Restrictive state immunity

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MORE THAN SIX YEARS AGO, this column discussed the doctrine of state immunity and how it was interpreted and applied in various jurisdictions, including the UK, mainland China and Hong Kong (see China Business Law Journal, volume 9, issue 1: “State immunity”). The column noted that the majority of jurisdictions recognised restrictive state immunity. Mainland China, however, recognised absolute state immunity. Further, the Court of Final Appeal in Hong Kong had held in 2011 that the question of state immunity was a matter that concerned the management and conduct of foreign affairs, which was a power that was reserved for the Central People’s government under the Basic Law of the Hong Kong Special Administrative Region.

On this basis, although Hong Kong had recognised the doctrine of restrictive immunity prior to the return of sovereignty to the People’s Republic of China in 1997, the courts of the Hong Kong Special Administrative Region could not adopt a legal doctrine of state immunity that was different from the position on state immunity that was recognised by the PRC.

The column also noted that a decision of the Court of First Instance in Hong Kong in 2017 had held that a PRC state-owned enterprise could not claim state immunity in proceedings to enforce an arbitral award against it, except in very limited circumstances.

In a significant move in 2023, the Standing Committee of the National People’s Congress passed the Foreign State Immunity Law (FSIL). The law, which came into effect on 1 January 2024, adopts the doctrine of restrictive state immunity and aligns China with the position in other developed jurisdictions.

This column starts by revisiting the doctrine of state immunity, then outlines the position in mainland China under the new Foreign State Immunity Law.

What is the doctrine of state immunity?

As noted in the previous column, issues of international law – particularly as they concern relations between states and the principles that govern them – rarely become relevant in commercial transactions. One situation in which these issues become relevant, however, is when a company or investor in one state enters into a commercial transaction with a state, or an arm or instrumentality of a state, and subsequently seeks to sue the other state in a foreign court. In such a situation, the foreign court will need to determine whether the other state can be sued in its courts.

Under the doctrine of state immunity, a jurisdiction grants immunity to a foreign state from being sued in its courts or being subject to enforcement action in respect of its assets in that jurisdiction. The doctrine is based on the concept that a state should not be subject to the jurisdiction of another state without its consent, reflecting the need for comity or friendly relations between states (for another example of comity between states, see China Business Law Journal, volume 8, issue 8: “Cross-border insolvency”).

The doctrine also reflects the reality that states in many jurisdictions around the world enjoy immunity in their own courts. The immunity that a state enjoys in its own jurisdiction is often referred to as “sovereign immunity” or “crown immunity” and extends not just to the state but also to the head of state personally. The nature and extent of sovereign immunity varies between jurisdictions. In some jurisdictions, such as Australia, the doctrine applies very narrowly and there is no automatic immunity enjoyed by the state. In others, such as the US, the doctrine is widely recognised and applies in respect of different levels of government (e.g. state and federal governments).

Although a distinction between state and sovereign immunity is sometimes drawn on the basis that the former refers to the immunity enjoyed by states in foreign courts and the latter refers to the immunity enjoyed by a state in its own courts, the terms are often used interchangeably.

To date, issues relating to state immunity have been determined by the domestic law of each state and have not been influenced by international treaties. There is, however, an international treaty on state immunity that has not yet come into force. The United Nations Convention on Jurisdictional Immunities of States and Their Property provides that it will come into force after 30 states have ratified or acceded to the convention. As of the date of writing, 28 states had signed the convention and 23 states had ratified it. As a result, the convention has not yet come into force. China signed the convention on 14 September 2005, but has not yet ratified it.

Is state immunity absolute or restrictive?

In recognising and applying the doctrine of state immunity, jurisdictions around the world can be divided into those that recognise absolute immunity and those that recognise restrictive immunity. Under the doctrine of absolute immunity, a jurisdiction recognises that a foreign state enjoys immunity in all circumstances and in respect of all acts undertaken by the state, including commercial acts. Under the doctrine of restrictive immunity, a jurisdiction recognises that a foreign state only enjoys immunity in respect of the public acts of state, as distinct from commercial acts that would arise in the context of commercial transactions.

