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Dispute Resolution Law Alert - August 2017
Submitted by // K Bowers, Partner / Solicitor Advocate
25 August 2017


Are PRC State-Owned Entities entitled to assert Crown immunity?

TNB Fuel Services SDN BHD v China National Coal Group Corp [2017] 3 HKC 588

Summary

In the recent case of TNB Fuel Services SDN BHD v China National Coal Group Corp [2017] 3 HKC 588, the Court of First Instance ("CFI") dismissed a claim of Crown immunity by a Chinese state-owned enterprise ("SOE").

In December 2014, the Applicant obtained an arbitral award against the Respondent, whereby it was ordered to pay approximately US$5.2 million in damages for its breach of contract ("Award"). In June 2015, the CFI granted an order for enforcement of the Award. In April 2016, the Applicant obtained a charging order nisi against the Respondent in respect of its shares in a Hong Kong company ("Shares").

In response, the Respondent (which is wholly owned by the State-owned Assets Supervision and Administration Commission ("SASAC") of the State Council of the PRC Central People's Government ("CPG")) opposed the charging order nisi being made absolute on the ground that it is an entity of the CPG and is therefore entitled to assert Crown immunity against enforcement of the Award by execution against the Shares.

Ultimately, the CFI dismissed the Respondent's assertion of Crown immunity and granted a charging order absolute in respect of the Shares.

Doctrine of Crown Immunity

According to the common law doctrine of Crown immunity, the Crown enjoys immunity from being sued in its own courts and immunity from execution, which arises from the principle that "the sovereign can do no wrong". As established in the leading case of Hua Tian Long (No. 2) [2010] 3 HKLRD 611, the doctrine continues to apply in Hong Kong following its handover to China in 1997. Since then, following on from the British Crown, the CPG is entitled to claim Crown immunity in the Courts of Hong Kong.
[1]

Judgment

The Respondent's claim was dismissed on the following bases:

(1) Lack of authority to assert Crown immunity

It was held that the Respondent had "…failed to show that it had authority to assert Crown immunity on behalf of the CPG, and that no such claim has been validly made on behalf of the CPG..." Specifically, the only assertion of the alleged status of the Respondent came from its general legal counsel, Zhou. There was no assertion that Zhou was authorized by SASAC or CPG or any authority other than the Respondent itself to make such a claim.

In reaching its finding, the Court construed a letter issued by the Hong Kong and Macao Affairs Office of the State Council stating that the Respondent is "an independent legal entity, which carries out activities of production and operation on its own, independently assumes legal liabilities, and there is no special legal person status or legal interests superior to other enterprises" ("Letter"). It was the Court's view that the Letter defeated the Respondent's assertion of Crown immunity.

(2) Failure to satisfy the "control test"

The CFI then went on to consider whether the Respondent was subject to the control of the CPG by applying the "control test". The relevant factors taken into consideration by the Court include the following:-

(i) independent discretion enjoyed by the entity;
(ii) control exercised by the Crown as investor;
(iii) separate legal personality of the entity;
(iv) power of the Crown to appoint and remove senior officers of the entity; and
(v) financial autonomy of the entity.

It was agreed between the parties that the question of whether the Respondent was controlled by the CPG was a matter of PRC law. On the facts, it was found that the Respondent was not a part of CPG, nor of SASAC, in that it is a "separate corporate entity…enjoys the rights to possess, use, profit from the dispose of its property, has operation autonomy, and is able to exercise independent powers of its own which were safeguarded by law". Accordingly, it was held that the Respondent was not entitled to Crown immunity.

The CFI distinguished the position of the Respondent from that of the defendant in Hua Tian Long (No. 2) in which the Court found that the defendant "…was at all times under the control of the Ministry of Communications…not a separate legal entity and was itself part of the Ministry of Communications…and entitled to assert Crown immunity."

Comment

This case shines light on the approach which the Hong Kong Courts may take when dealing with claims of Crown immunity by Chinese SOEs in Hong Kong.

Seeing as an assertion of Crown immunity does not conclusively bind the Court, and the entitlement to Crown immunity is to be decided on a case-by-case basis (depending on the particular circumstances and evidence available), Chinese SOEs wishing to assert Crown immunity in Hong Kong and parties wishing to engage in business with Chinese SOEs should seek legal advice, where necessary.

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[1] Note: Crown immunity does not apply to arbitration proceedings in Hong Kong.

 

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