RBRG Trading (UK) Ltd v Sinocore International Co. Ltd  EWHC 25
A recent decision by the Court of Appeal has addressed the public policy defence to enforcement under s.103(3) of the Arbitration Act 1996, in circumstances involving alleged illegality on the part of the enforcing party in requesting payment on the basis of forged bills of lading.
The Court of Appeal confirmed that where foreign arbitral awards raise questions of illegality, enforcement will only be refused on public policy grounds where international, as opposed to domestic, public policy is engaged. The decision also provides useful guidance as to the scope of the illegality defence as set out by the Supreme Court in Patel v Mirza, which the Court of Appeal found not to apply in the context of a challenge to enforcement of an arbitral award under s.103(3).
Background to the dispute
The award giving rise to the English enforcement proceedings was issued under the auspices of the China Economic and Trade Arbitration Commission (CIETAC), by a tribunal seated in China. The underlying dispute arose out of a contract, for the sale of rolled steel coils to be shipped from China to Mexico, was governed by Chinese law (the Sale Contract). Under the Sale Contract, payment was to be made by RBRG to Sinocore by means of an irrevocable letter of credit issued by Rabobank in the Netherlands.
In May 2010, the parties amended the Sale Contract to include an 'inspection clause', providing for RBRG to arrange an inspection of quality and quantity of goods prior to or during loading. The following month, Rabobank purported to amend the letter of credit so as to change the required shipping period, acting on instructions from RBRG given in breach of the Sale Contract.
In July 2010, when requesting certain payments under the letters of credit, Sinocore presented forged bills of lading. Subsequently, the Dutch courts granted a temporary injunction preventing Rabobank from making payments against the false bills under the letter of credit. Sinocore then purported to terminate the Sale Contract due to RBRG's alleged repudiatory breach (due to its ordering the amendment of the letter of credit). RBRG accepted the termination without prejudice to its right to claim damages for breach of contract, and Sinocore sold the goods to a third party at a reduced price
In April 2012, RBRG brought arbitration proceedings on the basis of Sinocore's alleged breach of the inspection clause in the Sale Contract. Sinocore counterclaimed on the basis that RBRG had breached the Sale Contract by instructing Rabobank to issue an amendment to the letter of credit.
In the arbitration, the tribunal concluded that it did not have jurisdiction to determine whether the bills of lading were forged. It did, however, refer to findings made in separate proceedings before the Dutch and Chinese courts that the bills were, in fact, forged. Ultimately, it dismissed RBRG's claims and found in favour of Sinocore with respect to its counterclaim, concluding that the fundamental cause of the termination of the Sale Contract and Sinocore's failure to obtain payment was the non-conforming letter of credit, rather than the subsequent forgery of the bills of lading presented by Sinocore.
The English proceedings at first instance
Sinocore applied to enforce the award in England and Wales. In March 2016, Burton J granted an enforcement order in favour of Sinocore pursuant to s. 101(2) of the Act. RBRG then applied to have the enforcement order set aside on public policy grounds under s. 103(3), on the basis that Sinocore's claim in the arbitration had been based on forged bills of lading.
At first instance, RBRG contended that the award should be set aside (1) on the 'narrow ground' that Sinocore could have presented genuine bills of lading to request payment since the attempted amendment to the letter of credit was ineffective, and the claim in the underlying arbitration was thus based on its own fraud, and (2) on the 'broad ground' that the English courts will not assist a seller who presented forged documents under a letter of credit.
Philips J dismissed RBRG's application and upheld the enforcement of the award, finding that the claim did not, on its face, uphold a claim for payment against the presentation of forged bills. Rather, the claim was for breach of the Sale Contract by RBRG, with such breach having occurred prior to the forgery or presentation of the bills. The narrow ground thus mischaracterised the award and sought to go behind its findings as to the causation of loss. As to the broad ground, the proposition that a bank should not pay out under a letter of credit against fraudulent documents did not support the wider argument, relied on by RBRG, that a party who presented fraudulent documents could not obtain relief from the courts in respect of a transaction more generally.
The English appellate proceedings
On appeal, RBRG argued that:
- The judge had applied the wrong test for assessing the consequences of Sinocore's illegality, since it applied the test set out in Tinsley v Milligan  (i.e. whether Sinocore had relied on its own fraud in its pleaded case) rather than the more flexible approach laid down by the Supreme Court in Patel v Mirza;
- Applying the Patel test would have led the judge to refuse to enforce the award;
- The judge was wrong to find that Sinocore's claim was not based on its own illegality, its lost having been caused by its deliberate decision to present forged documents to the bank under the letter of credit, and that there exists a very strong international public policy in favour of refusing to lend assistance in such circumstances; and
- The judge was wrong to enforce the award in light of his (correct) finding that Sinocore was conducting 'plainly fraudulent' parallel proceedings in China, notwithstanding that Sinocore had offered an undertaking during the first instance hearing that it would not pursue double recovery.
In considering the effect of s.103(3), the Court of Appeal began by reaffirming that where an arbitral tribunal has jurisdiction to determine the relevant issue of illegality, the English courts should not allow the facts to be re-opened save in exceptional circumstances (citing the majority decision in Westacre v Jugoimport ). It further noted that where 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.
Thus, the Court of Appeal concluded that Patel did not provide the relevant test under s. 103(3), although it might be relevant to the question whether on the facts there had been any illegality as a matter of English law. In other words, Patel may be relevant in the context of a defence to a substantive claim. Since the Patel test was not engaged, RBRG's grounds of appeal on this basis fell away.
The Court of Appeal then went on to find that the degree of connection between Sinocore's fraud and its claim for enforcement of the award in any event did not engage international public policy and were insufficient to refuse enforcement. Specifically, this was because:
- The tribunal had considered the issue of causation and found that as a matter of Chinese law, the cause of termination of the Sale Contract was the non-conforming letter of credit tendered by RBRG, rather than Sinocore's presentation of forged bills; to pursue the causation arguments RBRG sought to raise would go behind the findings made by the tribunal;
- Even if it were permissible for the court to review the tribunal's findings, RBRG had argued in the arbitration that Sinocore had agreed to the amendments to the letter of credit. RBRG could not now contend that the tribunal should have found that the effective cause of the claim and loss was Sinocore's failure to present documents under the original letter of credit;
- The Sale Contract and its performance did not of themselves involve any illegality under either English or Chinese law;
- In any event, this was at most a case of attempted fraud, since Sinocore was never paid under the forged bills of lading and obtained no benefit from its attempted wrongful act. If RBRG had indicated a preparedness to adhere to the terms of the original letter of credit, conforming bills of lading could and would have been issued; and
- Alternatively, even if public policy were engaged, such considerations were 'clearly outweighed by the interests of finality'.
The Court of Appeal went on to state that the same conclusion would follow even if the Patel test were applied, since Sinocore's conduct was 'essentially collateral' to the Sale Contract and its performance.
The judgment reaffirms the English courts' pro-enforcement stance and emphasises the public interest in upholding the finality of arbitral awards. In doing so, it also confirms the narrow scope of the public policy defence to enforcement under the New York Convention.
In delivering the unanimous judgment, Hamblen LJ made clear that that Court of Appeal was not allowing its process “to be used by a dishonest person to carry out a fraud”. Rather, "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". In any event, the case had been argued fully before the CIETAC tribunal and the Court of Appeal accorded proper deference to the tribunal's Chinese law analysis.