DRC, China Railway Group, cobalt and copper

[John Ashworth]

In many respects this is not a railway story, but it is about China Railway Group, so here it is:

Hong Kong court ruling hits Beijing's Congo hopes

A firm investing in distressed debt has won an unlikely victory, write Tom Mitchell and William Wallis

24 February 2010
Copyright 2010 The Financial Times Ltd. All rights reserved.

China's commercial designs on the Democratic Republic of Congo have encountered an unexpected obstacle - an appellate court on Chinese soil ruling in favour of a US firm that invested in distressed debt.

Beijing's strategy of seeking natural resources in return for infrastructure investments in poor African nations has aroused concern, especially among western rivals and non-governmental organisations. A Hong Kong appeal court, however, was perhaps one of the last places where it expected a serious challenge to its ambitions.

In a 97-page decision issued on February 10, two justices, Frank Stock and Maria Yuen, upheld claims by FG Hemisphere Associates, a New York-based firm, on "entry fees" that the state-owned China Railway Group had agreed to pay the government and state companies in Congo.

The fees were part of a $9.25bn (€6.8bn, £6bn) project announced in April 2008. China Railway, described by the official media as the country's largest construction group, is leading a consortium that will develop more than 10m tonnes of Congo's copper and cobalt reserves.

Congo has about 4 per cent of the world's copper and its government hopes the China deal will help recovery from civil war, translating the nation's mineral wealth into tangible development. But the deal is also one of the more controversial minerals-for-infrastructure contracts struck in África.

Last year western donors expressed concern that Congo was taking on too much debt and successfully lobbied to scale back the project's price tag to $6bn.

Less predictable was the challenge from FG Hemisphere, which in November 2004 acquired the rights to two arbitration awards totalling more than $34m. They were originally secured against the Congolese state by Energoinvest, a Yugoslav company contracted to build electricity facilities in Congo in the 1980s. The amount of money owed now exceeds $100m.

China Railway found itself caught up in what Akere Muna, a Cameroonian jurist, said was a classic "vulture fund" case, in which investment firms acquire the distressed debt of some of the world's poorest nations and then attempt to force repayment through litigation.

Energoinvest won rulings at the International Chamber of Commerce's court of arbitration in 2003 and in the US in 2004. It then transferred its rights to FG Hemisphere.

African governments, Mr Muna added, were forced into repayment because of the accumulating penalties and the cost of fighting litigation. Similar funds have won an estimated $1bn from debtor nations in recent years.

While lawyers for FG Hemisphere said their client would dispute the "vulture" label, the fund declined to comment as the litigation is continuing.

China Railways' investment project in Congo gave FG Hemisphere an opportunity to seek recourse in Hong Kong, which maintains an independent judiciary under its "one country, two systems" arrangement with mainland China.

"As a matter of law, it's one of the most fascinating cases that I've ever done," said Russell Coleman, barrister for FG Hemisphere. At issue was whether Congo enjoyed full sovereign immunity from the fund's claims in Hong Kong. If, however, the common law notion of "restrictive sovereign immunity" applied, Congo could be held liable for damages in the context of a commercial dispute.

FG Hemisphere argued Congo should not enjoy full sovereign immunity in Hong Kong, a former British colony with a common law heritage. But in an unusual intervention, Hong Kong's justice secretary asked to be heard.

"The case has raised the important question of state immunity as applicable to [Hong Kong]," an official for the justice department said. "In view of this important legal issue, the secretary decided . . . to intervene in the proceedings on the ground of public interest."

The justice department produced a letter sent from the Chinese foreign ministry to the Hong Kong government's Constitutional and Mainland Affairs Bureau. "The courts in China have no jurisdiction over, nor in practice have they ever entertained, any case in which a foreign state or government is sued as a defendant or any claim involving the property of any foreign state or government," the letter said.

"At the same time, China has never accepted any foreign courts having jurisdiction over cases in which the state or government of China is sued as a defendant, or cases involving the property of the state or government of China. This principled position held by the government of China is unequivocal and consistent."

The defendants also argued that Hong Kong courts did not have jurisdiction, given that the territory's autonomy does not extend to foreign affairs.

The appeal court rejected these arguments. In a two-to-one decision, justices Stock and Yuen found "the doctrine of restrictive immunity currently continues to apply in Hong Kong" and ruled that FG Hemisphere could pursue fees payable by China Railway to Gecamines, a Congolese state mining company.

The consortium led by China Railways owes Gecamines $350m. FG Hemisphere argues that it should receive some of this money in order to settle Congo's debt.

The Congolese government and China Railway, whose lawyers declined comment, have not indicated if they will appeal.

Additional reporting by Barney Jopson in Nairobi and Justine Lau in Hong Kong