Sion Soleeimany (Appellant, United Kingdom) v.
Court of Appeal, Civil Division, 30 January 1998, United Kingdom
Sion Soleimany (hereinafter referred to as the father) and his son, Abner Soleimany (refers as the son) were engaged in the export of Persian carpets from Iran. Between 1980 and 1983, the son arranged for the export of the carpets from Iran in contravention of Iranian Revenue laws and export controls. The carpets were sold by the father in England or elsewhere outside Iran.
Disputes arose between the father and the son relating mainly to whether the son had received what he claimed was due to him from the proceeds of the sale of the carpets that he alleged to have arranged to export from Iran.
Both the father and his son, agreed to submit the dispute to arbitration by the Jewish Beth Din, the court of the Chief Rabbi. According to a leaflet provided by the Beth Din, the system of law to be appied by the Beth Din is Jewish law, albeit “sometimes other systems of law may also be relevant…by way of the doctrine of incorporation…” but the decision as to which law to apply “is that of the Dayanim…”.
In the award made by the Beth Din on 23 March 1993, it was noted “The son purchased quantities of carpets and exported them illegally out of Iran.” The award further recognized that the activities in Iran were illegal, stating, e.g., that “By the very nature of the illicit enterprise, few records were kept….In assessing profits the award disallows the full sum claimed by the son on the basis inter alia that no allowance has been made for ‘smugglers’ fees’.” After assessing the son’s share of the profits, the Dayan awarded him UK 576,574 pounds and his costs.
1. Court of first instance
After the award was made the son applied to register the award as a judgment under Sect. 26 of the Arbitration Act 1950 as his father dad failed to comply with it. On 4 May 1993, Master Gowers granted leave to enforce the award.
The father applied to set aside the leave for enforcement on the ground that the illegality which was at the root of the enterprise rendered the claim void or unenforceable in an English court, and that it would be contrary to public policy for an award founded on an illegal agreement or transaction to be enforced as a judgment.
The father also sought leave to appeal the award in several instances, but was unsuccessful in this respect. However he was successful regarding the application to set adide the leave for enforcement of the award.
2. Court of Appeal
The Court of Appeal, per Morritt, LJ, Waller, LJ and Sir Christopher Staughton, held that the award, which purported to enforce an illegal contract, was not enforceable in England and Wales.
Here are some important points the Judges analyzed the case both by themselves and by referring some precedents:
1. What is the law relating to illegality?
“There are two general principles. The first is that a contract which is entered into with the object of committing an illegal act is unenforceable. The application of this principle depends on proof of the intent, at the time the contract was made, to break the law; if the intent is mutual the contract is not enforceable at all, and, if unilateral, it is unenforceable at the suit of the party who is proved to have it….”
“The effect of illegality on a contract may be threefold.
(1) If at the time of making the contract there is an intent to perform it in an unlawful way, the contract, although it remains alive, is unenforceable at the suit of the party having that intent; if the intent is held in common, it is not enforceable at all.
(2) Another effect of illegality is to prevent a plaintiff from recovering under a contract if in order to prove his rights under it he has to rely on his own illegal act; he may not do that even though he can show that at the time of making the contract he had no intent to break the law and that at the time of performance he did not know that what he was doing was illegal.
(3) Third effect of illegality is to avoid the contract ab initio (from the very beginning), and that arises if the making of the contract is expressly or impliedly prohibited by statute or is otherwise contrary to public policy.”
“There is a distinction, which may not be unimportant in the context of this case, to be drawn between a ‘joint venture’ agreement with an object of committing illegal acts in a foreign and friendly state which will be totally unenforceable, and a contract which does not have that objective. In the latter case, the question may arise whether the plaintiff, in order to establish his rights, has to rely on his own illegal act.
2. What kind of the contract in this case?
Is it apparent from the award itself what type of the contract the arbitrator was dealing with? We pose the question in this way because it seems to us important to emphasize that we are dealing with a case where it is apparent from the face of the award that: (1) the arbitrator rejected the son’s case that he had exported carpets purchased by himself which had then been sold by his father on his behalf; and (2) the arbitrator was dealing with what he termed an illicit enterprise under which it was the joint intention what carpets would be smuggled out of Iran illegally….The arbitrator just considered the illegality to be of no relevance ‘since he was applying Jewish law, under which, any purported illegality would have no effect on the rights of the parties.
If the award were a judgment of a foreign court, the English court would not enforce it. Does it make any difference that the question of enforcement relates to an arbitration award? There are material distinctions between awards and foreign judgments. First, an award can only be valid if the arbitrator had jurisdiction founded on a contract between the parties. If that contract is itself invalid the award will be unenforceable. In this case we were referred to the cases relating to the separability of an arbitration clause. It was sought to demonstrate that the rather broad statement of Denning LJ in Taylor v. Barnet (1953) 1 WLR 562 that ‘an arbitrator has no jurisdiction or authority to award damages on an illegal contract’ must be read in the context of the facts with which that case was concerned..’ The most important case in this area is Harbour v. Kansa (1993)，where the Court of Appeal held that the arbitration clause in an insurance contract was separate from the main contract with the effect that (a) invalidity of the main contract did not deprive the arbitrator of jurisdiction, and (b) the arbitrator had jurisdiction to decide the question of illegality of the main contract.
But, the fact that in a contract alleged to be illegal the arbitration clause may not itself be infected by the illegality, does not means that it is always so, and does not mean that an arbitration agreement that is separate may not be void for illegality. There may be illegal or immoral dealings which are from an English law perspective incapable of being arbitrated because an agreement to arbitrate them would itself be illegal or contrary to public policy under English law. The English court would not recognize an agreement between highwaymen to arbitrate their differences any more than it would recognize the original agreement to split the proceeds. There is possibility of an agreement containing an arbitration clause of such a nature that the arbitration clause itself was invalid. It must also follow that an arbitration agreement made separately in relation to an illegal or immoral dispute would not be recognized.
At one stage it seemed to us that what the father and the son sought to have arbitrated was how to split the proceeds of a joint venture that had as its object the commission of offences in Iran. If that were so, we would incline to the view that the arbitration clause was invalid, so that there was no award to enforce. But, on reflection, and having analyzed the way the matter was put before the arbitrator, it seems to us that it is not fair to characterize the matter in that way. Disputes between the father and the son arising out of a claim by the son for an account of the proceeds of sale, was what was referred to the arbitrator. It was during the arbitration that the arbitrator took the view that he was dealing with a joint venture with the objects we have already indicated. Accordingly it seems to us that the original arbitration agreement was a valid agreement, and that it was within the jurisdiction of the arbitrator to consider questions of illegality insofar as they might affect the rights of the parties.
It follows that an award, whether domestic or foreign, will not be enforced by an English court if enforcement would be contrary to the public policy of this country. It is clear that it is contrary to public policy for an English award to be enforce if it is based on an English contract which was illegal when made.
There was for some time a dispute as to whether that decision was based on the theory that an arbitrator had no jurisdiction to make an award on an illegal contract, or that it was misconduct for an arbitrator to do so. That dispute has been concluded, so far as this court is concerned, in the case of Harbour Assurance Co. (UK) Ltd. v. Kansa General International Insurance Co. Ltd. (1993). That was an action brought for a declaration that some reinsurance policies were void for illegality, and that the plaintiffs were not liable under them. The illegality alleged was that the defendants were not registered or approved to carry on insurance or reinsurance business under the Insurance Companies Acts. The illegality was denied. This court granted a stay of the action in favour of arbitration, on the ground that the illegality pleaded did not affect the validity of the arbitration clause. All three members of the Court Appeal held that the David Taylor decision was not based on jurisdiction but on misconduct by the arbitrator. It was also held that the arbitration clause in the Harbour Assurance contracts was wide enough to enable an arbitrator to decide on the illegality there alleged.
The Harbour Assurance case was not concerned with enforcement of an award, but with whether there should be a stay of legal proceedings in favour of arbitration. The illegality was at that stage contested, and at least in view of Hoffmann LJ it was open to question whether there was illegality such that the contracts were void ab initio. By contrast it may be that in the case of palpable illegality, an English court would declare that there was no arbitrable dispute, or refuse to grant a stay in favour of arbitration, on the ground that an arbitrator could not lawfully enforce the contract. As already indicated, there may be classes of contract – trading with the enemy was cited as a plausible example, and the robbers referring their dispute would be another – where the making of he contract will itself be an illegal act, and where the court would be driven nolen volvens to hold that the arbitration clause was itself void.
Finally, under this head, we should state explicitly what may already have been apparent: when considering illegality of the underlying contract, we do not confine ourselves to English law. An English court will not enforce a contract governed by English law, or to be performed in England, which is illegal by English domestic law. Nor will it enforce a contract governed by the law of a foreign and friendly state, or which requires performance in such a country, if performance is illegal by the law of that country. This is well established as appears from the citations earlier in this judgment. This rule applies as much to the enforcement of an arbitration award as to the direct enforcement of a contract in legal proceedings.
The award in this case, which purports to enforce an illegal contract, is not enforceable in England and Wales.
Questions and Comments
1. This case was about the enforcement of the arbitration award on the illegal contract. The Court of Appeal made some distinction between the illegal contracts made by mutual consent and those made unilaterally. Do you think whether the disputes arising from contracts aimed at breaking law could be settled by arbitration?
2. Whether arbitration clause in an illegal contract , which violates public policy, is valid?
3. Is there any difference as to the doctrine of separability of the arbitration clause between this case and Harbour Assurance?