Taiwan’s Supreme Court recently affirmed in Shending Law Firm v. Tien Chin Yu Machinery Mfg. Co., Ltd. Chinese judgments and arbitral awards do not have res judicata effect even if they are recognized by the Taiwanese courts. 104 Taishang Zi No. 33. In contrast, foreign judgments and arbitral awards (including those from Hong Kong and Macau) are routinely recognized and enforced.

Tien Chin Yu (“TCY”) is a Taiwanese manufacturer of flexographic printing and corrugator machinery. In 2003, it retained a law firm in Guangdong, China to act for it in litigation against a printing company in Dongguan.

The law firm’s engagement agreement provided that if TCY terminated the representation for any reason other than the law firm’s malfeasance or a breach of the agreement, TCY would have to return any funds advanced by the law firm plus 20% of the amount of TCY’s claim. According to TCY, the law firm failed to keep it informed during the course of the litigation. Although TCY eventually prevailed on some claims but not on others, it decided not to appeal and terminated the representation.

The law firm demanded its fees under the agreement’s 20% termination penalty and submitted the dispute to CIETAC’s South China Sub-Commission pursuant to the agreement’s arbitration clause. The law firm prevailed in the CIETAC proceedings and was awarded about US$110,000 in damages.

The Taoyuan District Court in northern Taiwan duly recognized the CIETAC award in 2009, rejecting TCY’s contentions that the award violated public policy in Taiwan.  After the Taiwan High Court upheld the District Court’s recognition of the Chinese arbitral award the law firm applied for compulsory enforcement of the award in the Taoyuan District Court’s enforcement division. In response, TCY filed an action asserting objections concerning the claim itself as established by the judgment (zhaiwuren yiyi zhi su) in the Taoyuan District Court’s civil division (this statutory cause of action has its roots in German law).

In general, an action objecting to the claim itself as established by the judgment is precluded from raising claims germane to the underlying action by Taiwan’s version of res judicata. This res judicata effect is well established for not only Taiwanese final judgments, but also recognized final foreign judgments and arbitral awards as well as. It bars the claimant from raising any claim that was or should have been raised by the time of final oral arguments. As a result, the judgment debtor in these circumstances is normally limited to raising objections based on new facts that arose after final oral arguments such as a post-judgment satisfaction.

However, TCY’s action attempted to raise defenses such as the illegality of the 20% penalty clause under Taiwan law and the unreasonableness of the legal fees. While the Taoyuan District Court and the Taiwan High Court dismissed TCY’s action on grounds that a Chinese arbitral award should have res judicata effect once it has been recognized by the Taiwanese courts, the Supreme Court held for TCY and remanded the case back the lower courts for a decision on the merits of TCY’s defenses to the underlying claim.

The Supreme Court reasoned that when the Taiwan Legislature enacted Article 74 of the the Act Governing Relations between the People of the Taiwan Area and the Mainland Area, it intended that a judgment or arbitral award from China could serve as a writ of execution if recognized by a Taiwanese court but not as a  final judgment. In other words, a judgment or arbitral award from China is enforceable through the compulsory execution process but it does not have the same res judicata effect as a final Taiwanese judgment or arbitral award.

The Supreme Court based this distinction on a close reading of the statutory language used in Article 74 of the Act Governing Relations between the People of the Taiwan Area and the Mainland Area. This language differs from the language in the Civil Code and the Compulsory Execution Act applicable to from judgments and arbitral awards jurisdictions other than PRC that recognize Taiwanese judgments. Civil Code §402; Compulsory Execution Act §4-1. The Supreme Court inferred that Taiwan’s legislature intended the PRC’s legal system to be treated sui generis to protect the rights and interests of Taiwanese citizens in view of the special relationship with China and the differences between the two legal systems.

While the Supreme Court previously issued three judgments nearly a decade ago with similar holdings(96 Taishang Zi No. 2531, 97 Taishang Zi No. 2258, and 97 Taishang 2376), a number of lower courts including the Taiwan High Court have reached different conclusions in the interim. Shending Law Firm unequivocally rejects the theories of the lower courts and reaffirms that Taiwan does not recognize Chinese judgments and awards as having the same res judicata effect as those from other foreign jurisdictions including Hong Kong and Macau. Consequently, while enforcement of a Chinese judgment or arbitral award is still ultimately possible in Taiwan, the underlying claims are likely to be relitigated on the merits.

The result for the foreseeable future is that when faced with the increasingly common situation of a potential dispute with Taiwanese business partners in China whose assets are in Taiwan, practitioners should choose dispute resolution in an appropriate third jurisdiction or possibly in Taiwan itself if there is any possibility that the judgment or arbitral award must be enforced here. For the same reasons, it is also very important to realize that one is dealing with an entity whose principals or parent are based in Taiwan.

One caveat is that the third jurisdiction must always be checked to see if Taiwan will recognize judgments and arbitral awards from that jurisdiction. In the case of most (but by no means all) leading jurisdictions, Taiwan will recognize and enforce judgments and arbitral awards without excessive scrutiny on public policy grounds as was initially the case with the CIETAC award.