English Court of Appeal: Enforcement of a Chinese award for the first time, circumstances in which the English court may refuse recognition or enforcement of foreign arbitration award on public policy grounds relating to illegality, international public policy v domestic public policy

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In RBRG Trading (UK) Limited v Sinocore International Co. Ltd [2018] EWCA Civ 838, the English Court of Appeal addressed an appeal wherein the enforcement of an award issued by the China International Economic and Trade Arbitration Commission (CIETAC) was challenged on the ground of Public Policy enshrined under Section 103(3) of the English Arbitration Act 1996 (the Act). The English Court of Appeal while dismissing the appeal held that the extent to which an may be contrary to English public policy depends of number of factors and the public policy ground should be given a restrictive interpretation. It was further held that where, on the facts found, there is no illegality under the governing law but there is illegality under English law, public policy will only be engaged where the illegality reflects considerations of international public policy rather than purely domestic public policy. In considering whether and, if so, to what extent public policy is engaged the degree of connection between the claim sought to be enforced and the relevant illegality will be important. The detailed analysis of the case is given below:

Factual Matrix

Sincore entered in to a contract (the Contract) with RBRG to sell goods to be shipped from China to Mexico within time stipulated in the terms of contract. Mode of payment was by an irrevocable letter of credit which was to be opened by RBRG as per the terms of the Contract. As per the dispute resolution clause disputes were to be determined by CIETAC arbitration, under Chinese law, in Chinese, in China.

Later a conforming letter of credit was issued by one Rabobank on the instructions of RBRG which was subject to the Uniform Customs and Practice for Documentary Credits (UCP600). The parties amended the Contract to provide for RBRG to arrange an inspection of quality and quantity of the Goods prior to or during loading.

Under instruction from RBRG, Rabobank was supposed to issue an amendment to the letter of credit, so that the required shipment period can be updated.

The goods were loaded on board of a vessel in China and consequently genuine bills of lading were issued. The vessel departed and on the same day Sinocore sent a shipping advice to RBRG which stated that the date of the bills of lading is of that day itself.

Sinocore’s collecting bank requested payment from Rabobank under the letter of credit, presenting bills of lading dated wrong dates on the basis of forged bills. Sincore presented such bills to comply with the purported amended shipment date terms in the letter of credit.

The Court of Amsterdam granted a temporary injunction preventing Rabobank from making payment under the letter of credit against the false bills. Subsequently, Sinocore commenced proceedings against Rabobank in the Chinese courts, claiming damages for Rabobank’s non-payment under the letter of credit which was dismissed, on the basis that the bills of lading presented upon the request for payment were fraudulent. Sinocore brought an appeal against this decision in China, which was not yet heard (till I penned this entry).

Sinocore terminated the Contract due to RBRG’s “repudiatory breach by failing to fulfil [their] contractual obligations under the [Sale] Contract”. RBRG accepted the termination without prejudice to its right to claim damages for breaches of contract.

Sinocore sold the goods to a third party, Chimay. The goods arrived at Houston Port, USA, where they were detained by the US authorities on RBRG’s application following a decision of the US District Court. Later on, the price was reduced by a supplemental agreement with Chimay.

RBRG commenced CIETAC arbitration proceedings against Sinocore for damages caused by Sinocore’s breach of the inspection clause in the Contract. RBRG alleged that Sinocore had shipped the goods to prevent RBRG from inspecting them, and then produced forged bills of lading to falsely show a later shipment date which complied with the amendment to the letter of credit. RBRG inferred from this conduct that the goods were of insufficient quality. Sinocore counterclaimed for damages for breach of contract based on RBRG’s unilateral attempt to amend the letter of credit.

Tribunal’s Award

The tribunal held as under:

  • It did not have jurisdiction to determine whether the bills of lading were forged. It referred to the fact that the Dutch court and the Chinese court had both ruled on the issue and “totally accept the judgments rendered by the courts”.
  • Sinocore had not deceived RBRG about the shipment date of the Goods because RBRG had been made aware of it by the shipping notice sent by Sinocore.
  • The fundamental cause of the termination of the Contract and Sinocore’s failure to obtain payment was the non-conforming letter of credit tendered by RBRG following amendments to which Sinocore did not agree.
  • Disallowed Sinocore’s claim for interest because of its “improper operation” in presenting false bills of lading.

Appeal in China

RBRG applied to the Chinese court to set aside the Award, although as a foreign company they were confined to an appeal on procedural grounds only. This application was dismissed meaning that RBRG has exhausted its rights of appeal from the Award.

Enforcement Proceedings in UK Court

Sinocore applied to enforce the Award in English jurisdiction. The order was made pursuant to Section 101(2) of the Act, under the New York Convention. RBRG applied to set aside the order on the ground that enforcement would be contrary to public policy as Sinocore’s claim was based on forged bills of lading. This argument was put in two ways: firstly, on the ‘narrow ground’ that it had been open to Sinocore to present the genuine bills and obtain payment under the letter of credit as the attempted amendment to the letter of credit was ineffective, so that their claim in the arbitration was based on their own fraud; secondly on the ‘broad ground’ that the English courts will not assist a seller who present forged documents under a letter of credit.

The judge dismissed RBRG’s application and upheld the enforcement of the Award. The judge stated that RBRG’s claim must be considered in light of the fact that there was no suggestion that the Contract itself was fraudulent or otherwise contrary to public policy, and that the Award did not, on its face, uphold a claim for payment against the presentation of forged bills. Rather, it was for breach of the Contract by RBRG, with such breach occurring before the forgery or presentation of the bills, which breach the Tribunal held was the cause of the loss.

