English Court of Appeal considers “public policy” exception to enforcement of an Award

In RBRG Trading (UK) Limited v Sinocore International Co Ltd [2018] EWCA Civ 838 an Award debtor (“RBRG”) argued that enforcement of an international arbitration award (an “Award”) under the New York Convention would be contrary to English “public policy”.

Finality is one of the key advantages of arbitration. However, if enforcing an Award would offend English public policy then enforcement may be refused by the English Courts. For example, Awards obtained by perjury or fraud can be susceptible to challenge. If an Award is otherwise tainted by illegality (for example, if the underlying contract is illegal), its enforcement may also offend English public policy. The determination of illegality and its effect on enforcement is a matter on which judicial guidance is always welcome.

Factual summary

RBRG was ordered to pay substantial damages to Sinocore pursuant to an Award, which was issued by the China International Economic and Trade Arbitration Commission (“CIETAC”).

Pursuant to the contract at issue, Sinocore agreed to sell rolled steel coils to RBRG. Payment was to be made by an irrevocable letter of credit (the “LOC”) opened by RBRG. The contract was governed by Chinese law and provided for CIETAC arbitration, seated in China.

The LOC was opened shortly after the contract was entered into. RBRG then, however, instructed its bank to purport to amend the letter of credit. Once the steel was shipped, Sinocore provided shipping confirmation to RBRG which stated the genuine date of the bills of lading. Shortly after shipment, Sinocore’s bank sought payment under the LOC but presented forged bills of lading in support of its payment request. The forgery purported to show that the date of the shipment date complied with the contract (as amended a fortnight after it was entered into). RBRG’s bank did not honour the LOC, leading to the arbitration (among other proceedings). In that arbitration, amongst other things, Sinocore issued a counterclaim for damages alleging that RBRG’s initial instruction to its bank to amend the LOC was a breach of the underlying contract. The tribunal agreed and found that the fundamental cause of the termination of that contract, and Sinocore's failure to obtain payment, was that initial non-conforming letter of credit.  This resulted in an Award in favour of Sinocore. Sinocore sought enforcement of the Award in England.

The English High Court ordered enforcement. RBRG applied to set aside that order pursuant to Section 103(3) of the Arbitration Act 1996, on the ground that enforcement would be contrary to public policy as Sinocore’s claim for breach of contract was based on forged bills of lading. That application was dismissed.

The Appeal

RBRG appealed the dismissal of its application to the Court of Appeal. RBRG argued that the High Court:

• applied the wrong test of illegality and that the correct test to be applied was the more flexible approach set out in Patel v Mirza [2016] UKSC 42. A different outcome would have been reached if that test had been applied; and
• should have found that Sinocore’s claim was “based on” its own illegality and that enforcement was therefore sufficiently connected to the illegality to engage the “public policy” exception.

The Court of Appeal reiterated the following principles to be considered when a “public policy” challenge arises:

1. The “public policy” basis for resisting enforcement should be interpreted restrictively and that “there is always a strong public policy in support of enforcement” (par 26(4)). Even if a ground for refusing enforcement is established (for example, because enforcement may offend public policy), the Court retains discretion to nevertheless allow enforcement.
2. Save in exceptional circumstances, if the tribunal has determined that there was no illegality, the English Court should not allow the facts to be re-opened. A “preliminary inquiry” is discouraged.
3. Even where there is illegality under English law, “public policy” will only be engaged where illegality reflects considerations of international (rather than purely domestic) public policy. It is necessary to look at “universal principles of morality” rather than “considerations which are purely domestic” (par 25(3)).
4. A strong degree of connection between the claim sought to be enforced and the illegality in question is required. For example, whereas an award enforcing a contract to bribe would not be enforced, a contract procured by bribery may be enforced.

Satisfying the English law test of illegality is insufficient

Having summarised the relevant principles, the Court of Appeal found that the English law test of illegality (set out in Patel v Mirza) does not affect the principles to be applied when considering recognition and enforcement of an Award.

The considerations of “public policy” to be taken into account may overlap with the principles relevant to determining illegality under English law, but the English law illegality test is not the test to be applied to the “public policy” determination. Among other reasons for this conclusion, the Court of Appeal held that “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” (par 26(3)). Consequently, the Court of Appeal rejected RBRG’s argument that the High Court applied the wrong legal test.

Nexus between the illegality and the Award

The Court of Appeal found that the degree of connection between Sinocore’s fraud and enforcement of the Award was not sufficient to engage public policy. Even if it had been, it would not be sufficient to justify refusal of enforcement of the Award.

The reasons for this finding included:

1. The Tribunal found that the cause of the termination of the underlying contract and Sinocore’s losses was not the forged bills of lading but was RBRG’s tender of a non-conforming LOC . It would not be appropriate to go behind the Tribunal’s findings and revisit the issue of causation.
2. The performance of the contract did not involve any illegality (and neither has this been suggested).
3. This was, at most, a case of “attempted fraud”. RBRG was not deceived. Sinocore obtained no benefit as a result of that attempt, as payment had not been made by RBRG’s bank. Sinocore’s claim therefore succeeded “despite its wrongful act” and not “because of its wrongful act” (par 36).

Attempted fraud distinguished from committed fraud

Interestingly, the Court of Appeal held that “there is no public policy to refuse to enforce an award based on a contract during the course of performance of which there has been a failed attempt at fraud” (par 37). In this case the “failed attempt” was fairly clearly delineated and it will be interesting to see the application of this principle in cases where the distinction between an attempted fraud and committed fraud may not be entirely clear cut.