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Hong Kong SAR court upholds principle of non-interference in arbitration

A recent decision by a court in the Hong Kong Special Administrative Region (SAR) seeks to uphold the fundamental principle of non-interference in the arbitration process, an expert has said. 

Karah Howard, arbitration expert at Pinsent Masons, said the Hong Kong Court of First Instance (HKCFI) showed willingness to uphold non-interference “even in the case of clear errors of law.” 

In this case, G v N (27 pages/ 237KB) the decision centred on the arbitrator’s denial of relief based on the illegality of a transaction. This was based on a law that changed in Hong Kong just days before the arbitrator’s decision.

Here, G was a shareholder in N, a British Virgin Island (BVI) entity listed on the New York Stock Exchange. G and N agreed a securities purchase agreement (SPA) in which further shares were issued by N to G for approximately US$147 million, increasing the G’s shareholding in N from 24% to 44%. The SPA was governed by Hong Kong SAR law and contained an arbitration clause. The exchange meant that G now obtained a sufficient shareholding to block calls for a shareholder meeting called by IsZo Capital (IZ), an American investment fund, who aimed to make changes to the current directors in N due to an apparent lack of confidence in the board.

IZ then sought to void the SPA through the BVI Commercial Court, with the court of appeal upholding that the exchange of shares was not in the interests of N and was not valid. The BVI court acknowledged that G would “in principle” be entitled to claim repayment of the considerable money from N. 

Arbitration proceedings later commenced, with G seeking repayment of the US$147 million exchanged during the “void” SPA. The arbitrator acknowledged that the funds should, in principle, be recoverable but concluded that the funds should not be recovered on the basis that is it not a principle of justice but a principle of public policy. 

The HKCFI was asked to review to arbitrator’s decision, considering the question of illegality in two distinct stages. First, the court applied the facts to determine whether the SPA was in fact illegal. The court then considered any potential consequences of the SPA being void for reasons of illegality. The court held that the sum was recoverable, along with damages, despite the SPA being void by law. The court recognised that refusing recovery in line with the arbitral award would result in an unjust award, despite the claim for damages being brought forward by G, who was equally engaged in an illegal agreement.

The HKCFI decided that the matter should return to the arbitrator to resume arbitral proceedings and allow him to consider the most recent authority to decide on the recovery of money.

“Rather than deciding the issue on the basis of public policy, the court remitted the case back to the arbitral tribunal to reconsider the award and to ultimately decide the dispute between parties in the context of the changed legal position on entitlement to repayment,” Howard said.

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