The case is seen as a key test of judicial independence under Chinese rule.
A summary of the decision said: “The freedom to demonstrate peacefully is a constitutional right.”
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The ruling may bolster confidence in Hong Kong’s legal system, which has faced criticism in recent weeks that judicial independence is being eroded by meddling from the territory’s Communist rulers in Beijing.
The former British colony was returned to China in 1997.
The case stemmed from a March 2002 protest against mainland China’s ban on Falun Gong, which Beijing considers to be an evil cult that threatens society.
The spiritual movement wasn’t banned in Hong Kong, but authorities accused the demonstrators of assaulting and obstructing police after being arrested for the protest outside China’s liaison office in Hong Kong.
But Hong Kong’s Court of Final Appeal ruled that since the demonstration was legitimate, the arrests were illegal and the defendants can’t be held accountable for their behaviour during their detention.
The ruling came amid complaints from pro-democracy MPs and legal experts that Hong Kong’s law has been compromised by Beijing’s interference during the past month.
Last week, China’s most powerful legislative body resolved a constitutional dispute over how long Hong Kong’s next leader should serve.
The pro-democracy MPs and legal experts thought that Hong Kong’s courts should have been given a chance to resolve the controversy.
But Hong Kong’s government insisted that a speedy ruling was needed to prevent the July 10 election for the leader from being delayed.
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