On 1 September 2023, the Standing Committee of the National People’s Congress of China (NPC) passed the long awaited Foreign State Immunity Law (FSIL), which will come into effect on 1 January 2024. This is a seminal development in the Chinese position on the issue of sovereign immunity with profound implications to clients, legal practitioners and researchers alike.

For decades, China did not have a statute on foreign state immunity, which means that the Chinese position on this notoriously complex issue could only be gleaned from diplomatic practice. The Chinese diplomatic practice, though consistent, has adopted the position of absolute immunity, meaning all acts and assets of a state or acts conducted on its behalf (or assets held by it) are absolutely immune from foreign jurisdictions, unless that state expressly agrees to waive its state immunity. Many critics say (and the NPC spokesperson admitted) this position is out of step with China’s increasingly outward-facing economy and the international mainstream. All this is set to change on 1 January 2024.

Moving towards Restrictive State Immunity

The FSIL contains 23 sections and may be divided into the following parts: (1) the principle of immunity of foreign states and their property (ss.1-3); (2) submission to Chinese jurisdiction (ss.4-6); (3) exceptions to the immunity of foreign states and their property (ss.7-15); (4) special court procedural issues (ss.16-19) and (5) other provisions (ss.20-23).

The FSIL confirms the general principle that foreign states and their property enjoy immunity from the jurisdiction of Chinese courts, except as otherwise provided by the FSIL (s.3). There are essentially two broad categories of exceptions: submission to the court’s jurisdiction and exceptions to immunity provided by the statute, which break away from the doctrine of “absolute immunity” previously adopted by the Chinese government.

The most consequential and most broadly applicable exception under the FSIL is likely to be the so-called “commercial activities” exception. Section 7 of FSIL provides that:

‘Where commercial activities between a foreign state and an organisation or individual of another state, including that of the PRC, take place in the PRC territory, or have a direct effect in the PRC territory even though they take place outside the PRC territory, the foreign state does not enjoy immunity from the jurisdiction of PRC courts in litigation arising from such commercial activities.

“Commercial activities” as used in this Law refers to transactions of goods or services, investments, borrowing and lending, and other acts of a commercial nature that do not constitute an exercise of sovereign authority. In determining whether an activity constitutes a commercial activity, the PRC court shall undertake a holistic consideration of the activity’s nature and purposes.’ (Fangda complimentary translation)

A few points worth noting for the clients arise from section 7:

1. The “commercial activities” exception apply to transactions between a foreign state (vis-a-vis the PRC) and non-state actor(s). Although not expressly stipulated in the FSIL, transactions between states fall out of the scope of the principle of state immunity.
2. By virtue of the requirement that the activities in question shall either take place in the PRC territory or have a direct effect in the PRC, section 7 seems to impose a jurisdictional condition on the operation of “commercial activities” exception. There are other bases for a court to establish jurisdiction in civil proceedings, but the FSIL appears to narrow them down to two scenarios.
3. The definition of “commercial activities” is broad and empowers the Chinese court to adopt a holistic approach taking into account the nature and purposes of the activities in question. Any acts that are not exercises of sovereign authority may be commercial activities.

The FSIL also sets out the following exceptions to the immunity of foreign states and their property: (1) contracts of employment; (2) personal injuries and damage to property; (3) ownership, possession and use of property; (4) intellectual property matters; and (5) effect of an arbitration agreement. The statute continues to recognise the distinction between immunity from jurisdiction and immunity from enforcement.

Special Position of Hong Kong

In Hong Kong, the doctrine of sovereign immunity does not apply with respect to China because China is not a foreign state vis-a-vis Hong Kong. Instead, with respect to China, the doctrine of crown immunity applies in Hong Kong, which dictates that the sovereign (China) cannot be sued in its own courts (in Hong Kong).

With respect to foreign governments and the issue of foreign state immunity, the Hong Kong Court of Final Appeal held in Democratic Republic of the Congo v FG Hemisphere Associates that Hong Kong cannot adhere to a doctrine of state immunity that is different to that adopted by the Chinese government as a matter of constitutional and legal principle. This meant that Hong Kong had to follow the doctrine of absolute state immunity as adopted by the Chinese government.

As the FSIL now pivots to the principle of restrictive state immunity, applying the reasoning in Congo v Hemisphere, the Hong Kong courts shall follow the same transformation starting from 1 January 2024. A NPC spokesperson expressed the same view in a Q&A session with journalists on 1 September 2023. It remains to be seen whether the FSIL will be added to Annex III of the Basic Law, as a piece of national legislation directly applicable to Hong Kong.

Separately, Hong Kong courts consider state owned enterprises (SOEs) to be separate entities that are distinct from the state. The principle of state immunity does not extend to SOEs, and the FSIL shall not affect the Hong Kong courts’ position on this issue.

Chinese Foreign Policy Angle

Foreign policy plays an important role in a legislation such as the FSIL. Section 19 of the FSIL provides that the Chinese Ministry of Foreign Affairs may give advice to the courts on matters concerning foreign affairs and significant state interest. Section 21 lays down a principle of reciprocity, where if a foreign state accords China and its property narrower immunity than that provided in the FSIL, China will reciprocate. Section 21 suggests that if a plaintiff sues State A before a Chinese court, it shall also take into account the legislation and diplomatic practice in State A, especially vis-à-vis China.

Comments

The FSIL will have significant implications for state entities and commercial parties dealing with sovereign states and state entities who have nexus with Mainland China, Hong Kong and/or Macau. It is high time to review the contractual provisions pertaining to state immunity and waiver thereof, and (re)consider disputes resolution strategy where appropriate.

If you would like to know more about the FSIL or issues of state immunity more generally, please contact Peter Yuen, Partner, Xiongchao Chen, Counsel or your usual Fangda contacts.