The thorny issue of illegality, mistake and the unruly horse of public policy

In the recently published decision AB Limited v GH Limited BVIHC  (COM) 192/2021, the BVI Commercial Court ruled on an application to set aside an order enforcing three Singaporean arbitration awards. The BVI Court considered the legal principles discussed in Soleimany and Betamix to handle the tension between the pro-enforcement policy of arbitration awards in the BVI and the public interest to prevent the enforcement of illegal contracts.

The key issue under consideration was whether an order enforcing an award should be set aside on public policy grounds where, as accepted by the parties, the award contained a component that was illegal under the governing law, ie the compound interest issue.

Here, the parties to a Thai law governed share purchase agreement, engaged in a two-stage arbitration to resolve the dispute between them. The compound interest issue arose as the agreement provided that default payments would attract interest at 15 per cent compounded monthly. In phase one of the arbitration, at an expert witness ''hot tubbing'' session, the tribunal raised the issue of whether Thai law permits the award of such interest. The Thai law experts mistakenly agreed that share purchase agreements could impose compound interest up to 15 per cent, but it could only compound annually.

By the second stage of the arbitration, the Thai law experts on a closer review of Thai laws, agreed that compound interest was only recoverable in respect of loan agreements. Notwithstanding this, by an apparent oversight, the Tribunal awarded the Claimants compound interest. The Claimants sought the substitution of simple interest for compound interest, but the Tribunal considered itself functus officio. The Claimants nonetheless sought enforcement of the awards with compound interest in the BVI.

The BVI Court noted that while public policy is heavily weighted in favour of enforcement, enforcement can be refused on the public policy ground of illegality. While the BVI Court will not re-assess a tribunal’s finding of illegality, where an award is then made under the illegal contract, the BVI Court is entitled to refuse enforcement if it would be contrary to BVI public policy. While the award of compound interest does not offend BVI public policy, comity also forms part of BVI public policy. Therefore, the BVI’s public policy dictates that the BVI Court will not enforce a contract that is deemed illegal according to the laws of a foreign friendly state, such as Thailand.

The BVI Court made it clear that its decision to set aside the enforcement of the award was based purely on public policy grounds and the need to protect the integrity of the Court’s process from abuse. Considerations of justice and fairness between the parties were not relevant considerations for the court when exercising its discretion to enforce or refuse the enforcement of an award. Accordingly, the compound interest parts of the awards were set aside.

Reproduced from Practical Law with the permission of the publishers. For further information visit www.practicallaw.com.