G was a BVI-incorporated, wholly-owned subsidiary of a Hong Kong listed company. G was a shareholder in N, also a BVI entity which was a real estate developer and operator conducting its main business in the PRC mainland. An American investment fund IsZo Capital LP (ISZ) was also a shareholder in N and objected to plan agreed by the management to purchase more land in the PRC.

N arranged for an allotment of shares with a view to defeating a no-confidence vote planned by ISA and on 5 October 2020, N and G entered into a Securities Purchase Agreement (SPA) for a placement known as “PIPE” (a private investment in public equity). The SPA contained an HKIAC arbitration clause.

Upon application by ISZ, the BVI Commercial Court set aside the placement on the grounds that it was not in N’s best interests, made for an improper purpose, and would be in breach of the relevant section of the BVI Business Companies Act. The decision was upheld by the BVI Court of Appeal.

Arbitration

G commenced arbitration against N in Hong Kong seeking restitution of the monies it had paid for the placement. During the arbitration, G was granted an interim preservation order restraining N for disposing of US$90 million of the consideration monies it was holding in a Hong Kong bank account. N argued it in its defence that G should not be allowed to recover the consideration monies since the placement was illegal and relying on the principle of unclean hands. 

The arbitrator issued a first partial award on liability in which he found that the placement was illegal and dismissed G’s claims, relying on the English case of Tinsley v Milligan [1994] 1 AC 340. He also upheld counterclaims lodged by N meaning that N was permitted to retain both the consideration it was paid and to recover damages from G. G asked the court to set aside the awards as being contrary to the public policy of Hong Kong.

Just a few days before the arbitral award was handed down, the Hong Kong Court of Appeal had handed down its decision in Monat Investment Ltd (滿利投資有限公司) v All Person(s) in Occupation of Part of No 16 Ma Po Tsuen [2023] 2 HKLRD 1311. In Monat, the Court of Appeal held that the UK Supreme Court decision in Patel v Mirza [2017] AC 467 represented the true state of the law on illegality in Hong Kong and that Tinsley should no longer be followed.

The Patel / Monat approach gave the court the discretion to consider a range of factors when considering whether the court should allow relief in restitution even if the underlying contract was unenforceable as it  involved an illegal act such as (i) the underlying purpose of the prohibition which has been transgressed; (ii) any other relevant public policies which may be rendered ineffective or less effective by the denial of the claim; and (iii) keeping in mind the possibility of overkill unless the law is applied with a due sense of proportionality.

According to Patel, consideration of illegality involves two stages, the first to decide whether there is any illegality in law and the second a determination of the consequences of any illegality found. The Privy Council in Betamax v State Trading Corp [2021] UKPC 14 had made it clear the first stage was not open to review by the court.

The original decision

In G v N [2023] HKCFI 3366, counsel for G pointed out that it is open to the court to review the decision of the arbitrator on public policy (see Hogan Lovells publication Arbitration Highlights in the Year of the Dragon). He highlighted the fact that the question of illegality involves two distinct stages. The first stage involves the tribunal making findings of facts, and applying the law to the facts to ascertain if there is any illegality in law. The second stage then involves ascertaining the consequences of the illegality found and the court must assume jurisdiction to determine whether the award is in conflict with the public policy of the jurisdiction of the supervisory court.

The finality of the award is not affected when the role of the court is simply to decide whether there is any conflict between public policy and the award, on the findings of law and fact made by the arbitrator which are not reviewed. Here, the arbitrator did not apply the approach advocated in Patel v Mirza on the basis that it was not part of Hong Kong law.

The court, rather than coming to a conclusion as to whether the awards should be set aside as contrary to public policy, suspended the set-aside proceedings for three months and remitted the matter back to the arbitrator. N applied for leave to appeal against the court’s decision.

Leave to appeal granted

Mimmie Chan J, in allowing the appeal, accepted that the decision “raises an important and novel issue on the proper scope of the Court’s permissible intervention on the ground of public policy, and the interplay between, on the one hand, the public policy underpinning the denial of remedies on the ground of illegality and, on the other hand, the policy of the Court’s support of arbitral awards and minimal curial interventions in arbitrations”.

Counsel for N argued that, “at most, there was a change in the in the legal framework, but no change in public policy or its scope. Any change in the legal approach as to how the illegality defence should be evaluated by the courts is a question of law, and there is no review of arbitral awards on the basis of there being errors of law”.

Takeaways

The decision in G v N, drawing as it does on both recent English and Privy Council authority on the interpretation of the illegality defence, underlines the long tradition of Hong Kong courts in respecting the finality of awards. 

However, where a party makes an application under section 81 of the Ordinance (applying Article 34 of the Model Law) to set aside an award, or under either section 86(2)(b), 89(3)(b) or 95(3)(b) of the Ordinance to resist enforcement of an award, it is open to (and incumbent on) the party to show to the court that the award or enforcement thereof is contrary to the public policy of Hong Kong.

When such a contention is made, the court is bound to consider and decide the claim, applying the authorities which define the narrow scope of such a claim. It is not against the spirit or principles of the New York Convention or the Ordinance to do so.

The ability to challenge on a point of law was examined by the court in G v N [2023] HKCFI 3366. Here, a separate Hong Kong court decision had changed the law on a key point relied upon in the arbitration just days before the arbitration hearing took place. And that was enough for the judge to send the case back to the arbitrator to reconsider whether the award should be set aside.

The decision is now under appeal. However Mimmie Chan J noted in her ruling that the hearing of the arbitration would in any event still be resumed for the arbitrator to consider the matter.

Authored by James Kwan and Nigel Sharman.