Successful recognition in Switzerland of a Chinese CIETAC arbitral award ordering a party to pay back a loan bearing a yearly interest of 24%

In its judgment 4A_57/2024 of September 3, 2024, the Swiss Federal Supreme Court had to decide whether the enforcement of a Chinese CIETAC arbitral award regarding the repayment of a loan bearing yearly interest of 24% violated public policy.

The CIETAC arbitral award concerned a short-term loan between two Chinese companies, for which the Swiss domiciled debtor acted as guarantor and was held liable for the repayment of a loan bearing interest of 24% per year. The parties to the loan agreement had agreed on an initial interest rate of 8%, which was to increase to 15% p.a. if domestic or foreign financing related to the loan failed later. In addition, the parties agreed to an additional interest rate of 0.05% per day on the amount not repaid on time. After the loan was not repaid, the debtor was ordered by the competent CIETAC arbitral tribunal in China, jointly and severally with the borrower, to repay the loan amount plus yearly interest of 24% to the creditor.

The creditor then initiated debt collection proceedings at the Swiss domicile of the guarantor for the amount awarded to it by the Chinese arbitral tribunal, plus interest of 24% per year, and sought incidental recognition of the CIETAC arbitral award based on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958 (New York Convention, NYC; RS 0.277.12).

The creditor was able to obtain favorable judgments from the first and second instance courts of the canton of Uri. The debtor appealed against the second instance court's decision before the Swiss Federal Supreme Court in a last attempt to block the enforcement of such arbitral award invoking, among others, a violation of public policy. In essence, the debtor argued that the annual interest rate of 24% was excessively high and therefore contrary to public policy.

The Swiss Federal Supreme Court concluded that a high interest rate alone is not sufficient to prevent enforcement of a foreign arbitral award:

"An annual interest rate of 24% may seem prohibitively high from a Swiss perspective. However, such an interest rate alone does not necessarily violate fundamental principles of the Swiss legal and value system. The public policy concept in enforcement proceedings does not apply only because the interest rate is excessive according to Swiss domestic standards. As stated above, the Swiss Federal Supreme Court has held that a monthly interest rate of 2% is permissible. In light of this case law, there is no reason to intervene in the case of an annual interest rate of 24%, especially since the complainant does not comment on the specific legal nature of his loan relationship. In particular, he does not claim to have guaranteed a particularly low-risk loan, which would require applying a low interest rate." (BGer 4A_57/2024 of September 3, 2024, E. 4.3.3)

The Swiss Federal Supreme Court confirmed its previous case law, according to which the concept of public policy in cross-border enforcement proceedings is less broad than the concept of public policy under the rules of private international law (Art. 17 of the Federal Act on Private International Law (PILA)) and that not every mandatory provision of Swiss law is part of the public policy, but only those that are of fundamental importance.

The Swiss Federal Supreme Court also pointed out that Swiss contract law does not contain any explicit maximum interest rates and that the enactment of provisions to prevent interest rate abuses is left to public law. No such provisions were applicable in the present case. Regarding the compatibility of the interest rate with "good morals" (Art. 20 para. 1 CO), the Swiss Federal Supreme Court then referred to its previous case law, according to which not every annual interest rate of more than 18% is immoral. The court may deviate from this benchmark in individual cases, taking into account in particular the creditor's risk of loss. In this context, the Swiss Federal Supreme Court also pointed out that it grants the cantonal courts a certain degree of discretion in determining the maximum admissible interest rate.

Besides taking issue with the interest rate, the debtor also relied on the form requirements of Swiss surety law, according to which sureties must be notarized and the spouse's consent is necessary for the valid conclusion of a guarantee. Since no notarization took place and no such consent had been obtained in the present case, the debtor went on to argue that the failure to comply with these requirements also violated public policy. The Swiss Federal Supreme Court also rejected these arguments and confirmed its previous case law, according to which the formal requirements of surety law, although mandatory, are not part of public policy. An exception to this can only be made if the guarantor was not in a position to assess the financial consequences of his undertaking.

Furthermore, a possible lack of consent of the spouse does not fall within the scope of the Swiss public policy in enforcement matters (BGer 4A_57/2024 of September 3, 2024, E. 5.3).

(BGer 4A_57/2024 of September 3, 2024)