In this recent decision, the High Court considered the grounds for refusing to enforce an award under the New York Convention on the basis of public policy. In this instance, the defendant argued that the original arbitration claim was based on fraudulent bills of lading and the award should not therefore be enforceable.

Factual background

Under a sale contract dated 15 April 2010 (sale contract), Sinocore (the seller) agreed to sell 1,450MT of steel coils to RBRG (the buyer) at a price of US$870/MT. Under the terms of the sale contract the buyer was required to open an irrevocable letter of credit for 100% of the sale price. The sale contract contained a CIETAC arbitration clause and provided for Chinese law and jurisdiction.

On 7 May 2010 an amendment was made to the sale contract allowing for the buyer to inspect the steel coils for quantity and quality during and prior to loading.

The buyer procured that a conforming letter of credit – subject to the UCP600 – was issued by Rabobank Nederland (Rabobank) on 22 April 2010, providing that the latest date of shipment was 31 July 2010.

On 12 June 2010, on the instructions of the buyer, Rabobank purported to issue an amendment to the letter of credit, changing the shipment period to the ‘20th to 30th July 2010’. The change was not agreed by the seller and was therefore ineffective by operation of the UCP600.

The goods were shipped on 5 and 6 July 2010 and bills of lading were issued to that effect. However, on 22 July the collecting bank, Bank of Communications Beijing Branch (BoC), requested payment from Rabobank under the letter of credit and presented bills of lading dated 20 and 21 July 2010. It was clear that those bills were forgeries, produced so as to present Rabobank with documents in accordance with the purported amendment to the letter of credit.

The buyer was granted a temporary injunction restraining Rabobank from making payment under the letter of credit. The seller terminated the sale contract, alleging that the buyer had repudiated the agreement. The seller sold the coils to another buyer at a price of US$535/MT (re-sale contract).

In April 2012, the buyer commenced arbitration proceedings against the seller in Beijing for damages caused by breach of the inspection clause. The seller counterclaimed for damages for breach of contract, claiming the difference between the sale contract price and the significantly lower re-sale contract price.

The Tribunal awarded damages of US$4,857,500 to the seller, and held that:

  1. the buyer had not requested that it be permitted to arrange an inspection of the steel coils before or during shipment and the seller was not therefore in breach;
  2. as the seller had not agreed to the revised shipment date, the buyer was in breach of the sale contract in procuring the amendment to the letter of credit so it was inconsistent with the sale contract; and
  3. the submission of the forged bills was a deception of Rabobank, but did not mean deceiving the buyer (who had actual knowledge of the true shipment dates).

In February 2016 the seller issued an application in the English courts for leave to enforce the award under the New York Convention and an order was made to that effect.

The buyer subsequently applied to set aside the order on the grounds that recognition or enforcement of the award would be contrary to public policy.

Legal issues

The buyer’s argument was premised on section 103 of the Arbitration Act which stated that recognition or enforcement of a New York Convention award should not be refused except if inter alia it would be contrary to public policy to recognise or enforce it.

The buyer argued that the English courts should not allow their processes to be used to give effect to commercial fraud. It challenged the order under two grounds, that:

  1. the seller’s claim in the arbitration was directly based on its own fraudulent presentation of documents; and
  2. the English courts should not assist a seller who presented forged documents under a letter of credit.

Relevant legal principles

Phillips J first summarised the general approach to an application under section 103. This recognised a strong presumption that New York Convention awards were enforceable and that public policy defences were to be treated with extreme caution (as summarised in IPCO (Nigeria) -v- Nigerian National Petroleum [2005] 2 Lloyd’s Rep 326).

He went on to set out circumstances in which the public policy exception would be engaged. These included instances where the contract was unlawful in the place of performance and those situations in which an award gave effect to a corrupt practice (e.g. recovery/payment of a bribe).

However, the situation was more complex where the arbitral tribunal had itself considered and rejected alleged illegality. The Court had to balance the competing public policy considerations of finality or arbitration awards on the one hand and the alleged illegality on the other.

The buyer’s grounds for challenging the award had to be considered in the following context:

  1. it was common ground that the sale contract and its intended performance was entirely lawful;
  2. the award did not uphold a claim for payment against the presentation of the forged bills; and
  3. the Tribunal was aware of the full facts of the matter, including the fact that the bills of lading were forgeries.

In relation to ground (i) referred to previously, Phillips J held that the claim for damages was for breach of the sale contract in respect of its instruction to amend the letter of credit. This was the operative cause of the loss and was entirely distinct from the forgery and presentation of the bills.

In relation to ground (ii), the authorities did not support the much wider proposition that a party who presented forged documents could not obtain relief from the Court in respect of the transaction more generally, even if its claim was for damages for a prior breach of contract. The public interest in the finality of arbitration awards, particularly an international award determined as a matter of foreign law, clearly and distinctly outweighed any broad objection on the grounds that the transaction was ‘tainted’ by fraud.

The application was consequently dismissed and the order upheld.

This case provides further evidence of the advantages of arbitration and the effectiveness of the New York Convention. It is only in very rare circumstances that a New York Convention award will not be recognised; these do not include allegations that the transaction was ‘tainted’ by fraud. This allows for effective enforcement in multiple jurisdictions without the need for complex and protracted court proceedings.