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England and Wales Court of Appeal (Civil Division) Decisions
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Cite as:  2 Lloyd's Rep 133,  EWCA Civ 838
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ON APPEAL FROM QUEEN'S BENCH DIVISION
MR JUSTICE PHILLIPS
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE HAMBLEN
LORD JUSTICE IRWIN
| RBRG TRADING (UK) LIMITED
|- and -
|SINOCORE INTERNATIONAL CO. LTD.
Nicholas Vineall QC and Neil Henderson (instructed by Holman Fenwick Willan LLP) for the Respondent
Hearing date : 27 March 2018
Crown Copyright ©
LORD JUSTICE HAMBLEN :
The Factual and Procedural Background
(1) RBRG had not requested to inspect the Goods before or during shipment. Sinocore had given sufficient notification of shipment. Sinocore was, therefore, not in breach of the inspection clause. Further, any breach would not have been causative of RBRG's loss, as the termination was caused by a failure of the parties to agree whether the attempted amendment to the letter of credit was consistent with the Sale Contract, rather than issues with the quality of the Goods, or their inspection.
(2) RBRG had breached the Sale Contract by instructing Rabobank to issue an amendment to the letter of credit which was not compliant with the terms of the Sale Contract and which, contrary to RBRG's case at the arbitration, had not been agreed to by Sinocore.
(3) Although the Tribunal held that it did not have jurisdiction to determine whether the bills of lading were forged, it referred to the fact that the Dutch court and the Chinese court had both ruled on the issue and "totally accept the judgments rendered by the courts".
(4) The Tribunal then went on to consider the consequence of that determination on Sinocore's position in the arbitration:"…the arbitral tribunal believes that it is an important task of this arbitration to decide if it constituted falsification under the sales contract to forge such bills of lading by the seller and if the seller had to assume any liability thereof based on the above fact found."
(5) RBRG alleged in the arbitration that there had been a fraud against it which had serious consequences, namely that it could not have taken delivery of the Goods with the forged bills of lading even if it had paid and that the bills of lading could not have been forwarded to its sub-buyer with the result that RBRG would have been in breach of the sub-sale contract. The Tribunal held that Sinocore had not deceived RBRG about the shipment date of the Goods because RBRG had been made aware of it by the shipping notice sent by Sinocore on 6 July 2010:"The bills of lading under the letter of credit which were submitted by the seller to the issuing bank were forged … That the seller submitted, to the issuing bank, forged bills of lading under the letter of credit in order to get the payment was equivalent to concealing the fact and deceiving the issuing bank, which was also the sole reason why the letter of credit was enjoined from payment by the Dutch court. Such deception or fraud was a fact between the beneficiary and the bank in the legal relationship of the letter of credit, but deceiving the bank did not mean deceiving the buyer. The facts and evidence in this case have to be taken into consideration to decide if the seller deceived the buyer or not. According to the evidence in this case, the seller had informed the buyer of the dates of issue of the true bills of lading as early as July 6, 2010 (see paragraph 13). From evidence C in paragraph 62 above, we can see that with knowledge of the actual shipment period of the goods the buyer took the initiative to ask STX PAN OCEAN only to get evidence from the carrier to apply for the injunction at the Dutch court. Many pieces of evidence above could prove that the buyer knew the movement of the goods very well. It all indicates that the buyer fully understood the actual shipment period of the goods, so the claim that the seller deceived the buyer is unfounded" (Award paras. 65-66).
(6) The Tribunal agreed with RBRG that Sinocore "could have done it better" and in particular could have insisted that RBRG's unilateral amendment had no effect under UCP 600 and presented documents conforming with the original, unamended letter of credit:"The arbitral tribunal totally agrees that the seller could have done it better. For example, the seller may insist that such amendment did not have any effect on it according to the provision of Article 10.a UCP 600, and act and present the documents according to the terms of the letter of credit first issued by the buyer, instead of making such an unwise decision" (Award para. 68).
