01 Mar 2017

Does fraud always “unravel all”?

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The English High Court considers the enforceability of a Chinese arbitration award relating to a sale transaction that was tainted by fraud.

In Sinocore International Co Ltd v RBRG Trading (UK) Ltd [2017] EWHC 251 (Comm), the English High Court was asked to consider whether it was “contrary to public policy” to uphold a CIETAC arbitration award which related to a fraudulent transaction and forged bills of lading. The Court found that on balance, the public interest in preserving the finality of arbitration awards outweighed any broad objection that the transaction had been “tainted” by fraud.

Background

It all started with a routine sale contract in which Sinocore International Co Ltd (“Sinocore”) agreed to sell steel coils to RBRG Trading (UK) Ltd (“RBRG”). Owing to a series of unfortunate events, it transpired that Sinocore presented forged bills of lading when requesting payment for the contract price under the letter of credit. Rabobank (RBRG’s issuing bank) refused to pay the funds, and this led the parties to commence various actions against one another.

One of the actions was a CIETAC arbitration between RBRG and Sinocore, each claiming against the other for breach of the sale contract. RBRG had initially provided a letter of credit that complied with the terms of the sale contract, but later instructed Rabobank to amend the shipment period in the letter of credit without Sinocore’s consent. Sinocore therefore claimed against RBRG for damages as a result of RBRG’s breach of the obligation to procure a letter of credit in strict conformity with the sale contract. The CIETAC Tribunal found for Sinocore and ordered RBRG to pay USD 4,857,500 in damages plus costs.

RBRG’s objections to enforcement of the CIETAC award on the grounds of public policy

Sinocore subsequently applied to the English Court to enforce the arbitration award. RBRG challenged the enforceability of the award on the basis that under English law, it would be “contrary to public policy” for the English Court to:

  1. Enforce an award that was based on the fraudulent presentation of forged bills of lading; or

  2. Assist a seller who had presented forged documents in an attempt to obtain payment under a letter of credit.

The Court’s ruling

The English Court dismissed RBRG’s challenge, finding that:

  1. The CIETAC Tribunal was aware that forged bills of lading were involved and had fully considered this point, yet still found that as a matter of Chinese law, RBRG had breached the sale contract by wrongfully instructing Rabobank to amend the shipment period under the letter of credit without Sinocore’s consent;

  2. Although it is well established under English law that a party who presents forged documents cannot force a bank to make payment under a letter of credit, there is no corresponding rule that such a party cannot obtain a judicial remedy in respect of the transaction more generally;

  3. The English law exception allowing the Court to refuse enforcement of an arbitration award for reasons of public policy was to be exercised with extreme caution; and

  4. In these circumstances, the public interest in preserving and upholding the finality of a foreign law arbitration award clearly and distinctly outweighed any broad objection that the transaction was “tainted” by fraud.

Commentary

The ruling in this case clearly demonstrates that although English judges generally take quite a dim view of fraud, they are nevertheless extremely reluctant to disregard or run roughshod over decisions by foreign arbitrators applying foreign law.

However, it is noteworthy that in this particular case, the Court was satisfied that the CIETAC Tribunal had given all due consideration to the fact that Sinocore had attempted to utilise forged bills of lading, and this had been taken into account in the Tribunal’s award. If the Tribunal had not adequately addressed this issue in its award, the Court may very well have ruled differently.

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