Why did the owners of a derrick barge enjoy immunity from being sued in Hong Kong courts?

By Colin Dodd and Victor Lau.

Key Points:
When contracting with a party which may be a sovereign counterpart, there are ways to minimise the risks of a sovereign entity successfully escaping liability by relying upon an immunity defence.

It is not uncommon for entities based in the People's Republic of China (PRC) to be involved in construction disputes, as was the recent case in Intraline Resources SDN BHD v The Owners of the Ship or Vessel "Hua Tian Long" HCAJ 59/2008, which involved the largest floating derrick crane-barge based in Asia intended to be used for the installation of pipelines and oil platforms.

In the Intraline case it was held that upon the handover of Hong Kong to China on 1 July 1997, the new sovereign power, the Central People's Government of the PRC, also enjoys the crown immunity that was available to the British Crown under the English common law doctrine.

This means that if you are in dispute in a contract in Hong Kong or in a contract which chose Hong Kong law as the governing law, and the entity that you have contracted with is found to be an entity of the Central People's Government of the PRC, then that entity will also enjoy crown immunity, with the result that the Crown is immune from the processes of the Hong Kong courts.

Background to the Intraline case

Intraline brought an action against Guangdong Salvage Bureau (GSB - although the judgment refers to it as "GZS", presumably as an abbreviation for the Mandarin term "GuangZhou Salvage"), the owners of the ship or vessel "Hua Tian Long", for breach of contract arising from failure to make available the vessel, which is the largest floating derrick crane-barge based in Asia, to work on offshore Malaysian and Vietnamese projects for the installation of pipelines and oil platforms. Damages of some hundreds of millions of US dollars were claimed for fraudulent misrepresentation and/or breach of contract.

GSB applied for a stay and/or dismissal of the action on the ground that the vessel was ultimately owned by the Central People's Government of the PRC, and that it enjoyed sovereign and/or crown immunity and therefore the Hong Kong courts did not have jurisdiction over it.

Key legal issues

The key legal issues that arose in this case were whether an entity of the Central People's Government of the PRC enjoys the following privileges in Hong Kong:

• sovereign immunity;
• "modified" sovereign immunity; and
• crown immunity.

Sovereign immunity

Under the principles of sovereign immunity, no state can intervene in the affairs of another state by claiming jurisdiction over that state. By the end of the hearing the defence accepted that this concept did not apply to this case, since the PRC exercises sovereign power over Hong Kong after 1 July 1997 under the "one country, two systems" principle. There was therefore no question about its not being a foreign sovereign state.

Modified sovereign immunity

The ship's owners also relied on a series of Canadian cases which concluded that one province may utilize sovereign immunity to resist the jurisdiction of the courts of another province. The judge noted that there were other cases to the opposite effect which he preferred, and which were considered to be a better fit for the concept of sovereign immunity premised upon mutual respect for the dignity of foreign sovereign states. Such immunity should therefore not be applied in any form within the same state.

Crown immunity - did it apply at all?

The primary issue to the case was therefore whether crown immunity applied, as represented by the maxim "the sovereign can do no wrong". Under this doctrine, the crown is not bound by statute unless expressly named or by necessary implication.

The court considered that prior to the handover of Hong Kong there were effectively two crowns in Hong Kong - Her Majesty's Government in the then colony and Her Majesty's Government in the United Kingdom. Although before the handover in 1997 the Hong Kong statute enabled certain proceedings to be brought against the Government of Hong Kong, it had no effect on, and did not remove the concept of, the crown immunity of the Queen in the UK. The court held that after the handover in 1997 of Hong Kong to the PRC, the concept of crown immunity as imported from customary international law continues to exist, and PRC would also enjoy the privilege of crown immunity.

Factors which appears to have persuaded the court in accepting that GSB was not a separate legal entity undertaking commercial activities independent from the PRC Government included:

• GSB was set up under registration with the State Administration of Industry and Commerce. It was not set up by the State-owned Assets Supervision Committee, which is the body representing the state as investor in state-owned enterprises;
• GSB has no shareholders;
• GSB is under the control of the Ministry of Communications, or a department of the Guangzhou Maritime Rescue and Salvage Bureau, which supervises and manages GSB's business;
• the Ministry of Transportation issued statements to the effect that GSB only has rights to possess and use the state-owned assets and that GSB must apply to the Ministry of Transportation and the Ministry of Finance for approval for the use and disposal of the state owned assets involved in the maritime transport safety supervisory and salvage and rescue system.

The court also said that the nature of the "crown immunity" precludes the development of an approach which accords immunity only to functional "acts of state" (and therefore not to commercial acts). Accordingly the owner of the derrick barge was entitled to assert "crown immunity".

Crown immunity - was it waived?

Ultimately it was a pyrrhic victory for GSB as the court held that GSB waived its right to claim crown immunity through its conduct which included:

• taking an active part throughout the course of the proceedings, including the filing of a counterclaim;
• first "flagging up" and asserting sovereign immunity on 30 April 2008, but not raising the defence of crown immunity until 21 October 2009.

What steps can you take to minimise your risks?

While the facts of this case meant that "sovereign immunity" was not available to an entity of the PRC Government under Hong Kong law, it provides a useful reminder that, in other jurisdictions, the outcome may be very different.

When contracting with a party which may be a sovereign counterpart, to minimise the risks of a sovereign entity successfully escaping liability by relying upon an immunity defence, you may wish to consider:

• undertaking due diligence and to carefully ascertain the status of the party that you are contracting with. In that regard, the judgment in the Intraline case stated that it had not been easy to sort out the precise organisational structure to determine whether GSB was a separate legal entity or part of the Ministry of the PRC. Evidence presented to the court included the way the entity was initially set up, its shareholding status, its rights in running the business, the way it is managed, and statements published by the relevant Ministry;
• including a comprehensive waiver of immunity clause in the contract. In that regard, one should also investigate whether the entity has the authority to do so;
• including in the contract the choice of law of a jurisdiction that would make it more difficult for a defence of jurisdictional immunity to be made out. In the Intraline case, the Hong Kong court held that crown immunity was available to the PRC entity, even though the transactions were commercial in nature.

For further information, please contact Colin Dodd and Victor Lau.