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United States

A major federal appeal court in the US has ruled that Hong Kong is not a foreign state for the purposes of deciding whether a Hong Kong company is entitled to sue an American firm in US courts. Because Hong Kong is not considered a state, a company organized under Hong Kong law lacks the ability to sue in US courts on the basis of diversity or 'alienage' jurisdiction.

Matimak Trading Co was organized under the Hong Kong Company Ordinance. Several years ago it brought suit in federal court against a US sportswear firm for breach of contract. Federal courts have jurisdiction over any civil action arising between "citizens of a state and citizens or subjects of a foreign state". Thus, to hear the case, the federal court had to decide whether Matimak was a citizen or subject of a foreign state.

In resolving this question, the US Court of Appeals for the Second Circuit held that it must defer to the executive branch of the government because the existence of foreign states is a political question. The US Justice Department filed an amicus curiae brief with the court in which it noted that "the State Department [does not urge] treatment of Hong Kong as a de facto foreign state". Accordingly, the court concluded: "The State Department's stance ... confirms what is already clear from the United States' dealing with Hong Kong, as evidenced in the US-Hong Kong Policy Act of 1992: it does not regard Hong Kong as an independent sovereign entity." Thus, the court dismissed the suit brought by Matimak (Matimak Trading Co v Khalily 1997 WL 353473 (2nd Cir NY)).

The court did not discuss the recent reversion of Hong Kong to China because diversity jurisdiction is determined at the time of the start of an action. Would the new status of Hong Kong change the result in the future? Will Hong Kong companies now be treated as citizens of China? Under the Second Circuit's reasoning, this will depend on how the US government deals with Hong Kong. As a separate administrative region of China, Hong Kong may be treated as separate from China but not an independent state, in which case courts would probably follow the decision of the Second Circuit in Matimak.

The Second Circuit's decision also raises a question as to whether companies or citizens of territories such as the Cayman Islands and Bermuda are entitled to sue in the US courts under 'alienage jurisdiction'. A vigorous dissent by judge Altimari argues that the framers of the Constitution and Congress never intended to create 'stateless' persons such as Matimak and bar them from access to US courts in suits against US citizens.

Robert Rendell

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