Arbitration awards and fraud revisited

The English Court of Appeal has rejected a further attempt by the buyers of goods to set aside enforcement of a CIETAC arbitration award on grounds of fraud.

For the full background to the case, see our blog post reporting on the first instance decision.  In RBRG Trading (UK) Ltd v Sinocore International Co Ltd [2018] EWCA Civ 838, the Court of Appeal recently rejected Buyers' challenge to that decision.

First instance decision

In summary, Buyers (RBRG) argued that Sellers (Sinocore) should not be allowed to enforce an award for damages for breach of the sale contract because Sellers had (unsuccessfully) attempted to obtain payment by presenting forged documents under a letter of credit.

The Commercial Court dismissed Buyers' challenge to enforcement of the award because:

• It was not appropriate or permissible to go behind the CIETAC tribunal's finding that the cause of Sellers' loss was Buyers' wrongful instruction to their bank to change the shipment date in the letter of credit; and

   

• The principle that "fraud unravels all" only applied to Sellers' claim against the bank, not to Sellers' separate claim against Buyers under the sale contract.

 Appeal

Buyers appealed on 2 main grounds:

• The Judge applied the wrong test in assessing the consequences of Sellers' fraud.  If he had applied the correct test, the Judge would have refused enforcement; and

   

• Even applying the test he did, the Judge should have refused enforcement on the ground that Sellers' claim was based on its own fraud.

 The correct test

Buyers argued that the Judge should have applied the test laid down by the Supreme Court in Patel v Mirza [2016] UKSC 42.  Buyers said this was a more flexible test than that applied by the Judge, and would have led him to refuse enforcement of the award.

The Court of Appeal reviewed the authorities and concluded that the Judge applied the correct test.  The test in Patel v Mirza only applies to consideration of illegality as a defence to a substantive claim.  It does not apply to illegality as a "public policy" defence to the enforcement of an arbitration award. 

As the Court noted, there are good reasons for taking a different approach to substantive claims and enforcement claims.  Not least, there is always a strong public policy in support of enforcement of awards.

Even if Patel v Mirza was the correct test, the Court of Appeal would still not have refused enforcement.

Application

Whichever test was applied, Buyers' main argument was that Sellers' fraud was so closely connected with its claim under the sale contract, and hence with the award, that the award should not be enforced as a matter of public policy.

The Court of Appeal, however, found that there was in fact no fraud.  This was at most a case of attempted fraud, but neither Buyers nor their bank were actually deceived.  The bank did not pay out against the forged bills of lading and Sellers obtained no benefit from their wrongful conduct. 

The Court accepted Sellers' submission that the attempted fraud was not the basis of its claim under the sale contract but was "essentially collateral" – an interesting choice of word reflecting perhaps the Supreme Court's lenient approach to "collateral lies" in the presentation of insurance claims.

The simple answer to the Buyers' complaint can be found in the Court of Appeal's statement that "there is no public policy to refuse to enforce an award based on a contract during the course of the performance of which there has been a failed attempt at fraud".

Comment

Of course, Courts do not condone fraud, nor will they enforce claims based on fraud.  However, where the fraud or attempted fraud is merely collateral, the balance of public policy considerations lies in upholding the finality of arbitration awards.

In this case, the issue of fraud had already been fully considered by the CIETAC tribunal to which the parties had agreed to submit their disputes.  The English Courts' decisions are a welcome example of their pro-arbitration and pro-enforcement approach.