Enforcement of Arbitral Awards – Does Fraud Unravel All?

Statutory Underpin

Section 86(2)(b) of the Arbitration Ordinance (Cap. 609) provides that our courts may refuse the enforcement of an arbitral award if “it would be contrary to public policy to enforce the award”.

Local Case Law

The predecessor of this section (ie s. 44(3) of the old Arbitration Ordinance (Cap. 314) came before the Court of Final Appeal in the landmark decision of Hebei Import & Export Corp v. Polytek Engineering Co. Ltd [1999] 2 HKCFAR 111 where Litton PJ (at p. 118D-E) gave this oft-quoted interpretation on the scope of this particular statutory limb for refusing to enforce an arbitral award in the HKSAR:

“The expression public policy as it appears in s. 44(3) of the Ordinance is a multi-faceted concept. Woven into this concept is the principle that courts should recognise the validity of decisions of foreign arbitral tribunals as a matter of comity, and give effect to them, unless to do so would violate the most basic notions of morality and justice...”.

Notably, Bokhary PJ concurred and added this graphic observation (albeit less quoted in subsequent case law) at pp. 122F-123F:

“In my view, there must be compelling reasons before enforcement of a Convention award can be refused on public policy grounds. This is not to say that the reasons must be so extreme that the award falls to be cursed by bell, book and candle. But the reasons must go beyond the minimum which would justify setting aside a domestic judgment or award … None of this is to say that the proper approach is insular. It is eclectic...”.

Forged Documents

If A (as the seller) and B (as the purchaser) entered into a contract for the international sale of goods and A (in purported performance of the contract) tendered forged bills of lading with a view to seeking payments under a letter of credit opened by B, whether the fraud committed by A in so doing would render the arbitral award subsequently obtained by B against A (in the Mainland China) for repudiatory breach of the contract unenforceable in the enforcement court (the English High Court)?

English Position

This thorny question surfaced in the English decision of Sinocore International Co. Ltd. v. RBRG Trading UK Ltd [2017] 1 CLC 601.

Sinocore (a company in the Mainland China) agreed to produce and sell and RBRG (a UK company) agreed to buy prime newly produced cold rolled steel coils. The payment method was agreed to be by an irrevocable letter of credit that allowed for shipment by July 2010. The contract contained an arbitration clause whereby the parties agreed to submit any dispute to the China International Economic and Trade Arbitration Commission (CIETAC) in Beijing, the Mainland China, in accordance with Chinese law. RBRG procured a conforming letter of credit from a Dutch bank stipulating the latest shipment date to be 31st July 2010 and made subject to UCP600 but later on unilaterally (and without first obtaining Sinocore’s consent) instructed its bank to amend the letter of credit by varying the shipment period.

The collecting bank of Sinocore requested payment from the Dutch bank on the strength of bills of lading bearing the shipment dates of 20th and 21st July 2010 respectively. Given that the actual shipment dates were much earlier, Sinocore conceded that those bills of lading were forgeries with concocted shipment dates.

Aggrieved by RBRG’s refusal to pay, Sinocore terminated the contract.

Later, Sinocore sold the goods to another buyer at a discounted price. RBRG then invoked the arbitration clause and commenced CIETAC arbitration proceedings against Sinocore in Beijing.

The award was handed down in Beijing in Chinese under which Sinocore succeeded in its counterclaim with a damage award of US$4.87 million and with RBRG’s claims all dismissed. Dissatisfied, RBRG appealed to the Beijing Second Intermediate People’s Court on 24th December 2014 to set aside the award yet it failed.

Armed with the award, Sinocore applied for leave to enforce it in England and Burton J made an order in terms. RBRG sought to set aside the enforcement order on the ground that the enforcement of the award fell foul of s. 103(3) of the Arbitration Act 1996 as it would be “contrary to public policy to recognise or enforce the award”.

The application to set aside the enforcement of the award was heard before Philips J who dismissed it. In gist, Philips J held that:

  • There is a strong presumption that the award (being a New York Convention award) should be recognised and enforced and the public policy defence must be treated with extreme caution;
  • Undoubtedly, the court would refuse an award which upheld a fraudulent claim to payment based on the presentation of documents which were admitted or found by the tribunal to be forgeries;
  • However, the situation would be more complicated when the issue of illegality and its effect had already been considered by the tribunal;
  • The court will not refuse to enforce a lawful claim under a lawful transaction (even if voidable) on the basis that the transaction was somehow tainted with the alleged illegality;
  • In the present case, the tribunal decided that the breach of RBRG in unilaterally changing and amending the letter of credit was without Sinocore’s consent and therefore wrongful;
  • The tribunal had also expressly considered and decided that the fraudulent act of Sinocore in presenting the forged bills of lading under the un-amended letter of credit (whilst it was culpable and wrong) was not sufficient to displace it from recovering substantial damages against RBRG in wrongfully amending the letter of credit;
  • The maxim of “fraud unravels all” was only effective to entitle the Dutch bank to refuse to make payments on ground that the documents so tendered were forged:

“46. … What the authorities do not support is the wider proposition 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”;

  • In any event:

“47. … I would nevertheless conclude that public interest in the finality of arbitration awards, particularly an international award such as in the present case determined as a matter of a foreign law, clearly and distinctly outweighs any broad objection on the grounds that the transaction was “tainted” by fraud”.

