Summary of facts
G commenced an arbitration in Hong Kong to seek restitution of a sum paid by G (Sum) for a placement under a securities purchase agreement between G and N (Agreement). This followed the British Virgin Islands Court’s determination that the placement under the Agreement was made for an improper purpose and that the allotment of shares under the placement was void.
In response, N claimed, inter alia, illegality of the placement and relied on the principle of illegality and the principle of unclean hands, respectively, as defence to G’s personal claim and proprietary claim. N further counterclaimed for costs and damages it sustained in relation to the placement and the Agreement.
In his first partial award, the arbitrator applied Tinsley v. Milligan [1994] 1 AC 340 in concluding that the placement was illegal and in dismissing G’s personal claim, and further dismissed G’s proprietary claim by virtue of the principle of unclean hands. He further upheld N’s counterclaim and subsequently made a second partial award on the quantum of damages to be paid by G to N.
However, a few days prior to the handing down of the first partial award, the Hong Kong Court of Appeal held that the “range of factors” test under Patel v. Mirza [2017] AC 467 rather than the “reliance” test under Tinsley (which had been applied in Hong Kong until then) represented Hong Kong law on illegality.
G applied to the Hong Kong Court to set aside the two partial awards (Awards) or, alternatively, suspend the setting aside application for the matter to be remitted to the arbitrator.
The first ground for G’s application was that the Awards were in conflict with the public policy of Hong Kong on illegality (First Ground). G made it clear in the application that it was not seeking to challenge the Awards on the grounds of any error of law when the arbitrator applied Tinsley instead of Patel.
The second ground for G’s application was that the Awards contained decisions on matters beyond the scope of the submission to arbitration, and that the procedure was not in accordance with the parties’ agreement (Second Ground). In this regard, G relied on the arbitration clause in the Agreement, which stated the arbitrator “shall have no authority to award consequential, special or punitive damages”, contending that this gave rise to a limitation on the tribunal’s authority and that the arbitrator had no authority to make an award in favour of N in respect of its counterclaims for “consequential, special or punitive damages”.
Decision
First Ground
The Honourable Madam Justice Mimmie Chan (Judge) held that the Court was entitled to review the arbitrator’s decision to deny relief to G on the grounds of public policy. In this regard, the Judge found the following:
- While any error of law made by the arbitrator does not entitle G to set aside the Awards, it is the Court’s power and duty to consider whether the Awards are contrary to the public policy of Hong Kong.
- Applying the case of Betamax v. State Trading Corp [2021] UKPC 14, the Judge held that the question of public policy was to be determined by the Courts. The Judge considered that Betamax was a decision of the Privy Council on the meaning of “public policy” in the context of the UNCITRAL Model Law, and was therefore highly persuasive as an authority.
- As the Privy Council explained in Betamax, the finality of the award was not affected when the Court was simply to decide whether there was any conflict between public policy and the award on the findings of law and fact made by the arbitrator that were not subject to review.
- Where a party seeks to set aside an award or resist enforcement of an award on the grounds that the award or enforcement thereof is contrary to the public policy of Hong Kong, the Hong Kong Court should consider such contention, having regard to the public policy of Hong Kong as recognised by the Hong Kong Court at the current date.
- G had a good arguable case on the merits for the setting aside of the Awards on the grounds of public policy. However, instead of forming a final view as to whether the Awards were contrary to the public policy of Hong Kong, the Judge ordered the setting aside proceedings to be suspended for three months and the matter to be remitted to the arbitrator so that he could consider Patel (as recognised by the Hong Kong Court) and decide whether the Awards would be affected in any way.
Second Ground
The Judge found that the Second Ground amounted to a claim that the arbitrator had no jurisdiction. However, the Judge held that, contrary to article 16 of the UNCITRAL Model Law, G failed to raise the issue of jurisdiction in the arbitration and was therefore estopped from asserting such claim during the setting aside application.
Further, G had expressly pleaded in the arbitration that its argument on the arbitration clause was not a jurisdictional challenge. Applying C v. D [2023] HKCFA 16 (which drew a distinction between a party’s challenge to a tribunal’s jurisdiction and a challenge to the admissibility of a claim), the Judge held that G’s plea was simply a challenge to admissibility (that there was a limitation on the claims that could be properly advanced in the arbitration). Accordingly, the Court found that it had no jurisdiction to review the arbitrator’s ruling.
Concluding remarks
This case is a rare instance of the Hong Kong Court’s suspension of the setting aside proceedings and remission of the matter to the tribunal under section 81 of the Arbitration Ordinance (Cap. 609), which allows the tribunal to eliminate any potential flaws or defects in the arbitral proceedings. While the Judge held that the Hong Kong Court was entitled to review issues of illegality in the context of public policy, the Judge emphasised that G had no grounds to seek the setting aside of the Awards based on any error of law. The general position therefore remains that an error of law is not subject to the Court’s review unless the parties have expressly opted for appeal against an arbitral award on a question of law under the Arbitration Ordinance.
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