(7) The Tribunal concluded 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 tendered by RBRG following amendments to which Sinocore did not agree. This is borne out by a number of passages in the Award, in particular:(i) Paragraph 32 - "…according to the description of the factual background of this case, the arbitral tribunal holds that the direct reason leading to the termination of Contract No. 415 in this case had nothing to do with the quality of the goods because both parties failed to reach an agreement on whether if the amended letter of credit was consistent with Contract No. 415 in terms of shipment period, which then made the seller unable to settle exchange or get the payment, and caused the seller to cancel the contract."(ii) Paragraph 56: "(3) According to the provision of Article 10.e of UCP600, "Partial acceptance of an amendment is not allowed and will be deemed to be notification of rejection of the amendment." The seller held that it did not fully, but partially accept the second amendment of the letter of credit by the buyer, so it should be deemed to be notification of rejection of the amendment.The arbitral tribunal decides:56) The arbitral tribunal reiterates now that this dispute is the key dispute in this case, and has the most direct causal relationship with the consequence that the seller did not get the payment, the Contract was terminated, and losses were caused."(iii) Paragraph 68 - "…the buyer issued a letter of credit that did not meet the contracted requirement and put the seller into trouble. Such breach where the buyer failed to provide a letter of credit complying with the sales contract is still the primary or fundamental cause why the seller could not get the payment and why the sales contract was terminated".
(8) The Tribunal disallowed Sinocore's claim for interest because of its "improper operation" in presenting false bills of lading:"As a company that has been engaged in international trade for years, the seller shall be familiar with related practices of the letter of credit and know the risk of submitting the bills of lading whose dates are amended to the bank for negotiation. The seller shall take the risk produced by its improper operation. Therefore, the seller's claim for the loss of interest is not supported."
Grounds for Appeal
(1) The judge applied the wrong test for assessing the consequences of Sinocore's illegality. He applied the overly narrow (and now discarded) test, set out in Tinsley v Milligan  1 AC 340, of whether Sinocore's pleaded claim relied on its own fraud. He should have applied the more flexible approach laid down by the Supreme Court in Patel v Mirza  UKSC 42,  3 WLR 399.
(2) If the judge had applied the correct illegality test, he would have approached the balancing exercise that he purported to carry out at paragraphs  and  of the judgment differently, by applying the factors laid down in Patel v Mirza. That would have led him to refuse to enforce the Award.
(3) The judge was in any event wrong to find that Sinocore's claim was not "based on" its own illegality. Sinocore's loss was caused by its own deliberate (and admitted) decision to present forged documents to the bank under the letter of credit which was the agreed payment mechanism under the Sale Contract.
(4) The judge was wrong to enforce the Award in the light of his (correct) finding that Sinocore was conducting "plainly fraudulent" parallel proceedings in China, in respect of the very same loss claimed in these proceedings. He should, at the very least, have required Sinocore to discontinue those fraudulent proceedings as the price for the court agreeing to enforce its Award in this jurisdiction.
The law relating to section 103
"103 Refusal of recognition or enforcement
Recognition or enforcement of a New York Convention award shall not be refused except in the following cases
Recognition or enforcement of the award may also be refused if the award is in respect of a matter which is not capable of settlement by arbitration, or if it would be contrary to public policy to recognise or enforce the award."
"English law recognises an important public policy in the enforcement of arbitral awards, and the courts will only refuse to do so under Rule 69(2) in a clear case. A controversial question, which has been the subject of several recent decisions, is the extent to which it may be contrary to English public policy to enforce a foreign arbitral award rendered on the basis of an underlying contract the enforcement of which (as distinct from enforcement of the arbitral award) might be contrary to English public policy. The following principles can be derived from the authorities. First, it is legitimate for the court, in considering whether a foreign arbitral award should not be enforced on the ground of public policy, to take account of the underlying contract on which the award is based. Second, if that contract is in itself contrary to public policy (e.g. the classic case of a contract to share the proceeds of crime) the award may be refused enforcement on the ground of public policy. Third, it is important to distinguish between domestic public policy in English law; and considerations of international public policy applied by the English courts so as to disapply foreign law or refuse to enforce an arbitral award, as the case may be. Thus the mere fact that English law would have arrived at a different result does not of itself justify the application of English public policy. Fourth, the mere fact that the performance of the contract may be illegal in the place of performance, without more, will not render an award on the basis of such a contract unenforceable in England, where the contract is legal by its applicable law and by the lex arbitri. Fifth, if it is apparent on the face of the award that the contract was made with the intention of violating the law of a foreign friendly State, then the enforcement of an award rendered on the basis of such a contract may be contrary to English public policy. Sixth, the court has to perform a balancing exercise between the finality that should prima facie exist particularly for those that agree to have their disputes arbitrated, against the policy of ensuring that the enforcement power of the English court is not abused: the nature of, and strength of the case for, the illegality, and the extent to which it can be seen that the asserted illegality was addressed by the arbitral tribunal are factors in the balancing exercise between the competing public policies of finality and illegality."
