Is an arbitration tribunal’s decision on illegality in conflict with public policy?

Under the Arbitration Ordinance (Cap. 609) of Hong Kong (‘AO’), unless the relevant arbitration agreement expressly provides for application of the opt-in provisions in sections 5-7 of Schedule 2 of the AO, an arbitral award cannot be appealed on a question of law. 

However, under section 81 of the AO (Article 34 of the Model Law), an arbitral award may be set aside by the Hong Kong High Court on certain limited specified grounds, including where the award is in conflict with the public policy of Hong Kong. Additionally, Section 81 provides the Hong Kong Court with the power, where appropriate and where so requested by a party, to remit the matter to the arbitral tribunal for reconsideration or to take such other action as in the tribunal’s opinion will eliminate the grounds for setting aside. 

Consistent with its usual pro-arbitration approach, the Hong Kong Court has in the past ordered, in appropriate cases, remission (as opposed to setting aside) of defective arbitral awards in order to give the tribunal a chance to rectify the defects in of the awards. 

The recent decision of the Court of First Instance of Hong Kong (‘CFI’) in G -v- N [2023] HKCFI 3366 is one of the latest instances where such a remission was ordered by the CFI, albeit in the nuanced context of a public policy challenge of the arbitral tribunal’s decision concerning an illegality defence. 

The decision therefore provides useful guidance on whether (and to what extent) a tribunal’s decision on an illegality defence (which by its nature involves consideration of public policy) is subject to the Hong Kong Court’s curial review. 

Background 

G and N were respectively the applicant and the respondent in the Hong Kong set aside proceedings. Both G and N are BVI companies. As illustrated in the diagram below, (a) G is an indirect wholly-owned subsidiary of K; (b) K held the shares in N through G and was N’s largest shareholder; and (c) the rest of the shares of N were held by IZ and other shareholders.

IZ, with the support of other shareholders of N, called a shareholders’ meeting for the purpose of changing the management of N. For the purpose of giving K the necessary votes to defeat the requisition for the shareholders’ meeting, N (which was then under the de facto control of K) entered into a Securities Purchase Agreement (‘SPA’) with G for the allotment of 16,051,219 extra shares to G (‘Allotment’) in exchange for the price of US $146,868,653 (‘Consideration Monies’). 

The SPA was governed by Hong Kong Law and contained a Hong Kong arbitration clause.

The BVI proceedings 

IZ applied to the BVI Court to set aside the Allotment. By a judgment of Jack J. on 3 March 2021, the BVI Court set aside the Allotment on the ground that the Allotment was in breach of section 121 of the BVI Business Companies Act (‘Section 121’). Subsequently, a special meeting of shareholders of N was called pursuant to an order of the BVI Court, which resulted in a change of management of N. 

The award

After the judgment in the BVI was handed down, G commenced arbitration in Hong Kong against N seeking restitution of the Consideration Monies previously paid under the SPA for, inter alia, (a) a personal claim against N for unjust enrichment or total failure of consideration; and (b) a proprietary claim based on a constructive trust arising out of fundamental mistake. In response, N claimed that G should not be permitted to recover the Consideration Monies because the Allotment was tainted by illegality, namely the breach of Section 121 identified by the BVI Court in the proceedings commenced by IZ. 

By its 1st Partial Award (‘Award’), the Hong Kong seated arbitral tribunal (‘Tribunal’) held that the Allotment was illegal and dismissed G’s claims on the basis that the illegality defence was applicable. In doing so, the Tribunal applied the ‘reliance approach’ regarding illegality established in Tinsley -v- Milligan [1994] 1 AC 340, which held that a person should not generally be granted a remedy where he has to rely directly on unlawful conduct to succeed. However, just a few days before the Award, the Hong Kong Court of Appeal held in Monat Investment Ltd -v- All Person(s) In Occupation of Part of The Remaining Portion of Lot No 591 in Mui Wo DD 4 No 16 Ma Po Tsuen, Mui Wo, Lantau Island [2023] HKCA 479 that the ‘range of factors approach’ established by the UK Supreme Court in Patel -v- Mirza [2017] AC 467 (see our related article at Illegality and the ‘range of factors’ test | Hill Dickinson), rather than the ‘reliance approach’ in Tinsley (which had hitherto been applied in Hong Kong), represented Hong Kong law on illegality. 

G then applied to the High Court of Hong Kong to set aside the Award on the ground that, inter alia, the Award was in conflict with the public policy of Hong Kong on illegality. 

Decision of the CFI

Mimmie Chan J. held that the Court was entitled to review the Tribunal’s decision regarding public policy and, if the Court considered the Award to be contrary to the public policy of Hong Kong, to set aside the Award. 

In this regard, Mimmie Chan J. accepted that there were sound arguments (as advanced by N’s counsel) against setting aside the Award, specifically that (a) it was important to maintain the finality of awards under the New York Convention and the Model Law; (b) it was previously held by the Privy Council in Betamax -v- State Trading Corp [2021] UKPC 14 that the Court below in that case was in error in reviewing the decision of the arbitrator in that case on illegality; and (c) even if the Tribunal had misunderstood what the relevant public policy was, this was at best an error in law (hence outside of the scope of the Court’s curial review). 

