Bloomberg News

Singapore Gains as Hong Kong Follows China Rule on Immunity

August 30, 2011

(Updates with Australia ruling in 14th paragraph.)

Aug. 31 (Bloomberg) -- Singapore, seeking to create a “multi-billion dollar” market for resolving cross-border disputes, will gain from China’s affirmation that sovereign states can’t be sued in Hong Kong courts, lawyers say.

On Aug. 26, China approved an interpretation of Hong Kong’s Basic Law that states the city should follow central government policy giving countries absolute immunity.

Singapore, which allows sovereign states to be sued on commercial and contractual issues, has opened its legal market to foreign law firms and offered tax incentives in a challenge to Hong Kong for international arbitration business. Hong Kong handled 25 percent more international cases than Singapore last year, compared with having nearly three times as many arbitration cases as Singapore in 2009.

“The decision essentially renders Hong Kong an unsuitable forum in which to resolve disputes with states,” said James Berger, a New York-based lawyer with Paul Hastings Janofsky & Walker LLP. “Because parties will be unable to compel states to honor arbitration agreements in Hong Kong,” they are likely to choose other jurisdictions, including Singapore, to solve their conflicts, he said.

The decision by China’s Standing Committee of the National People’s Congress affirmed a June ruling by Hong Kong’s top court in a lawsuit brought against the Democratic Republic of Congo.

FG Hemisphere Lawsuit

FG Hemisphere Associates LLC, a so-called vulture fund that buys distressed debt, sued Congo in jurisdictions around the world in a bid to seize assets to enforce two arbitration awards. In Hong Kong, its attempt to collect the payments has tested the financial center’s judicial independence.

Peter Grossman, managing director at FG Capital Management Ltd. in New York, declined to comment on the implications of China’s decision.

“Rightly or wrongly, the perception would likely be that Hong Kong is a less neutral seat than Singapore for disputes with politically connected PRC entities,” said Yu-Jin Tay, head of international arbitration in Asia at Shearman & Sterling LLP in Singapore. “This decision could reinforce such views.”

Robert Pe, head of Asia dispute resolution at Orrick Herrington & Sutcliffe LLP, which advised Congo in Hong Kong, said concerns over the city’s judicial independence are unfounded.

‘Alive and Well’

Hong Kong’s top court has ruled against its government as often as in its favor, Pe said. “This suggests that judicial independence is alive and well in Hong Kong.”

Hong Kong was ranked 15th out of 139 countries by a World Economic Forum report for its judicial independence. Singapore was 21st. Both cities, which were former British colonies, were rated as having Asia’s best court systems.

The legal services sector accounted for 0.6 percent of Singapore’s economic output, or S$1.59 billion ($1.32 billion), in 2009, according to the government.

Singapore’s top court in 2008 dismissed the Philippines’ appeal for state immunity in a case where the ownership of the alleged ill-gotten gains held by the late Filipino President Ferdinand Marcos was contested. The Philippines, one of the defendants in a related lawsuit, had sought a Singapore court order to release the funds.

Other Rulings

The New South Wales Supreme Court in December ruled FG Hemisphere’s claims could be pursued in Australia. U.S. and Canadian courts have also said the arbitration awards were enforceable in those countries.

Hong Kong was guaranteed an independent judiciary and a separate legal system for at least 50 years under the Basic Law when it returned to Chinese rule in 1997.

The application in Hong Kong of the principle of “restrictive immunity,” which allows sovereign states to be sued for commercial matters, “would prejudice the sovereignty of China,” China’s foreign ministry wrote in an Aug. 25, 2010, letter.

“The impact of this is only limited to doing business with states,” said Mark Lin, a Hong Kong-based partner at law firm Hogan Lovells US LLP.

--Editors: Joe Schneider, Lars Klemming

To contact the reporter on this story: Andrea Tan in Singapore at atan17@bloomberg.net

To contact the editor responsible for this story: Joe Schneider at jschneider5@bloomberg.net


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