China moves away from absolute immunity

January 2024 | SPOTLIGHT | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

January 2024 Issue

On 1 September 2023, the Standing Committee of the National People’s Congress – the legislative body of the People’s Republic of China (PRC) – adopted the Foreign State Immunity Law.

This new legislation is significant because the PRC has long maintained a doctrine of ‘absolute immunity’. There were no exceptions to this, including when a state contracts in a purely commercial capacity.

From 1 January 2024, foreign states will no longer be granted full immunity from suit or execution in the PRC courts for commercial activities. The same will apply in Hong Kong and Macau.

China’s shift away from absolute immunity means that parties will be able to sue foreign states in China, Hong Kong and Macau, and also enforce against their commercial assets without the need to obtain a waiver of immunity from that state.

This change in legal doctrine will also bring the PRC closer in line with other key jurisdictions, such as Australia, the UK, the US and several members of the European Union (EU) that have all adopted a doctrine of restrictive immunity. As a result, this shift is likely to be welcomed by commercial parties that have or intend to do business with foreign states, or state-owned enterprises (SOEs), in Chinese territories.

The doctrines of absolute and restrictive sovereign immunity

Sovereign immunity is a principle recognised under international law. Where immunity is absolute, a sovereign state is protected from lawsuits, and its property is protected from being subject to enforcement orders, unless the state waives such immunity.

Over time, sovereign states have become increasingly involved in commercial activities. This has prompted an increasing number of states to move away from absolute immunity and adopt a doctrine of restrictive sovereign immunity instead. Under restrictive immunity, a state is still immune from suit when it engages in public acts. However, if it engages in private acts, such as commercial purposes, it may be sued and be subject to the jurisdiction of a foreign court.

China’s position on immunity

Many sovereign states have enacted national legislation clarifying its position on this subject. However, until the Foreign State Immunity Law, China had never codified any law on sovereign immunity. Thus, the Foreign State Immunity Law is also particularly significant in that it will be the first national law enacted on this subject.

The Jackson case

China’s position on its own immunity can be traced back to the case of the 1911 Huguang Railway Bonds. These were bonds issued in 1911 by the imperial Chinese government of the Qing dynasty and became the subject of litigation in the late 1970s and early 1980s before the US courts. Shortly after the bonds were issued, the imperial Chinese government was dissolved, and the debt remain unpaid. By 1949, the PRC was established and had become the successor government. In November 1979, Russell Jackson and other US citizens sued the PRC seeking repayment of their bearer bonds, which were in default. The PRC did not make an appearance in the US proceedings and default judgment was rendered in favour of the plaintiffs in 1981 and damages were awarded in 1982. Then in August 1983, the PRC made a special appearance and filed a motion requesting the US court to set aside the default judgment. The US court had to consider whether it had jurisdiction over the dispute, and as part of this analysis, whether the PRC could invoke sovereign immunity. The US court held that sovereign immunity could not be invoked by the PRC because the issuance of the bonds was a commercial activity. As the US adhered to restrictive immunity, China could not invoke immunity. The default judgment stood.

This case prompted a reaction from the Chinese government, motivating it to clarify where it stood on the subject. In 1983, China’s minister of foreign affairs delivered an aide-memoire to the US secretary of state about the Jackson case specifically. The aide-memoire expressed that China, as a sovereign state, had incontestable judicial immunity under international law. China also said that it rejected the practice of other states imposing jurisdiction over it, and that it considered such actions to be a violation of sovereign immunity under international law.

The Democratic Republic of Congo case

This adherence to absolute sovereign immunity also meant that China recognised absolute immunity on other states as well. No exceptions were recognised for commercial activity. This position was confirmed in Democratic Republic of the Congo and others v. FG Hemisphere Associates LLC, a 2011 case that went before the Court of Final Appeal of Hong Kong. In the Congo case, the Chinese ministry of foreign affairs issued three letters to the Hong Kong government confirming that China had consistently and unequivocally adopted absolute immunity toward itself, and all foreign states, and that its position was widely acknowledged by the international community.

Content of the Foreign State Immunity Law

Although article 3 of the new law confirms that states continue to enjoy jurisdictional immunity, it expressly states that this is now subject to a number of exceptions set out in the law.

First, a foreign state will no longer enjoy immunity from suit if it engages in commercial activity. Furthermore, a foreign state will also no longer enjoy full immunity from execution against its property, albeit subject to some exceptions.

Second, the law also clarifies that SOEs that are not performing sovereign functions on behalf of a state will also not enjoy any state immunity.

Third, a state’s express waivers of immunity from suit, whether it was made through a treaty or a contract, will stand. In other words, it will no longer be a requirement that a state must waive immunity before a court once formal proceedings have commenced.

Fourth, a state will also no longer enjoy immunity from lawsuits concerning intellectual property (IP) matters. This specifically includes the determination of the ownership of the foreign state’s IP rights, or if the foreign state is alleged to have infringed upon IP rights in the PRC.

Finally, the law also expressly states that foreign states will not have immunity in arbitral proceedings. Importantly, a state cannot invoke immunity from jurisdiction with regard to the validity of the arbitration agreement, and also when it comes to the revocation or recognition and enforcement of arbitral awards.

The Foreign State Immunity Law also includes a reciprocal provision, meaning that where a foreign state grants to the PRC (and its property) a level of immunity that is less than what is provided under this new law, the PRC will implement that on a reciprocal basis.

Implications

The clarity that the Foreign State Immunity Law offers will be welcomed by commercial parties and legal professionals. What remains to be seen is whether this shift toward restrictive immunity could also mean that China (or its state organs contracting in a commercial party) may play a more active role in any lawsuits it may become involved in, and which are outside of its territory. This includes proceedings where enforcement orders are made by a foreign court or tribunal.

For parties that have business interests in the PRC, it would be prudent to ensure that their commercial agreements with any states, including their state-organs or SOEs, clearly state that these contracts are of a commercial nature and arise out of commercial activities. Furthermore, and if feasible, it would also be advisable to include an express waiver to any state immunity in the contract as this could help cut through any potential defences should a dispute arise.

John Rhie is Asia managing partner and Lillian Li is a registered foreign lawyer at Quinn Emanuel Urquhart & Sullivan LLP. Mr Rhie can be contacted on +852 3464 5602 or by email: johnrhie@quinnemanuel.com. Ms Li can be contacted on +852 3464 5619 or by email: lillianli@quinnemanuel.com.

John Rhi and Lillian Li

Quinn Emanuel Urquhart & Sullivan LLP