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June 27, 2005

Greater Legal Assurances for Cross-Straits Transactions?

[Editor’s Note: We are now able to confirm the validity of a portion of the press release discovered on the P.R.C. Ministry of Justice website. A P.R.C. company, suing on a P.R.C. judgment, has for the first time won a judgment relating to a business transaction against a Taiwanese corporation in the Taiwan High Court. See this post for background. This ruling may have substantial ramifications for the legal relationships of businesses involved in cross-strait trade. We will continue to post on developments in this case.]

We turn to a guest columnist for a discussion of High Court’s decision and its possible implications. Peihuan Benjamin Kao, currently attending the University of Minnesota Law School as a Juris Doctor (J.D.) candidate, is our guest columnist this week. Mr. Kao was most recently a Legal Consultant to the Executive Director at a publicly listed corporation in Bangkok, having previously served as a Legal Research Fellow at the Science and Technology Law Center in Taipei. His education includes an LL.M. from Columbia Law School and Soochow Law School (Taipei), as well as an M.S. in Medical Technology from National Taiwan University.]

Ruling of the Taiwan High Court Recognizes P.R.C. Judgment

By Peihuan Benjamin Kao

On December 23, 2004, the Taiwan High Court, ruling against Changrong International Storage and Transport Corp. (“Changrong”), recognized a decision of the courts of the People’s Republic of China. [See links at end of this post for the full text of Ruling 93 抗 3089.] Reportedly, Changrong appealed this ruling to the Taiwan Supreme Court in May, 2005, and lost, leaving the judgment of the Taiwan High Court to stand. However, the decision on appeal has not yet appeared in the Supreme Court’s official database. Therefore, we don’t really know how the Supreme Court reached its ruling nor why it made the “breakthrough” at this moment, nearly 13 years after promulgation of the Act Governing Relations Between Peoples of the Taiwan Area and the Mainland Area (the “Act”).

While awaiting the publication of the Supreme Court’s official ruling, the ruling by the High Court is worth pondering. I will focus on the grounds upon which the Taiwanese High Court reached the conclusion of recognizing a P.R.C. judgment, and discuss the possible rationale of the Supreme Court’s denial of appeal.

BIRTH OF AN APPEAL

Zhejiang Textile Import & Export Group of the P.R.C. (“Zhejiang Textile”) sued Lirong in the Shanghai Court of Admiralty for Lirong’s breach of admiralty shipping contract. Zhejiang Textile won the judgment in the Shanghai Court of Admiralty and an appeal of that judgment in the High People’s Court of Shanghai. Lirong then merged with Changrong.

Because Changrong had no assets in the P.R.C. which the P.R.C. court could seize in order to enforce its judgment, Zhejiang Textile sought remedy in a Taiwan court by filing for a request of recognition and hence, enforcement, of the judgments of the Shanghai Court of Admiralty and the High People’s Court of Shanghai. Taiwan Taoyuan District Court ruled for Zhejiang Textile. Changrong appealed to the Taiwan High Court.

Zhejiang Textile filed its request based upon Article 74, Paragraphs 1 and 2 of the Act. Paragraph 1 allows for the filing of applications for recognition of irrevocable P.R.C. court rulings, judgments or arbitral awards, as long as they do not conflict with the public order or good morals of Taiwan. Once recognition is granted by a Taiwan Court, Paragraph 2 further permits P.R.C. rulings, judgments, or arbitral awards to serve as writs of execution.

DEFENDANT’S ARGUMENT ON APPEAL

Changrong on appeal based its arguments mainly on four grounds.

1) PUBLIC POLICY. Changrong argued that the decisions of the Shanghai Court of Admiralty and the High People’s Court of Shanghai were inconsistent with the “public order and good morals” of Taiwan, and thus shall be deemed as violating Article 74, Paragraph 1 of the Act. To back up its public policy argument, Changrong asserted: (1) the P.R.C. decisions breached the principle of privity of contract as stipulated in Taiwan’s Civil Code and (2) the P.R.C. decisions violated Taiwan’s Admiralty and Maritime Law regarding egulation of the Bill of Lading format requirements. By infringing these two legal principles, long enacted and upheld in Taiwan, the P.R.C. decisions were not in conformity with the public order and good morals of Taiwan.

2) LACK OF FINALITY OF THE P.R.C. DECISION. Changrong further argued that the decision in P.R.C. was not final. The company had appealed to the Supreme People’s Court of the P.R.C. and requested a retrial from the Shanghai Court of Admiralty, based on new substantive evidence which could overrule the former judgment. Hence, even if the Taiwan Court would have liked to review the P.R.C. judgment for the purpose of recognition, it should have halted until the final decision was rendered by the P.R.C. Supreme Court and the Shanghai Court of Admiralty.

