This was an appeal from a judgment of the Full Court of the Hong Kong Supreme Court (see CMI1365) which had allowed appeals by the respondents, Wallem Shipping (Hong Kong) Ltd (Wallem), and Telfair Shipping Corp (Telfair), against orders that had set aside their writs and actions in rem against the ship Philippine Admiral upon applications made by the Government of the Philippines.

In 1956, a treaty was agreed upon between the Republic of the Philippines and Japan, whereby Japan would provide USD 550 million as reparations for war damage. USD 500 million was to be made available in the form of capital goods and services. The Philippine Reparations Law (No 1789) (the Reparations Law) was enacted to establish procedures for procuring and utilising the reparations.

The Liberation Steamship Co (Liberation) of Manila applied for, and was granted funds under, the Reparations Law to acquire an ocean-going ship. Subsequently, the Reparations Commission entered into a contract with a Japanese shipbuilding company on behalf of the Philippine Government for the construction of the Philippine Admiral. The Philippine Government would finance the construction of the vessel using the reparations fund. An agreement was then signed between the Reparations Commission and Liberation for the conditional purchase and sale of the vessel at a price of USD 3,434,288.89, to be paid in instalments. The contract included the following terms:

1. In consideration for the payments made by Liberation the Commission would conditionally transfer the utilisation of the vessel to Liberation;
2. The Commission would retain title to and ownership of the vessel until full payment was made; and
3. Liberation would take delivery and possession of the vessel in Japan, crew it, and utilise it in accordance with Philippine laws. The contract was subject to the provisions of the Reparations Act.

In 1960, Liberation took delivery and possession of the vessel and operated it in accordance with the contract. Liberation initially paid the instalments as agreed, but by 1972 was in substantial arrears. On 12 December 1972, the vessel was chartered to Telfair for a period of 'nine months to about twelve months at charterers option'. During this time, the ship was being repaired at the port of Hong Kong and remained there. A dispute arose between Liberation and Telfair regarding payment for the repairs and Liberation purported to cancel the charterparty. Telfair issued a writ in rem in June 1973 for damages for breach of the charterparty. Wallem subsequently issued separate writs relating to goods supplied and disbursements made for the ship. Liberation appeared as the 'owner' of the vessel in response to these writs. The vessel was arrested in June, and substantial expenses were incurred by the bailiff to maintain the ship in the following months. The acting Deputy Registrar of the Supreme Court applied for an order to have the vessel appraised and sold. The order was granted on 8 October 1973.

On 29 October 1973, the Government of the Republic of the Philippines filed applications to set aside the writs of summons, all subsequent proceedings against the vessel, and the order for appraisement and sale. The Court granted an order setting aside the writs and all subsequent proceedings. However, on appeal to the Full Court, the decision was unanimously reversed. In order to secure the release of the vessel pending appeal to the Privy Council, the Government of the Philippines paid a bail bond, and the vessel was released.

Held: Appeal dismissed. Judgment of the Full Court of the Supreme Court of Hong Kong affirmed.

The three issues considered were whether:

1. The Board should follow the decision in The Porto Alexandre [1920] P 30; 
2. Even if the Board were not to follow that decision, the Philippine Admiral should still enjoy immunity because it could not be properly considered a mere trading ship; and
3. If the Board decided to follow The Porto Alexandre, that decision was applicable to this case, considering that there were no allegations that the Philippine Government was liable for any of the contracts that led to the actions, and that although it was the legal owner of the vessel, it did not have possession or control of the vessel during any relevant time.

The Board answered the first two questions in the negative, and the third question thus fell away.

The Board also took note of the Immunity of State-Owned Ships Convention 1926, which was signed by 20 countries, including the United Kingdom. Article 1 stipulated that:

Sea-going ships owned or operated by states, cargoes owned by them, and cargoes and passengers carried on state-owned ships, as well as the states which own or operate such ships and own such cargoes shall be subject, as regards claims in respect of the operation of such ships or in respect of the carriage of such cargoes, to the same rules of liability and the same obligations as those applicable in the case of privately owned ships, cargoes and equipment.

The Board acknowledged that this Convention article covered both actions in rem and in personam, but noted that the Convention had only been signed but not ratified by the United Kingdom (and was therefore not in force in Hong Kong).

The Board also referred to the Tate letter of 1952, addressed by the acting legal adviser of the State Department to the then acting Attorney-General of the United States notifying him of a change in the policy of the Department of State with regard to the granting of sovereign immunity to foreign governments. The letter referred to both the classical or absolute theory, and the newer or restrictive theory, whereby immunity is only recognised with regard to acts done jure imperii as opposed to acts done jure gestionis. The letter went on to list those countries whose courts accepted the absolute or the restrictive theory respectively - including in the former class the US itself and the British Commonwealth - pointing out that in many of the countries whose courts still applied the absolute theory academic writers tended to support the restrictive theory, and that a number of those countries were in fact parties to and had ratified the 1926 Convention. It concluded that the policy of the State Department would henceforth be to follow the restrictive theory of sovereign immunity.

The Board noted that according to the Tate letter the countries of the world were then fairly evenly divided between those whose courts adhered to the absolute theory and those which adopted the restrictive; but there was no doubt that in the last 20 years the restrictive theory had steadily gained ground. According to a list compiled by reference to the various textbooks on international law there were now comparatively few countries outside the Commonwealth which could be counted adherents of the absolute theory. It was not altogether clear whether the Republic of the Philippines was one of them.