No Substantive Public Policy without prior Exhaustion of Remedies: the Swiss Supreme Court Follows the CJEU
This post was written by Lorène Anthonioz, who is PhD candidate in Private International Law at the University of Geneva and a Research and Teaching Assistant in Private International Law at UniDistance.
Background
In July 2017, a Romanian tribunal ordered a Swiss company A SA) to pay a Romanian company (B SRL) around €159,000, plus interest at a rate of 0.15% per day from 10 June 2016, as well as additional interest. On appeal, however, the Romanian Civil Court amended this decision. A SA was ordered to pay B SRL approximately €56,000 with interest at a rate of 0.15% per day from 10 June 2016, together with further interest. The parties had indeed concluded a sales contract, agreeing that B SRL could claim interest at a rate of 0.15% per day until the debt was fully paid. In May 2022, the Romanian High Court rejected appeals from both parties.
B SRL filed a request for debt enforcement with a Swiss debt enforcement office for approximately CHF 250,000, with interest at a rate of 0.15% per day from 11 March 2022. Following an objection by A SA, the judge granted enforcement for CHF 10,500, plus 35% annual interest on CHF 57,500 from 10 June 2016. However, this decision was subsequently amended by the Superior Court, which granted enforcement for CHF 16,500 and CHF 57,500, at a daily interest rate of 0.15% from 10 June 2016.
A SA appealed to the Swiss Supreme Court.
Decision
During debt enforcement proceedings in Switzerland, a debtor may invoke the defences provided for in the relevant international treaty if the judgment was issued in another State (Article 81(3) of the Swiss Federal Act on Debt Enforcement and Bankruptcy (DEBA)).
In this case, because the judgment was rendered by a Romanian court in a civil or commercial matter, the Lugano Convention applied. Recognition may therefore be refused if it is manifestly contrary to public policy in the State in which recognition is sought (Article 34(1)).
A SA primarily relied on a breach of substantive public policy in relation to the interest rate of 0.15% per day. However, it emerged from the facts that the Swiss company had not challenged the interest before the Romanian courts. Those courts simply applied the contractual clause and did not specifically address the issue of interest in their judgments. The question before the Swiss Supreme Court was therefore whether A SA could still invoke a breach of substantive public policy, in light of the relevant CJEU case law (C-559-14, Meroni, para. 47 and 48; C-681/13, Diageo Brands, para. 63, 64 and 68).
When interpreting the Lugano Convention, the Supreme Court follows the CJEU’s jurisprudence, unless the decisions are based significantly on principles of Community law not derived from the Convention or the Contracting Parties’ legal systems. In this case, these decisions must be taken into account.
Regarding the issue in question, the Supreme Court referred to the CJEU case law, based on mutual trust in the administration of justice within the EU, according to which individuals are generally required to use all the legal remedies made available by the law of the Member State of origin. When assessing whether there is a manifest breach of public policy in the requested State, the court of that State must consider that litigants must avail themselves of all the legal remedies available in the Member State of origin to prevent a breach of public policy before it occurs, unless specific circumstances make it too difficult or impossible to make use of the legal remedies in that State.
The Supreme Court ruled that this case law was applicable in Switzerland, given that the Lugano Convention is also founded on mutual trust between Member States. Furthermore, this jurisprudence gives effect to the general principle of good faith in proceedings.
It may be interesting to note that Switzerland declared that it would not apply the exception in Article 34(2) (“unless the defendant failed to commence proceedings to challenge the judgment when it was possible for him to do so”), as it considered it to be an excessive limitation on defendants’ rights. However, according to the Supreme Court, this reservation did not apply in the present case, since the CJEU did not formally refer to procedural public policy in its decisions, nor did it draw any analogy with the exception to its application. Instead, it added the exception of “special circumstances making it too difficult or impossible to exercise remedies in the Member State of origin”, which differs from that set out in Article 34(2).
Consequently, in contractual matters, the party opposing the recognition of a foreign judgment on the ground of a breach of substantive public policy under Article 34(1) of the Lugano Convention must first have exhausted all available remedies in the State of origin to prevent such a breach. This obligation means that the party must have raised the grounds that would have prevented the alleged breach of public policy before the courts of the State of origin, unless they can demonstrate that the jurisdiction of those courts would not have allowed them to examine such grounds.
In the present case, A SA had not contested the interest in question before the Romanian courts, despite having exhausted all available Romanian appeals. This would have been possible under Article 1541 of the Romanian Civil Code. As a result, it could not invoke a breach of substantive public policy regarding the interest rate of 0.15% per day, even though it amounted to 50% per year. The appeal was dismissed.
Comment
Prior to this decision, there was a dispute over whether the CJEU case law on substantive public policy, which concerns the obligation to exhaust all legal remedies abroad before invoking it, was applicable in Switzerland under the Lugano Convention. Some literature considered this rule to be based on Community law principles, which are not binding for Switzerland, and contrary to its reservation not to apply the exception in Article 34(2).
However, the Swiss Federal Supreme Court dismissed these objections. It aligned Swiss case law with that of the CJEU, giving effect to the strict interpretation of the grounds for opposing recognition and, ultimately, the principle of mutual trust between Member States.
Hence, under the Lugano Convention, parties cannot invoke a breach of Swiss public policy to oppose the recognition of a judgment delivered in a State bound by the Convention unless they have first exhausted all legal remedies available in the State of origin to prevent the alleged breach. Therefore, the person who may be subject to recognition and enforcement in Switzerland must anticipate possible objections in this context when appearing before foreign courts. Nevertheless, this obligation does not apply where special circumstances made it too difficult or impossible to exercise remedies before the courts of the Member State of origin. This includes situations where the relevant grounds could not have been examined by those courts.
Regarding procedural public policy, however, Switzerland still does not require that “the defendant failed to commence proceedings to challenge the judgment when it was possible for him to do so” in order to invoke it (Article 34(2)). As Professor Bucher comments in the update to the Lugano Convention Commentary (Title III), this creates a somewhat “heterogeneous” system.
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