Hong Kong Knuckles Under Again to China

Hong Kong’s long-term role as an international business center has been undermined by a decision by China’s National People’s Congress which in effect makes the territory part of the People’s Republic of China rather than a separate legal entity in certain key commercial cases.

Although the decision was not unexpected, it has international lawyers and their clients pondering its implications and asking themselves whether all kinds of agreements signed in Hong Kong and subject to Hong Kong law will have to be replaced with new ones subject to other jurisdictions such as Singapore and England.

The NPC judgment was further highlighted by the decision of China’s largest state-owned shipping company, COSCO, to halt payments on loss-making charters on bulk carriers chartered from a Greek ship owner. This led to the arrest of some COSCO ships and sent waves through the whole shipping industry. COSCO is a huge player in global shipping and as an AAA rated offshoot of the Ministry of Communications in Beijing can scarcely claim that it is unable to pay. COSCO has since appeared to back off and agree to payment, probably under orders from the top in China which could do without such embarrassments. But meanwhile its action lifted borrowing costs throughout a shipping world already suffering from massive oversupply of vessels, especially bulk carriers.

The link between the COSCO affair and the NPC judgment is simple. The NPC declared that Hong Kong, as part of China for foreign policy purposes, must follow the mainland doctrine that the immunity of sovereign states from prosecution is absolute. Under Hong Kong’s British-derived law, immunity did not apply in commercial cases. The NPC decision, taken unanimously by the 157 members of its Standing Committee, was a political statement which left the actual legal situation imprecise. At the very least it needs follow-up clarification. This was perhaps not surprising as the Standing Committee has many members, including “patriots” from Hong Kong, who believe that law is less important than “Chinese cultural values” in determining disputes.

In the case at issue, the Democratic Republic of Congo was being sued in Hong Kong for a commercial payment but was pleading immunity. A complicating factor was that a co-defendant in the action was a Chinese state company which held Congolese assets which the claimant was trying to attach. The Congo had been operating as a sovereign state in its own right. But what the judgment did not make clear was whether the sovereign immunity would also apply to a state-owned commercial enterprise. Where did sovereignty begin and end?

One thing is for sure. Aggrieved charters are not going to try arresting COSCO ships in Hong Kong should it again renege on contracts. But beyond the issue of claims in Hong Kong against Chinese state companies is the bigger issue of the status of other state-owned entities, be they Malaysian, Norwegian, Nigerian or whatever when conducting business in Hong Kong or making contracts under Hong Kong law. That law, like Hong Kong’s other professional services, has been a major attraction for the territory particularly for regional traders who are wary of being subject to the vagaries of the legal systems of Indonesia, the Philippines etc.

The NPC decision stems from Hong Kong’s Court of Final Appeal’s referral of the case to Beijing, by a narrow margin accepting the argument that the case needed an interpretation of the Basic Law that only the NPC could deliver. However, the outcome was made worse by the fact that the Hong Kong government itself argued against Hong Kong having jurisdiction in the case. And the various Hong Kong chambers of commerce kept silent on the matter, cravenly wishing not to offend Beijing by arguing for Hong Kong to retain the legal tradition it had inherited and which is a cornerstone of its role as an international commercial centre – not simply a centre for doing certain types of China business which currently cannot be conducted on the mainland. The HK General Chamber of Commerce appears particularly at fault, being run by former government bureaucrats and mainly representing the interests of local property and other oligopolists rather than Hong Kong’s international traders, ship owners and bankers.