Our earlier blog post discussed the role of arbitrators and counsel when allegations of illegality and corruption are made in the course of international arbitration. A recent case in the England and Wales Court of Appeal, RBRG Trading v Sinocore International (“RBRG Trading”), reinforced the high standard for challenging a New York Convention arbitration award and outlined principles to consider in determining whether an award can be enforced where issues of illegality in the underlying claim are raised.
RBRG Trading involved a sale contract between Sinocore international (“Sinocore”) and RBRG Trading (“RBRG”). The contract provided that payment would be made by a letter of credit and any disputes would be determined by CIETAC arbitration under Chinese law. On RBRG’s instructions, Rabobank issued a letter of credit. The parties later amended the sale contract to include an inspection clause and Rabobank purported to issue an amendment to the letter of credit. After shipping the goods, Sinocore requested payment and presented forged bills of lading supposedly to comply with the amended letter of credit.
RBRG was granted an injunction preventing Rabobank from making payment. Sinocore terminated the contract due to RBRG’s failure to make payment. RBRG commenced CIETAC arbitration proceedings, seeking damages arising from Sinocore’s breach of the inspection clause in the sale contract.
The oral hearings took place in the CIETAC tribunal (the “Tribunal”) in 2013. The Tribunal found that RBRG breached the sale contract. RBRG’s application to the Chinese court to have the award set aside was dismissed. Sinocore applied to enforce the award in England and an order was granted under section 101(2) of the Arbitration Act 1996, c 23 per the New York Convention.
RBRG applied to have that order set aside on the ground that Sinocore’s claim was based on its own fraud and enforcement would be contrary to public policy. Section 103 of the Arbitration Act provides that enforcement of an award may be refused “if it would be contrary to public policy to recognise or enforce the award”.
After an oral hearing in the High Court of England and Wales, Justice Phillips dismissed RBRG’s application and upheld enforcement of the award, holding that the breach of contract occurred before the forgery of the bills. Justice Phillips rejected RBRG’s argument that fraud ‘taints’ the award to the extent that it should not be enforced, as this “would introduce uncertainty and undermine party authority.”
RBRG appealed the decision on four grounds:
- The judge applied the narrow test of whether Sinocore’s claim relied on its own fraud rather than the more flexible test in Patel v Mirza (“Patel”);
- Applying the proper test, the judge should have refused to enforce the award;
- The judge wrongly concluded that Sinocore’s claim was not based on its own illegality; and,
- The judge erred in enforcing the award notwithstanding that Sinocore was involved in fraudulent parallel proceedings.
Principles Governing Public Policy and Illegality
The Court of Appeal unanimously upheld the decision from the High Court. After reviewing the relevant authorities, the Court emphasized the following key principles:
- The ground of public policy “should be given a restrictive interpretation” and there is a presumption in favour of enforcement of New York Convention awards;
- The English court should not reopen the facts where the tribunal considered and rejected illegality and had the jurisdiction to do so, absent exceptional circumstances;
- Where there is no illegality under the governing law, public policy is only engaged where the illegality relates to international or ‘universal’ principles rather than purely domestic public policy; and,
- The degree of connection between the claim and the illegality is an important consideration in determining to what extent public policy is engaged.
The Court confirmed that Patel does not modify the principles above or decide the approach to be taken under section 103(3) of the Arbitration Act. The Court therefore dismissed the first and second grounds of appeal on the basis that the relevant test is not Patel.
On the third ground of appeal, the Court held that the degree of connection between the fraud and the claim for enforcement was not sufficient to justify a refusal to enforce the award, for four reasons:
- The Tribunal found that the contract termination and non-payment was not caused by the forged bills, but rather, the amendments to the letter of credit which Sinocore did not agree to.
- RBRG’s position at arbitration was that Sinocore had agreed to the amended letter of credit, so RBRG could not later argue that Sinocore’s failure to present documents under the original letter of credit caused the loss.
- There was no allegation that performance of the sale contract itself involved any illegality, under either Chinese or English law.
- RBRG was not deceived by the forged bills and Sinocore did not obtain any benefit from the act. This was “at most a case of attempted fraud”, and enforcement of an award cannot be refused on public policy grounds where there was a failed attempt at fraud during contractual performance.
For these reasons, the Court held that public policy was not engaged or, alternatively, the interests of finality clearly outweighed any public policy concerns. Therefore, the Court dismissed the third ground of appeal, noting that they would have reached the same result applying the approach in Patel v Mirza.
The Court also dismissed the fourth ground of appeal, concluding that the judge had discretion to refuse to stay enforcement of the award due to the undertaking provided by Sinocore that it would not obtain double recovery, and no error in law had been shown.
This decision is generally in line with the pro-enforcement approach taken by English courts and underscores the high standard required to challenge an arbitral award based on public policy concerns. RBRG Trading serves as a reminder that an appeal court will generally defer to the tribunal on the facts underlying allegations of illegality. Judges will examine the strength of the connection between the illegality and the claim; a mere ‘taint’ of fraud will not be sufficient for a court to refuse to enforce an award. Lastly, while courts will thoroughly consider any allegations of fraud, RBRG Trading suggests that promoting certainty and finality in commercial transactions is a key interest in the minds of judges.