(1) As is emphasised in Dicey, Morris & Collins, it is widely accepted that the public policy ground should be given a restrictive interpretation. This is recognised in the English law authorities – for example, Sir John Donaldson MR in Deutsche Schachtbau v National Oil  3 WLR 1023 at p1035D – "Considerations of public policy can never be exhaustively defined, but they should be approached with extreme caution"; Gross J in IPOC (Nigeria) v Nigerian National Petroleum  2 Lloyd's Rep 326 at  – "…there can be no realistic doubt that section 103 of the Act embodies a pre-disposition to favour enforcement of New York Convention Awards, reflecting the underlying purpose of the New York Convention itself; indeed, even when a ground for refusing enforcement is established, the court retains a discretion to enforce the award: Mustill & Boyd, Commercial Arbitration, 2nd edn, 2001 Companion, at page 87".
(2) Where the arbitration tribunal has jurisdiction to determine the relevant issue of illegality and has determined that there was no illegality on the facts the English court should not allow the facts to be re-opened, save possibly in exceptional circumstances. In this connection, I consider that the views expressed on this issue by the majority of the court in Westacre are to be preferred to those put forward by Waller LJ in the same case and in Soleimany. As Mantell LJ stated at p316G-H:"It is of crucial importance to evaluate both the majority decision in the arbitration and the ruling of the Swiss Federal Tribunal, Swiss Law being both the proper law of the contract and the curial law of the arbitration and Switzerland, like the United Kingdom, being a party to the New York Convention. From the award itself it is clear that bribery was a central issue. The allegation was made, entertained and rejected. Had it not been rejected the claim would have failed, Swiss and English public policy being indistinguishable in this respect. Authority apart, in those circumstances and without fresh evidence I would have thought that there could be no justification for refusing to enforce the award.However, in the obiter passage cited by Waller L.J. from the judgment in Soleimany v. Soleimany  QB 785 , 800, it seems to have been suggested that some kind of preliminary inquiry short of a full scale trial should be embarked upon whenever "there is prima facie evidence from one side that the award is based on an illegal contract . . . " For my part I have some difficulty with the concept and even greater concerns about its application in practice, but, for the moment and uncritically accepting the guidelines offered, it seems to me that any such preliminary inquiry in the circumstances of the present case must inevitably lead to the same conclusion, namely, that the attempt to reopen the facts should be rebuffed…."As Mustill & Boyd comment at p95 of the 2001 Companion:"…the opinion of the majority accords best with the principles of international arbitration and the great importance to international commerce of trusting the foreign arbitrators and the courts of the forum, even in cases where the judge called on to enforce the award has grounds for concern."
(3) Where, on the facts found, 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. This is in accordance with the rules at common law and under the Rome 1 Regulation (Article 21) in relation to the refusal of the application of the governing law on public policy grounds – see generally Dicey, Morris & Collins Rule 229 at 32R-181. In Lemenda Trading Co Ltd v African Middle East Petroleum Co Ltd  1 Lloyd's Rep 361 Phillips J referred to the heads of public policy which would be engaged as being those "based on universal principles of morality". In Westacre the court stated at p304F that what the Lemenda case decided was that; "there are some rules of public policy which if infringed will lead to non-enforcement by the English court whatever their proper law and wherever their place of performance but others are based on considerations which are purely domestic".