Further Appeal

RBRG took the case to the English Court of Appeal without success culminated into the decision of RBRG Trading (UK) Ltd. v. Sinocore International Co. Ltd [2018] 2 Lloyds Rep 133.

On appeal, RBRG relied on the principal ground of illegality that the judge had erred in its approach on determining the illegality involved when Sinocore presented concocted and forged bills of lading and should have adopted the much more flexible and 3-stage approach adumbrated by the late Lord Toulson in Patel v. Mirza [2017] AC 467:

“120. … In assessing whether the public interest would be harmed in that way, it is necessary (a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, (b) to consider any other relevant public policy on which the denial of the claim may have an impact and (c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts. Within that framework, various factors may be relevant, but it would be a mistake to suggest that the court is free to decide a case in an undisciplined way. The public interest is best served by a principled and transparent assessment of the considerations identified, rather by than the application of a formal approach capable of producing results which may appear arbitrary, unjust or disproportionate”.

In dismissing the appeal unanimously, Lord Justice Hamblen (with Lewison and Irwin LJJ concurring) held that:

  • The starting point is that the public policy ground for not enforcing a New York Convention award must be restrictively interpreted;
  • Where the arbitration tribunal had considered and determined the issue of illegality, the enforcement court should not allow the facts to be reopened, save in the most exceptional circumstances;
  • Where there was no illegality under the governing law (as decided by the arbitral tribunal) but there is an allegation of illegality under English law (being the applicable law in the enforcement court), 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, what extent public policy is engaged the degree of connection between the claim sought to be enforced (as per the award) and the relevant illegality (under English law) will be a very important consideration;
  • The judgment of Patel v. Mirza has no application in the context of an application to set aside the enforcement of an award on the public policy ground because:

“26. … (1) Prior to Patel v Mirza it is clear that a distinct approach applied in the context of a challenge to enforcement of arbitration award under s.103(3), compared to the enforcement of a substantive claim.

(2) In Patel v Mirza the Supreme Court did not consider any of the authorities on illegality and public policy in the context of section 103(3). These authorities were not cited in argument, nor were they referred to in the judgment. There is nothing in the judgment to suggest that the Supreme Court contemplated that the approach it set out might also be applicable in the context of section 103(3).

(3) There are sound justifications for taking a different approach to substantive claims and enforcement claims, reflecting the different role performed by the court in each circumstance…

(4) It may be that Patel v Mirza has moved the jurisprudence on illegality as a defence to a substantive claim rather closer to the multifactorial approach that has always applied in the context of illegality as a public policy defence to enforcement, but the context and the relevant factors remain different. In particular, as the authorities make clear, there is always a strong public policy in support of enforcement” …”;

  • The defence of illegality must fail because:

(1) The arbitral tribunal found expressly that it was RBRG’s failure to open and maintain a conforming letter of credit which (in turn) caused the termination of the contract and the resulting losses;

(2) It was an express finding of fact made by the arbitral tribunal that Sinocore did not consent to the amendment of the letter of credit;

(3) The performance of the contract did not involve illegality under either Chinese law or English law;

(4) Properly analysed and as determined by the arbitral tribunal, Sinocore succeeded despite its wrongful act in procuring and tendering the forged bills of lading;

(5) At most, there was an attempt at fraud as the Dutch bank detected the fraud and did not make any payment against the forged bills of lading;

(6) Sinocore’s fraud in relation to the forged bills of lading was only collateral and not central to its claim for loss and damages resulting from RBRG’s repudiatory failure to open a valid letter of credit under the contract.

The Sinocore International’s Case provides very useful and timely guidance to local practitioners on the ambit of the “public policy” limb on the recognition and enforcement of an arbitral award when the underlying disputes involved allegations of fraud and misconduct on the part of one of the contractual parties. Given the continuing increase in the number of applications for the recognition and enforcement of arbitral awards obtained in the Mainland China in the HKSAR, it is anticipated that this case will sooner or later be deployed in the Court of First Instance of Hong Kong.

In the context of the public policy defence when considering whether an arbitral award could be enforced, fraud may not unravel all.

Jurisdictions: 

Barrister-at-law, Parkside Chambers

Frederick is a member of the Parkside Chambers and a specialist in commercial litigation with expertise on company law and cross-border disputes involving the Mainland China.