The doctrine of restrictive immunity reflects the view that states commonly enter into commercial activities and that it would be unfair to treat them differently in that context. As noted by Lord Denning in the Trendtex case that was decided in 1977:

In the last 50 years there has been a complete transformation in the functions of a sovereign state. Nearly every country now engages in commercial activities. It has its department of state – or creates its own legal entities – which go into the market places of the world. They charter ships. They buy commodities. They issue letters of credit. This transformation has changed the rules of international law relating to sovereign immunity. Many countries have now departed from the rule of absolute immunity. So many have departed from it that it can no longer be considered a rule of international law. It has been replaced by a doctrine of restrictive immunity.

The previous column noted that the majority of states recognised restrictive immunity and a minority of states recognised absolute immunity. Until the beginning of 2024, China (including Hong Kong) was in the latter category.

The new position in mainland China

In short, the new FSIL provides that foreign states are no longer immune from suit or execution in mainland China in respect of their commercial activities. Hong Kong and Macau are now expected to adopt the same approach.

Although the FSIL provides that foreign states and their assets generally still enjoy state immunity (article 3), it recognises exceptions. The exception in respect of commercial activities (article 7) provides that if a foreign state has engaged in commercial activities, either (1) within the territory of the PRC or (2) outside the territory of the PRC but causing a direct effect in the territory of the PRC, the foreign state will not enjoy immunity in relation to such commercial activities. Commercial activities include transactions, investments, lending and borrowing of goods or services, and other acts of a commercial nature outside the exercise of sovereign power. The FSIL provides that when assessing whether the relevant state activities are commercial, the purpose and nature of the activities should be considered (article 7).

The FSIL also provides a domestic legal basis for investors to seek recognition and enforcement of investor-state arbitral awards in the PRC against foreign states under treaties such as the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (for a discussion about related issues, see China Business Law Journal, volume 8, issue 1: “The future of regional trade agreements)”.

In a media statement released on 5 September 2023, a spokesperson for the Foreign Ministry made the following remarks in respect of the new FSIL:

Enacting the Law on Foreign State Immunity is a normal legislative activity conducted by the Standing Committee of China’s National People’s Congress. The law stipulates provisions related to foreign state immunity in line with international practices and aims to improve China’s foreign state immunity system. The law stipulates the rules for Chinese courts to handle civil cases involving a foreign state and its property, with a view to protecting the lawful rights and interests of the parties concerned, safeguarding the sovereign equality of states, and promoting friendly exchanges with other countries, which all in turn boost China’s higher-level opening up.

The Law on Foreign State Immunity affirms the fundamental principle that a foreign state and its property enjoy immunity in China, and at the same time stipulates exceptions relating to non-sovereign acts of a foreign state, under which Chinese courts can exercise jurisdiction, such as cases involving disputes arising out of a commercial activity, relevant personal injury and property damage. The Law also states that Chinese courts can take compulsory judicial measures against a foreign state’s commercial property under strictly limited circumstances. It fully adheres to international law and it is also consistent with general state practices.

As a responsible major country, China firmly upholds the principle of sovereign equality and will faithfully implement this law to protect the legitimate rights and interests of Chinese nationals and legal persons and respect the immunities enjoyed by foreign states under international law.

The media statement confirms that the new FSIL is designed to bring the position on foreign state immunity under Chinese law in line with international practices and to improve China’s foreign state immunity system. Further, its objectives include protecting the lawful rights and interests of the parties concerned, safeguarding the sovereign equality of states, and promoting friendly exchanges with other countries, all of which will assist China’s higher-level opening up.

It will be interesting to see how the new FSIL is interpreted and applied in the years to come.

Andrew Godwin 2015
Andrew Godwin

Andrew Godwin is currently a member of a World Bank team that is advising a central bank in Asia on potential reforms to its mandate. He previously practised as a foreign lawyer in Shanghai (1996-2006) before returning to his alma mater, Melbourne Law School in Australia, to teach and research law (2006-2021). Andrew is currently Principal Fellow (Honorary) at the Asian Law Centre, Melbourne Law School, and a consultant to various organisations, including Linklaters, the Australian Law Reform Commission and the World Bank.

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