Court rules Dubai judgment does not offend UK public policy

Background
The Defendant, Mr Puri, was the owner and sole shareholder of IPC Dubai, which entered into a tripartite agreement with the Claimant ("Lenkor HK") and a third party buyer, pursuant to which Lenkor HK agreed to supply six cargoes of "High Speed Diesel" sourced from the UAE to the buyer. As part of this agreement, IPC Dubai was required to "issue a payment guarantee for a hundred percent of the cargo value by cheque."

In accordance with the agreement, Mr Puri drew two cheques in favour of the Claimant, which he signed. Two cargoes were delivered to the third party buyer, and the buyer made part-payment to IPC Dubai. However, the buyer made no further payments.

In the first instance, Lenkor HK initiated arbitration proceedings in London under the terms of the tripartite agreement to secure further payment from the buyer. In the course of the arbitration proceedings, it was discovered that Lenkor HK had not supplied High Speed Diesel from the UAE, but instead a different and inferior type of gasoil sourced from Iran, with documents and test results falsified to state that the product was High Speed Diesel. Whilst the Claimant obtained an award in its favour, the arbitrators were critical of its actions and the award reflected the actual value of the cargoes rather than the contract price. The award was not satisfied.

Having not received further payment from the buyer pursuant to the award, Lenkor attempted to cash the two cheques received from IPC Dubai, which bounced. Lenkor subsequently issued proceedings in Dubai. The Dubai court took a dim view of Mr Puri's actions. Article 599/2 of Dubai's Commercial Transactions Law imposes personal liability on individuals who sign bad cheques even if they are signed on behalf of companies. As such, he was found personally liable for the cheques and ordered to send the money paid by the buyer on to Lenkor HK. An interest charge of 9% was also ordered to run from the due date of the cheques.

The Claimant sought to enforce the judgment of the Dubai court in England and Wales. The Defendant resisted the application on the basis that recognising the Dubai court's judgment would offend public policy in England and Wales due to the fact that:

1. the principal obligation of the underlying agreement was tainted by illegality in the form of the falsified documents;

2. recognising Mr Puri's personal liability in respect of the bounced cheques would amount to an impermissible piercing of the corporate veil; and

3. the interest charged on the judgment debt was excessive and could therefore be characterised as a penalty.

Judgment
The Court ruled as follows in respect of the objections raised by the Defendant:

 (a) Illegality

• The general rule is that it is the judgment, and not the underlying transaction, which must have been tainted with illegality for this defence to succeed. There are exceptions where a judgment may be "infected" by an underlying public policy issue, or a finding of corrupt practices, but here the judgment concerned only the consequences of signing bad cheques in Dubai. As such, that is the only issue in the judgment that could give rise to a finding of illegality, and the Court did not have to have regard to the issues which arose in the arbitration proceedings, which were addressed in the award.

• Article 599/2 of Dubai's Commercial Transactions Law confers an onerous obligation on the drawer of a cheque, but does not offend English public policy in and of itself as English law recognises that a cheque gives rise to unconditional and autonomous rights and liabilities. That Dubai imposes more onerous liabilities is "neither surprising nor repugnant."

• In the present case, the judgment had not confronted the issue of illegality and, indeed, it did not need to, because "the judgment was squarely based upon the legal consequences of signing cheques in Dubai in circumstances where there were insufficient funds to meet them."

• Illegality was no bar to the recognition of the Dubai judgment, particularly as "Mr Puri operated in Dubai and he knew or must be taken to have known the consequences of putting his name to cheques there."

(b) Impermissible piercing of the corporate veil

• English law would not have imposed personal liability on Mr Puri in respect of the bounced cheques. However, the case was resolved in Dubai according to the principles of Dubai law, which provide that individuals will have personal liability in respect of cheques written by them on behalf of companies.

• For English law to recognise a judgment based on Article 599/2 would not result in an impermissible piercing of the corporate veil as a matter of English law in circumstances where a Dubai court had already ruled that an individual had personal liability.

(c) Excessive interest amounting to a penalty

• The interest on the judgment debt charged at 9% was only 1% higher than the judgment debt rate in England, so it was unrealistic to claim that the 9% interest rate amounted to a penalty.

Comment
The decision is particularly noteworthy due to the manner in which the Court approached the public policy defence of illegality, as it makes clear that it is the judgment and not the underlying transaction upon which the judgment is based which must offend English public policy for this defence to succeed.

 It also makes plain that even though there are circumstances where it might be appropriate to consider the illegality of an underlying transaction, the illegality would need to affect the obligation being enforced by the judgment in order to have any impact on its enforceability. In this case, the obligation being enforced by the judgment was simply IPC Dubai's obligation to pay the Claimant, and did not touch upon the Claimant's illegal behaviour vis-à-vis the buyer.

This case is a cautionary tale for those who enter into transactions on behalf of companies under local laws in Dubai believing that they will be able to rely on the protection offered by a corporate veil, or for any party who seeks to oppose the recognition of a foreign judgment in the UK on the basis that it seeks to enforce an onerous obligation that has no UK equivalent. An onerous obligation does not offend English public policy in and of itself, particularly if it is unsurprising that the jurisdiction in question applies such rules which would be understood and an accepted risk by anyone carrying out business in that jurisdiction.