Can “fraud unravels all” be applied to foreign arbitration award?

In the latest CJC Quarterly Case Update from London-based legal firm Campbell Johnston Clark, a case considered whether a foreign arbitration award, in which the successful claimants had issued forged bills of lading to attempt to trigger payment under a letter of credit, could survive the “fraud unravels all” principle and be enforceable in England.

In Sinocore International Co. Ltd. v RBRG Trading (UK) Ltd, the sellers (Sinocore) entered into a sales contract in April 2010 to sell 14,500 mt of cold rolled steel coils to the buyers RBRG at a price of $870/mt. An additional clause was added to the contract in May providing the RBRG Trading a right to inspect the goods prior to loading.

The sales contract required the buyers RBRG Trading to open a letter of credit to allow shipment by July 31st 2010 at the latest, and a letter of credit was duly provided on this basis. Later in June the buyers purported to change this date in the letter of credit to “20th to 30th July 2010” in order to prevent early shipment and allow for inspection prior to loading. That change was never agreed by the sellers Sinocure and was ineffective.

The coils were loaded and genuine bills were issued at Xinjang port on 5th and 6th July. The sellers informed the buyers of this and on July 22nd 2010 the sellers’ bank requested payment from the buyers’ bank under the letter of credit, presenting bills of lading dated 20th and 21st July 2010. However, these bills were forgeries, issued in order to comply with the (ineffective) amended date in the letter of credit. The buyers initially obtained a temporary injunction preventing payment from their bank in relation to the forged bills of lading. As a result of this, the sellers ultimately sold the coils to another buyer at a lower price.

The sale contract was subject to the China International Economic and Trade Arbitration Commission (CIETAC) and Chinese law. The buyers initially commenced arbitration proceedings claiming damages arising from sellers’ breach in preventing inspection, as per the additional clause. The buyers argued that the sellers had deliberately shipped the coils early to prevent inspection and then forged bills with false loading dates to hide this.

The sellers counterclaimed for the buyers’ repudiatory breach in not paying for the goods, and claimed the difference between the contract price and the price for which the sellers subsequently resold the cargo. The Chinese arbitrators found in favour of the claimant, the sellers Sinocure. The arbitrators held that the relevant breach which had caused the sellers’ loss had been the buyer’s breach in procuring an amended letter of credit which was inconsistent with the sales contract. Although the forged bills were submitted to deceive the buyers’ bank, they had not deceived the buyers, who had been aware of the true loading and shipment dates, the Chinese arbitrators found.

The buyers’ attempt to amend the letter of credit had been akin to a ‘trap set by the buyer for the seller’, the Chinese ruling stated. The sellers sought leave to enforce the Chinese arbitration award, by issuing an application to the Commercial Court for judgment to be entered in the terms of the Chinese arbitration award under the New York convention.

The buyers opposed this under section 103 of the Arbitration Act, contending that enforcement of an award in favour of a party who had committed fraud would be contrary to public policy as ex turpi causa non oritur actio or, in the words of Lord Diplock, ‘fraud unravels all’. The High Court upheld the sellers’ claim, and permitted the enforcement of the Chinese arbitration award.

The Chinese arbitration award did not uphold a claim for payment against forged bills of lading, but rather damages for breach of contract committed by the buyers before the forgery of the bills of lading. The Chinese arbitrators were aware of the forgery and the buyers did not allege that the tribunal had been misled or had acted improperly in any way. The High Court held that public policy defences (such as “fraud unravels all”) were to be treated with extreme caution, and restated the principles that a court would not void a contract which might have been “tainted” by fraudulent practices, but which was otherwise legal.

CJC observed that the case represented another example (similar to that set in the recent insurance case considering ‘fraudulent device’) of the court taking a restrictive approach to invalidating contracts where fraud or deceit was involved. Firstly, the fraud had to constitute an essential part of the Claimant’s claim in order for the fraud to ‘unravel all’. If it did not, “it seems the court will likely let the contract stand”.

CJC also observed that this was a victory for enforcement under the New York Convention. “Awards should be readily enforceable without further litigation over the original findings. In that regard, it was made clear that there was a greater public interest in upholding the certainty of arbitration awards over any public interest in voiding contracts which had been tainted by fraud.”