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Court of Appeal approves enforcement of Chinese arbitration award despite allegations of fraud

News / / Beijing, Hong Kong, Shanghai

RBRG Trading (UK) Limited v. Sinocore International Co Ltd [2018] EWCA Civ 838 

The Court of Appeal has dismissed an appeal against the Commercial Court’s decision to permit enforcement of a Chinese arbitration award, notwithstanding allegations that the underlying claim was tainted by fraud.

The background facts

The dispute arose under a contract for the sale of rolled steel coils by Sinocore to RBRG, to be shipped by July 2010 at the latest (“the Contract”). The Contract provided for payment to be made by an irrevocable letter of credit, which was to be opened by RBRG in strict accordance with the terms of the Contract.

RBRG arranged for a conforming letter of credit to be issued by Rabobank, but subsequently instructed Rabobank to amend the shipment date in the letter of credit to “20th to 30th July 2010”. Significantly, RBRG did not obtain Sinocore’s agreement to that amendment.

The goods were loaded onto the carrying vessel on 5-6 July 2010 and bills of lading dated 5 and 6 July 2010 were issued. Those bills did not comply with the amended shipment date of “20th to 30th July 2010”. However, forged bills dated 20-21 July 2010 were issued and Sinocore presented these to Rabobank seeking payment under the letter of credit.

RBRG obtained an injunction from the courts in the Netherlands, preventing Rabobank from paying Sinocore under the letter of credit on the basis of the forged bills of lading.  Having failed to obtain payment under the letter of credit, Sinocore terminated the Contract and sold the goods to a third party at a lower price than they would have been paid by RBRG.

The Chinese arbitration proceedings

RBRG commenced CIETAC (China International Economic and Trade Arbitration Commission) arbitration proceedings, claiming damages for breach of an inspection clause in the Contract. Sinocore made a counterclaim based on RBRG’s breach of the Contract in amending the letter of credit without Sinocore’s agreement. Sinocore claimed damages representing the difference between the Contract price and the price it received on the re-sale of the cargo.

The CIETAC tribunal rejected RBRG’s claim and found in Sinocore’s favour on the counterclaim, deciding that RBRG had breached the Contract by unilaterally amending the letter of credit. The tribunal considered the effect of the forged bills of lading and held that Sinocore had not deceived RBRG regarding the shipment date, since RBRG were fully aware of the correct date.

The fundamental cause of the termination of the Contract and Sinocore’s failure to obtain payment under the letter of credit was RBRG’s breach in unilaterally amending the letter of credit.  The tribunal, therefore, ordered RBRG to pay Sinocore damages of around US$4.8 million.

The enforcement proceedings in London – High Court

Sinocore obtained a without notice order granting leave to enforce the arbitration award as a judgment in England under section 101(2) of the Arbitration Act 1996.

RBRG applied to set aside that order on the basis of section 103 of the Arbitration Act 1996, which states that recognition or enforcement may be refused if this would be contrary to public policy.  It was argued that the English Court should not assist Sinocore in circumstances where they had presented forged bills of lading in an attempt to obtain payment under a letter of credit.

The Court rejected RBRG’s application, holding that RBRG’s claim had to be considered in light of the fact that there was no suggestion that the Contract itself was fraudulent or otherwise contrary to public policy. Further, the arbitration award did not uphold a claim for payment against the presentation of forged bills. The claim was for RBRG’s breach of the Contract in unilaterally amending the letter of credit. It was this breach that caused Sinocore’s loss and this breach pre-dated the forgery or the presentation of the forged bills.

The Court further held that the principle 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 is precluded from obtaining relief in respect of the underlying contract generally, even if the claim is based on a prior breach of the contract.

The Court of Appeal decision

RBRG appealed to the Court of Appeal, where they were again unsuccessful.

A central plank of RBRG’s appeal was that Sinocore had committed a fraud in presenting forged bills of lading, and that the fraud was sufficiently closely connected with the arbitration award that the English court should not enforce it.

The Court of Appeal held that this argument failed for a number of reasons.  In particular, the Court concluded that:

1.  The arbitral tribunal had expressly considered the issue of causation and concluded that the cause of Sinocore’s termination of the Contract and their resulting losses was RBRG’s breach of the Contract in unilaterally amending the letter of credit. The tribunal had concluded that the forged bills had no causal significance and it was not permissible for the Court to go behind the tribunal’s findings in this regard;

2.  There was no suggestion that the Contract or performance of the Contract involved any illegality;

3.  At most, this was a case of attempted (rather than actual) fraud, since neither RBRG nor Rabobank were actually deceived. Rabobank did not pay against the forged bills of lading and Sinocore did not obtain any benefit from their wrongful act. The attempted fraud was essentially a collateral issue; and

4.  Public policy was not engaged in these circumstances. Even if public policy was engaged, any public policy considerations were clearly outweighed by the interests of finality.

Comment

This decision confirms the pro-enforcement attitude of the English courts towards international arbitral awards and provides encouragement to traders seeking to enforce awards against recalcitrant debtors in England. While the public policy exception exists to prevent enforcement in appropriate cases, the Court of Appeal has confirmed that this will be given a restrictive interpretation. It is likely to be rare that public policy will present a bar to enforcement.  

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