"Fraud unravels all" – or does it?
The English Commercial Court has upheld the enforcement of a foreign arbitration award against a buyer of goods even though the seller submitted forged bills of lading under the letter of credit
Sinocore International Co Ltd v RBRG Trading (UK) Ltd  EWHC 251 (Comm) is a decision of Mr Justice Phillips on an application by RBRG Trading (UK) Ltd ("Buyers") to set aside the enforcement of a CIETAC arbitration award ("Award") obtained against them by Sinocore International Co Ltd ("Sellers").
Buyers' argument was that the Award gave effect to a claim by Sellers which was "based on … forged bills of lading". This, they said, meant that the enforcement of the Award in England would be contrary to public policy – one of the few grounds on which enforcement can be denied under the New York Convention.
The facts in brief were as follows:
- Parties contracted for the sale and purchase of steel coils on C&F terms, to be shipped by Sellers from China to Mexico
- Buyers were required to open a letter of credit allowing shipment by 31 July 2010
- Buyers initially did so, but later instructed their bank to change the shipment period to 20-30 July 2010, and their bank notified Sellers of such amendment
- Cargo was loaded on 5-6 July 2010 and (genuine) bills of lading were issued bearing those dates
- Sellers gave Buyers that (correct) information
- However, on 22 July 2010, Sellers' bank presented to Buyers' bank bills of lading dated 20-21 July 2010
- Buyers obtained an injunction from the Dutch Courts preventing payment under the letter of credit
- Sellers held Buyers in repudiatory breach of contract and re-sold the cargo at a loss
Proceedings in China
Sellers sued Buyers' bank in the Chinese Courts. That claim was dismissed, but Sellers' appeal was (at the time of the English judgment) still pending.
The sale contract provided for CIETAC arbitration in Beijing under Chinese law.
Buyers commenced arbitration, seeking damages for Sellers' alleged breach of a pre-shipment inspection clause. Buyers alleged that Sellers shipped the cargo early to prevent inspection and then produced forged bills of lading to cover this up.
Sellers counter-claimed damages for Buyers' repudiatory breach, claiming the difference between the original sale price and the resale price.
The CIETAC tribunal held that:
- Buyers had not requested an inspection, so their claim failed
- Buyers were in breach in instructing their bank to change the shipment date in the letter of credit
- That breach resulted in Sellers not receiving payment
- Sellers' submission of forged bills of lading to Buyers' bank was a deception of the bank, but not a deception of Buyers who knew the true shipment dates
- Buyers were liable for damages of USD4,857,500 plus costs
Buyers failed in an attempt to have the Award overturned by the Chinese Courts.
Enforcement in England
Sellers applied for enforcement of the Award in England in the usual way – on paper and without notice to Buyers. An enforcement Order was made but Buyers were given 14 days in which to object, which they did.
Buyers objected on 2 grounds:
- Sellers could have obtained payment by presenting the genuine bills of lading because the amendment to the letter of credit was legally ineffective, so Sellers' loss was caused by their presentation of the forged bills of lading, and/or
- Letters of credit are so important to international trade that the Court should not assist a seller who has presented forged documents
The Judge reaffirmed that the Courts will not enforce an award which, on its face, gives effect to an illegal contract or corrupt practice (e.g. payment or recovery of a bribe).
However, the Courts will not refuse to enforce a lawful claim under a lawful transaction even if it is alleged that the transaction is somehow "tainted" by fraud or illegality. For example, the English Courts have previously upheld contracts (lawful in themselves) which were procured by bribery.
The Judge rejected both of the arguments made by Buyers.
As to the first, it was not appropriate or permissible for the English Court to go behind the conclusion of the CIETAC tribunal, applying Chinese law, that the cause of Sellers' loss was Buyers' wrongful instruction to their bank to change the shipment date in the letter of credit.
As to the second, the principle that "fraud unravels all" (ex turpi causa non oritur actio) only arises in the context of the issuing bank's duty to pay under a letter of credit against apparently conforming documents. There is no wider principle that a party presenting forged documents to the bank cannot bring any other claim in relation to the transaction generally.
This decision is a useful reminder that fraud, while not condoned by the Court, does not always unravel everything. It is crucial to consider what the fraud is and whether it is an essential part of a party's claim.
The case has some interesting similarities with the recent Supreme Court decision in The DC Merwestone  UKSC 45 which decided that a "collateral lie" told by an assured during the course of a claim presentation (previously called a "fraudulent device") will not necessarily invalidate the right to recover under insurance – see our previous blog post.
It is also worth noting that, even if he had been tempted to accept Buyers' arguments, the Judge would still have enforced the Award on the basis that there was a greater public interest in upholding the finality of arbitration awards.