(4) In considering whether and, if so, to what extent public policy is engaged the degree of connection between the claim sought to be enforced and the relevant illegality will be important. The main example of the court refusing to enforce an award on the grounds of illegality is Soleimany in which, on the facts found by the arbitral tribunal, the contract was illegal as a matter of English law reflecting international public policy grounds (a contract to smuggle goods out of Iran). By contrast, whilst recognising that an award enforcing a contract to bribe would not be enforced, the courts have enforced awards where it has been alleged that the underlying contract has been procured by bribery – see Wilson v Hurstanger  1 WLR 2351 and the National Iranian Oil case. As Burton J stated in the National Iranian Oil case at :"(2) There is no English public policy requiring a court to refuse to enforce a contract procured by bribery. A court might decide to enforce the contract at the instance of one of the parties. It is not that the contract is unenforceable by reason of public policy, but that the public policy impact would not relate to the contract but to the conduct of one party or the other.(3) There is certainly no English public policy to refuse to enforce a contract which has been preceded, and is unaffected, by a failed attempt to bribe, on the basis that such contract, or one or more of the parties to it, have allegedly been tainted by the precedent conduct….."
(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. This is illustrated by the authorities referred to above and by the following comments of Waller LJ at  of his judgment in Westacre:
"…albeit the award is not isolated from the underlying contract, it is relevant that the English court is considering the enforcement of an award, and not the underlying contract...The English court takes cognisance of the fact that the underlying contract, on the facts as they appear from the award and its reasons, does not infringe one of those rules of public policy where the English court would not enforce it whatever its proper law or place of performance. It is entitled to take the view that such domestic public policy considerations as there may be, have been considered by the Arbitral Tribunal. It is legitimate to conclude that there is nothing which offends English public policy if an Arbitral Tribunal enforces a contract which does not offend the domestic public policy under either the proper law of the contract or its curial law, even if English domestic public policy might have taken a different view".
(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.
Application to the facts
"To this general statement of principle as to the contractual obligations of the confirming bank to [pay] the seller, there is one established exception: that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. Although there does not appear among the English authorities any case in which this exception has been applied it is well established in the American cases of which the leading or "landmark" case is Sztejn v J Henry Schroder Banking Corporation (1941) 31 NYS 2d 631. This judgment of the New York Court of Appeals was referred to with approval by the English Court of Appeal in [Edward Owen] … The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application of the maxim ex turpi causa non oritur actio or, if plain English is to be preferred, "fraud unravels all". The courts will not allow their process to be used by a dishonest person to carry out fraud." (emphasis added)
(1) Pursuant to the Sale Contract, the only payment mechanism for the Goods was by letter of credit. Sinocore attempted to obtain payment under that letter of credit by presenting fraudulent documents, but did not choose to terminate the Sale Contract until it became clear that Rabobank was not going to pay against the forged documents. It is submitted that this chronology of events demonstrates how Sinocore's fraud was central to its performance under the Sale Contract. If Sinocore's claim had really been for losses caused by RBRG's instruction to issue a non-conforming letter of credit, it would have terminated the contract at that time (i.e. on or just after 12 June 2010). Instead, it falsified the dates on the bills of lading and waited to see whether it would obtain payment against the forged documents and only terminated the Sale Contract on 20 August, once it became clear that the bank would not pay out against the forged documents.
(2) Since Sinocore never agreed to the amendment of the letter of credit the amendment was of no effect by reason of Article 10a of the UCP. The shipment date on the letter of credit therefore remained as "Latest date of Shipment 31 July 2010" and (consistently) the shipment date under the Sale Contract remained as "July 2010". Had Sinocore presented the genuine bills of lading, it would therefore have suffered no loss whatsoever because it would have been entitled to obtain payment of the full sale price from Rabobank under the letter of credit.
(3) Instead, what Sinocore chose to do was to present forged documents under the letter of credit and then to terminate the Sale Contract after it failed to obtain payment against those documents. It had no entitlement to payment under the letter of credit because it chose to present forged documents thereunder.
(4) It follows that Sinocore's true claim is for Rabobank's failure to pay against the forged bills of lading and it was the presentation of those forged bills that was the effective cause of its loss.
The fourth ground of appeal
LORD JUSTICE IRWIN:
LORD JUSTICE LEWISON: