Abstract
When “public interests” principle is cited to refuse the recognition and enforcement of a judgment, a strict construction standard should be adopted to, in general, limit the applicability of the principle only to a circumstance where the outcome of the recognition and enforcement would be directly contrary to public interests. If the judgment of a court recognizes the validity of a transaction, and its results bind only upon the parties and its recognition and enforcement does not involve the interests of the broader public or an unspecified majority of people, then the outcome of its recognition and enforcement should be considered as not harming public interests.
Basic Facts
The non-party Company A, a Hong Kong-registered legal person, is headed by Gao X, the respondent in this case. In 2014, the claimant, a commercial bank, signed ISDA’s master agreement and procedure clauses with Company A, as principal debtor, to trade “redemption FX options for selling USD for CNH.” Gao provided a guarantee to the commercial bank, agreeing to be jointly and severally liable with Company A for the payment of the USD 5 million principal and the interest and liquidated damages thereon under the financial derivatives and structured products transaction between Company A and the commercial bank. The above contract documents were signed as per the following process: Li XX, an employee of the commercial bank, met with Gao X in Shanghai and pitched the bank’s credit and trading services to Gao and the principal debtor; Gao, on behalf of Company A, signed the documents, which were then carried back to Taiwan by Li and approved by the commercial bank. Pursuant to the ISDA procedure clauses, their place of performance is the commercial bank’s principal business premises in Taiwan.
On January 17 and January 20, 2014, Company A and the commercial bank entered into a trade of “target redemption FX options for selling USD for CNH”, respectively, each with a nominal principal of USD 1 million and a leveraged principal of USD 2 million. According to the exchange rate results, Company A shall pay more than USD 2.59 million to the commercial bank, but failed to do so. The commercial bank then filed its dispute with the principal debtor Company A to an arbitral institution in Taiwan for arbitration in accordance with their agreed arrangement for dispute resolution, and prevailed in the arbitration.
As Company A failed to perform the arbitration award, the commercial bank sued Gao X to a district court in Taipei, Taiwan, demanding assumption of guarantee liability by Gao. After trials by the Taipei district court and the high court in Taiwan, a judgment was delivered and became effective, deciding that Gao was jointly and severally liable for Company A’s debts.
As Gao X failed to perform the effective judgment of the Taiwan court, the commercial bank applied to the competent court of the place of Gao’s domicile, namely the Shanghai Financial Court (the “Court”), for recognition and enforcement of the judgment. Respondent Gao argued that the commercial bank had, without approval, engaged in unlawful financial derivatives services in mainland China, that Gao’s provision of guarantee had not been approved by and registered with the competent authority in violation of China’s foreign exchange regulations, and that the recognition and enforcement of the disputed judgment would harm public interests.
Holding
On March 10, 2023, the Court issued a civil ruling ((2021) Hu 74 Ren Tai No. 1), recognizing and enforcing the 107 Zhong Su Zi No. 320 Civil Judgment of the Taipei district court of Taiwan and the 109 Zhong Shang Zi No. 424 Civil Judgment of the high court of Taiwan. Neither party has applied for reconsideration.
Reasoning
The Court opined that regarding whether the commercial bank had engaged in unlawful financial derivatives services in mainland China: First, according to an analysis of the parties to the disputed financial derivatives transaction, the counterparty to the trade of “target redemption FX options for selling USD for CNH” under the ISDA master agreement signed with the commercial bank was Company A, a Hong Kong-based legal person. Second, as showed by the signing process of the ISDA master agreement and procedure clauses, Gao X signed these documents, which were carried back by Li XX to Taiwan and formed upon approval by the commercial bank. Therefore, these documents were finally formed in Taiwan. Third, in terms of the performance place of the ISDA agreement, the ISDA procedure clauses also set Taiwan as the place of performance. To conclude, the commercial bank did not, without approval, engage in unlawful financial derivatives services in mainland China.
Regarding whether the guaranteed transaction in this case harmed public interests. The respondent Gao X asserted invalidity of an external guarantee contract not approved by or registered with the competent authority. In this regard, when the “public interests” principle is cited to refuse the recognition and enforcement of a judgment, a strict construction standard shall be adopted to, in general, limit the applicability of the principle only to a circumstance where the outcome of the recognition and enforcement would be directly contrary to public interests. This case involved a guarantee provided by Gao X to Company A, which is under Gao’s actual control. This guarantee, only an individual instance, concerns a civil legal relation between two parties of equal standing. The judgments from the Taiwan courts were only binding upon the parties, and their recognition and enforcement would not involve the interests of the broader public or an unspecified majority of people. Therefore, the guaranteed transaction in this case does not fall under a circumstance that harms public interests, and Gao X’s invalidity claim is thus rejected.
Significance
This case concerns a dispute over the recognition and enforcement of civil judgments from Taiwan courts. In this case, the Court clarified that a strict construction standard shall be adopted when citing the “public interests” principle to refuse the recognition and enforcement of a judgment; provided a factual and legal analysis of the criteria to assess whether the civil judgments from the Taiwan courts regarding cross-border financial derivatives transaction and cross-border guarantee are in violation of public interests; and defined the relation between financial regulation and public interests. Recognition and enforcement of judgments in this case is conductive to generating reasonable predictability for parties to cross-border financial transactions and optimizing law-based business environment.
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