Nevertheless, after careful consideration, on the facts of the case, the learned judge held that she was entitled to review the Award for, inter alia, the following reasons:

1. The Court was entitled to review the Award, not because the Tribunal made any error in law, but because it was in the Court’s power and its duty to consider whether the Award was contrary to the current public policy of Hong Kong, and whether the Tribunal’s consideration of public policy complied with the guidelines in Patel (as now recognized by the Court of Appeal as applicable in Hong Kong). 
    
2. The determination of the question of illegality can be divided into two distinct stages. Stage one involves the arbitral tribunal’s findings of fact and law for the purpose of ascertaining any unlawfulness. Stage two involves the determination by the supervisory, or curial, Court of the effect of any illegality found by the tribunal. On a proper analysis of Betamax, the Privy Council only held that the Court (Hong Kong Court for our present discussion) cannot review the tribunal’s decision regarding stage one. However, at stage two, in case where some illegality is identified by the tribunal, it remains open for a Hong Kong Court to determine whether, on the basis of the tribunal’s own findings of fact and law, that the effect of the illegality (as found by the tribunal) is to render enforcement in Hong Kong contrary to public policy. This analysis by the Hong Kong Court, arising as it does from the tribunal’s own independent findings as to illegality, does not affect or undermine the finality of the award because the Hong Kong Court is not reviewing or overturning any findings of law or fact of the tribunal, which remain final and binding. 
    
3. In the present case, G did not challenge the Tribunal’s findings of fact and law (the opt-in provisions in sections 5-7 of Schedule 2 of the AO were not applicable), including the finding that there was a breach of Section 121. Rather, G only sought to argue that the Tribunal’s decision to deny relief to G on the basis of the said breach was wholly disproportionate and would produce such a harsh and manifestly unjust result that the Award would be contrary to public policy in accordance with the ‘range of factors approach’ in Patel. Thus, this was a question that the Court could (and should) consider and decide. 
    
4. Specifically, the learned judge noted that:

“––-when the Court is now asked, on an application to set aside the Awards, to consider the award in the context of public policy, it is bound to consider whether the Awards or enforcement thereof would be contrary to the public policy of Hong Kong as recognized by the Hong Kong Courts at the current date. If, now adopting the “trio of necessary conditions” and range of factors approach in Patel as acknowledged by Monat, the Court considers that it would be manifestly unjust and against the public policy of Hong Kong to enforce the Awards–––-“

[Emphasis added] 

Notwithstanding the above, the learned judge did not proceed with deciding whether the Award was in conflict with the public policy of Hong Kong. Rather, Her Ladyship considered that, on the facts of the case, the more appropriate action was to suspend the set aside proceedings and remit the matter back to the arbitrator to give the Tribunal an opportunity to re-consider its decision in the light of the approach in Patel and to take such action as in the Tribunal’s opinion would eliminate the ground for settling aside.

Comment

At first glance, one may question whether the CFI undermined the finality of the Award by ordering the remission. Nonetheless, as noted by Mimmie Chan J., the decision of the CFI did not affect the finality of the Award because the CFI did not review or reverse any findings of law or fact of the Tribunal. Rather, the CFI was merely reviewing (based on the Tribunal’s findings of law and fact), within established narrow confines, whether the Award was contrary to the public policy of Hong Kong, and it was not ‘against the spirit or principles of the New York Convention or the Ordinance to do so’.

The key takeaways are that:

1. The determination of the question of illegality can be divided into two distinct stages. Stage one involves the arbitral tribunal’s findings of fact and law for the purpose of ascertaining any unlawfulness. Stage one is clearly within the substantive purview of the tribunal and cannot be reviewed by the Court. Stage two involves the determination by the supervisory, or curial, Court of the effect of any illegality found by the tribunal, and the Court will have jurisdiction to review whether the tribunal’s decision in this regard is in conflict with the public policy of Hong Kong based on the ‘range of factors approach’ in Patel. 
    
2. Although the decision concerned an application to set aside an arbitral award under section 81 of the AO (Article 34 of the Model Law), it appears from the judgment of Mimmie Chan J. that the same approach will likely apply (at any rate where the substantive law of the arbitration is Hong Kong law) to an application to resist enforcement of an arbitral award on the ground that the award is contrary to public policy under sections 86(2)(b), 89(3)(b) or 95(3)(b) of the AO. 
    
3. Nonetheless, it is worth noting that, in line with its usual pro-arbitration stance, even though the Tribunal in G -v- N failed to apply the Patel test, the CFI chose to remit the Award back to the Tribunal for re-consideration, as opposed to directly deciding the public policy challenge of the Award. Thus, it may be that, practically, the Hong Kong Court will not be very inclined to overturn the stage two decision of an arbitral tribunal who has applied the correct Patel test on illegality. This is, however, an issue that needs to be clarified by future decisions of the Hong Kong Court when suitable case(s) come along.