudest message coming from both [the Hua Tian Long and FG Hemisphere] cases is to agree [to] a Hong Kong arbitration clause," he says.

This article first appeared in The Asian Lawyer, an affiliate title of Legal Week.