The judge held that the narrow ground mischaracterised the Award, and/or sought to go behind its finding as to causation of the loss.

On the broad ground, the maxim that ‘fraud unravels all’ arose in the context of the strict duty upon an issuing bank to pay under a letter of credit against apparently conforming documents. The recognised exception that a bank should not pay against fraudulent documents did not support the wider proposition, relied on by RBRG, that a party who presents forged documents cannot obtain relief from the court in respect of the transaction more generally, even if his claim is for damages for a prior breach of contract. The argument that this ‘taints’ an award so that public policy sounds against its enforcement would introduce uncertainty and undermine party authority.

Grounds of Appeal before the English Court of Appeal

There were four grounds of appeal:

  • The judge applied the wrong test for assessing the consequences of Sinocore’s illegality. He applied the overly narrow (and now discarded) test, set out in Tinsley v Milligan [1994] 1 AC 340, of whether Sinocore’s pleaded claim relied on its own fraud. He should have applied the more flexible approach laid down by the Supreme Court in Patel v Mirza [2016] UKSC 42, [2016] 3 WLR 399.
  • If the judge had applied the correct illegality test, he would have approached the balancing exercise that he purported of the judgment differently, by applying the factors laid down in Patel v Mirza. That would have led him to refuse to enforce the Award.
  • The judge was in any event wrong to find that Sinocore’s claim was not “based on” its own illegality. Sinocore’s loss was caused by its own deliberate (and admitted) decision to present forged documents to the bank under the letter of credit which was the agreed payment mechanism under the Contract.
  • The judge was wrong to enforce the Award in the light of his (correct) finding that Sinocore was conducting “plainly fraudulent” parallel proceedings in China, in respect of the very same loss claimed in these proceedings. He should, at the very least, have required Sinocore to discontinue those fraudulent proceedings as the price for the court agreeing to enforce its Award in this jurisdiction.

Relevant law in question

Since the ground contended to set aside an award was Public Policy, the relevant Section is 103 of the Act which is as follows:

103 Refusal of recognition or enforcement

Recognition or enforcement of a New York Convention award shall not be refused except in the following cases

Recognition or enforcement of the award may also be refused if the award is in respect of a matter which is not capable of settlement by arbitration, or if it would be contrary to public policy to recognise or enforce the award.

The Court cited Dicey, Morris & Collins, The Conflict of Laws (15th edition) at 16-150 to summarize the circumstances in which the court may refuse recognition or enforcement of an arbitration award on public policy grounds relating to illegality which is as follows:

“English law recognises an important public policy in the enforcement of arbitral awards, and the courts will only refuse to do so under Rule 69(2) in a clear case. A controversial question, which has been the subject of several recent decisions, is the extent to which it may be contrary to English public policy to enforce a foreign arbitral award rendered on the basis of an underlying contract the enforcement of which (as distinct from enforcement of the arbitral award) might be contrary to English public policy. The following principles can be derived from the authorities. First, it is legitimate for the court, in considering whether a foreign arbitral award should not be enforced on the ground of public policy, to take account of the underlying contract on which the award is based. Second, if that contract is in itself contrary to public policy (e.g. the classic case of a contract to share the proceeds of crime) the award may be refused enforcement on the ground of public policy. Third, it is important to distinguish between domestic public policy in English law; and considerations of international public policy applied by the English courts so as to disapply foreign law or refuse to enforce an arbitral award, as the case may be. Thus the mere fact that English law would have arrived at a different result does not of itself justify the application of English public policy. Fourth, the mere fact that the performance of the contract may be illegal in the place of performance, without more, will not render an award on the basis of such a contract unenforceable in England, where the contract is legal by its applicable law and by the lex arbitri. Fifth, if it is apparent on the face of the award that the contract was made with the intention of violating the law of a foreign friendly State, then the enforcement of an award rendered on the basis of such a contract may be contrary to English public policy. Sixth, the court has to perform a balancing exercise between the finality that should prima facie exist particularly for those that agree to have their disputes arbitrated, against the policy of ensuring that the enforcement power of the English court is not abused: the nature of, and strength of the case for, the illegality, and the extent to which it can be seen that the asserted illegality was addressed by the arbitral tribunal are factors in the balancing exercise between the competing public policies of finality and illegality.”

Conclusion

The English Court of Appeal dismissed the appeal to set aside the award on the ground of Public Policy and held as under:

  • Public policy ground should be given a restrictive interpretation.
  • Where the arbitration tribunal has jurisdiction to determine the relevant issue of illegality and has determined that there was no illegality on the facts the English court should not allow the facts to be re-opened, save possibly in exceptional circumstances.
  • Where, on the facts found, there is no illegality under the governing law but there is illegality under English law, public policy will only be engaged where the illegality reflects considerations of international public policy rather than purely domestic public policy. This is in accordance with the rules at common law and under the Rome 1 Regulation (Article 21) in relation to the refusal of the application of the governing law on public policy grounds.
  • In considering whether and, if so, to what extent public policy is engaged the degree of connection between the claim sought to be enforced and the relevant illegality will be important.
  • Patel v Mirza does not affect the principles to be applied when considering recognition and enforcement under section 103. Patel v Mirza will be relevant to whether, on the facts found, there is any illegality as a matter of English law. The policy considerations taken into account for the purpose of that determination may overlap with those to be considered under section 103, but Patel v Mirza neither purports to nor does it consider or decide the proper approach to be taken in section 103(3) cases.
  • In enforcing the Award the court is not allowing its “process to be used by a dishonest person to carry out a fraud”. In the event, there was no fraud; only an attempt at fraud. There is no public policy to refuse to enforce an award based on a contract during the course of the performance of which there has been a failed attempt at fraud.

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