3) ARGUMENT ON THE MERITS. Changrong tried to argue the merits of the P.R.C. judgments by bringing up the substantive issues, such as document forgery and maritime fraud involved in the Bill of Lading. Investigation did uncover certain evidence that might support such allegation. Changrong argued that it claimed damages against its opponent based on these allegations and that those cases werere still pending.

4) LACK OF RECIPROCITY. Changrong stipulated that based on reciprocity, the P.R.C. decisions should not be enforced in Taiwan, since P.R.C. courts have refused to enforce most of the decisions rendered by Taiwan courts to “avoid violating the One China Policy.” Even if P.R.C courts had enforced some decisions involving Taiwanese, most of those decisions favored P.R.C. citizens inheriting properties from Taiwanese citizens. Thus, it was argued, Taiwanese Courts should not recognize and enforce decisions of P.R.C. courts.

CHANGRONG’S APPEAL: THE HIGH COURT RULING

The High Court rejected all of Changrong’s arguments, ruling against it on the following grounds:

(1) The case was governed by Article 74 of the Act. The Taiwan High Court interpreted Article 74 as a rule of procedural character which applies only to cases of a non-litigation nature. This warrants the Court's review the cases on two issues: A) whether the irrevocable P.R.C. ruling/judgment/award violates Taiwanese public order or good morals, and B) whether an application can be filed in the P.R.C. courts to recognize or serve as a writ of execution of that irrevocable ruling, judgment or awards rendered in Taiwan. Therefore, the Court may not review the substantive merits of the judicial decision rendered by the P.R.C. courts. Consequently, how the P.R.C. court applies P.R.C. law to the facts adopted in that court similarly may not be reviewed by the Taiwanese court.

2) The dispute involved breach of admiralty and maritime contractual responsibility, causing damages to the shipper. The legal effects of the P.R.C. judgments and the factual and legal bases for such decisions were not in breach of Taiwanese public policy, i.e., public order or good morals.

3) Even if there were maritime fraud and forgery involved in the Bill of Lading, it was a dispute of the substantive merits and, therefore, shall not be reviewed.

DISCUSSION: POSSIBLE IMPLICATIONS OF THE RULING

Although the Taiwan Supreme Court's decision of May 2005 has not appeared officially, we might well make a reasonable guess that the Supreme Court will have adopted an approach similar to the High Court’s interpretation and application of Article 74 of the Act.

While the implication of this case might not be crystal clear at this point, its ramifications could be larger and wider than it appears at first glance. It seems a little bit too formalistic for the High Court to have rejected all the arguments of Changrong without considering the reciprocity issue which indicated that the the current practice in mainland China seems to favor the citizens of the PRC. Furthermore, the maritime fraud and forgery issues exposed by UN investigation deserve some degree of consideration under the context of public policy and good morals. It was surprising that the Taiwan High Court reached its ruling without even looking into the merits of the case decided by the P.R.C. court.

Although the Taiwan High court and Supreme Court have recognized irrevocable P.R.C. judgments and rulings since promulgation of the Act, those cases were mostly for personal disputes such as divorce and inheritance of property among citizens across the strait. Should Taiwan Supreme Court affirm the rationale of the High Court, it will have for the first time recognized and consequently enforced a P.R.C. judgment for P.R.C. corporations against a Taiwanese corporation.

With increasing volume business transactions across the strait, it is not difficult to foresee what a huge impact this ruling might have on the future transactional environment between P.R.C. and Taiwan. It may encourage corporations incorporated and based in the P.R.C. to be more willing to conduct business with their counterparts in Taiwan, bearing in mind their legal remedies available in the mainland would also be recognized and enforced in Taiwan. On the other hand, if the unilaterally tilted practice of judgment recognition and enforcement in P.R.C. courts are not balanced with reciprocity, Taiwanese corporations might suffer from from the lack of such assurance in their business transactions with P.R.C.-based corporations.

Will these Taiwanese companies hesitate to enter into transactions with P.R.C. based corporations merely for this reason? Probably not. Even without reciprocal legal protection mechanisms, Taiwanese corporations have for more than a decade flooded the industrial parks and investment triangles all over the P.R.C.

In other words, the net impact of this ruling might well be a boost to cross strait business transactions by providing legal assurances to PRC-based corporations, while not pouring too much cold water over their Taiwanese counterparts.

However, this entire discussion must be put in the context of the Taiwan Supreme Court ruling expected in the very near future.

[The Taiwan High Court Ruling is available here or on this weblog at the extended entry link directly below.]

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