Wei v Li, 2019 BCCA 114
In Canada, s. 347 of the Criminal Code of Canada (the Criminal Code) precludes interest rates in excess of 60% per annum. In Wei v Li., the defendants defaulted in the re-payment of their loans to the plaintiff. The plaintiff obtained a judgment from a Chinese court after participating in court-ordered mediation with the defendants. The judgment allowed for the calculation of interest at a rate of 0.2% per day on the outstanding balance. The plaintiff sought to enforce the judgment in British Columbia, where one defendant was residing, and where the defendants owned property. In Canada, the interest rate set out in the Chinese judgment was effectively 73% per annum, thereby exceeding the rate permitted under the Criminal Code. In applying public policy criteria outlined in case law, the Court (as defined below) agreed with the trial judge in finding that the interest rate provided in the Chinese judgment could be notionally severed to comply with s. 347 of the Criminal Code. The interest rate of 73% was reduced to 60% and the defendants were required to pay $16,308,923.21 CAD in interest.
All material facts of this case occurred in China. In 2014, the Plaintiff, Tong Wei (TW), made two short term loans to a Chinese company called Fenghui Ltd (the Company). The loans were guaranteed by each of Gui Lian Li (GL) and Zi Jie Mei (ZM). The Company defaulted in payment, and the guarantees were not honoured by GL and ZM. ZM and GL attorned to the jurisdiction of the Chinese court and authorized Ms. Yajun Dong to act as their attorney for all matters pursuant to a power of attorney. On March 14, the Chinese Court conducted a court-initiated mediation. Ms. Dong was instructed to agree to settlement terms, which including a lump sum payment made by the Company, ZM and GL before June 14, 2014 in the amount of RMB 38,326,400 (the Settlement). Moreover, if such amount was not paid in full before said date, the balance would be subject to default payments calculated at 0.2% of unpaid balance, calculated daily.
The Chinese court issued a judgment, which was re-confirmed by a second judgment as fully enforceable (collectively, the Chinese Judgments). When the Settlement was unpaid as of the due date, TW applied to the Chinese court to enforce the judgments. The Chinese court served a Notice of Enforcement on the Company and each of ZM and GL on August 25, 2014, by serving their Attorney, Ms. Dong. As part of the Chinese court’s enforcement, it suspended the Chinese passports of ZM and GL, and sold certain properties they owned in China. Sometime in the fall of 2014, GL was permitted to leave China, and was residing in British Columbia where GL and ZM owned three properties. TW applied to the British Columbian Supreme Court to enforce the Chinese Judgments in British Columbia.
British Columbia Supreme Court – Summary Trial
The summary trial judge concluded that the Chinese Judgments were conclusive and final. In canvassing the case law, the judge noted that “[a] court enforcing a foreign judgment is enforcing the obligation created by that judgment. In principle, it should not look beyond the judgment to the merits of the case”. During the trial, both GL and ZM alleged that the Chinese Judgments had been obtained in fraud, but ultimately, these defences were rejected.
GL argued further that the Chinese Judgments were made contrary to natural justice. However, the summary trial judge found that the mediation agreement was voluntary, thus GL had failed to show any breach of natural justice.
In respect of the issue of criminal interest, the rate of interest running on the Chinese Judgments exceeded 60% per annum permitted by the Criminal Code. As discussed, the interest rate would be calculated at 0.2% of the unpaid balance per day (the original loan agreements had contemplated 3%). ZM conceded that the interest on the two loans should be reduced to the 60% Canadian maximum for both loans.
In supplemental reasons of the summary trial judge, questions relating to the form of the final order sought by TW were resolved. The parties agreed that the outstanding balance on the loans was RBM 25,017,461, however, the question of correct interest rate remained. The summary trial judge concluded that because the first Chinese judgment provided for interest to be paid by GL and ZM if they defaulted, this interest term was integral to the Chinese Judgments. However, the Criminal Code precludes the enforcement of such rate of interest. The loan agreements had been entered into for “ordinary commercial purposes”, by relatively sophisticated parties with independent legal advice. Furthermore, the summary trial judge noted that the interest rate of 0.2% per day had been agreed upon in mediation, and the judgment was essentially a “consent order” reached voluntarily at the mediation. Accordingly, the summary trial judge concluded that the interest rate to be applied in the order of the Supreme Court of British Columbia was to be 60% per annum.
On Appeal – Breach of Natural Justice
On appeal with the British Columbia Court of Appeals (the Court), GL advanced the argument that she did not have prior notice of the mediation held on March 14, 2014 in China, and that Ms. Dong, the authorized attorney, did not appear at the mediation as her agent. GL claimed that the power of attorney granted to Ms. Dong and the mediation transcripts (collectively, the Documents) were out-of-court statements and required test of reliability and necessity before accepting them for their truth. Justice Newbury held that these arguments failed because GL was found not to be credible.
With respect to the contention that GL did not have notice of the mediation, GL had sworn an affidavit on May 12, 2017 stating that she did not know about TW’s claim until the “summer” of 2014, and then had learned about the Chinese Judgments when she was served in Vancouver in February 2017. Further, she claimed that she did not affix her seal to the power of attorney and did not authorize Ms. Dong to act for her at the mediation.
Justice Newbury agreed with the summary trial judge in that it was clear that GL and ZM had attorned to the jurisdiction of the Chinese court, and had participated at every stage of the litigation, giving them the benefit of natural justice. These finding served the purpose that the Documents were accepted as reliable, as opposed to the evidence of both ZM and GL, which was not reliable.
Justice Newbury dismissed the grounds for appeal advanced by GL, except with respect to the rate of interest, discussed below.
On Appeal – Criminal Interest
Further on appeal, GL submitted that the summary trial judge “re-wrote” the interest rate in the Chinese Judgments, contrary to a court’s inability to re-write foreign judgments. Ultimately, there are two contrasting principles. First, where a foreign judgment carries interest, the interest is treated as a core term of the judgment and calculated accordingly. Second, a more flexible approach to the Criminal Code, allows notional severance of the interest rate that does not amount to “re-writing” the contract. Neither of the authority cases involved criminal interest or foreign judgment. Transport North American Express v New Solutions Financial Corp did not involve a foreign judgment, but will allow a court to notionally sever the interest rate exceeding 60% per annum if the following four criteria are satisfied (the Transport N.A. Factors):
- the interest rate severance would not subvert the purpose or policy underlying s. 347 of the Criminal Code;
- the parties did not enter into the agreement for an illegal purpose or with an evil intention;
- consideration of the bargaining powers of the parties, and their conduct in reaching the agreement; and
- the potential for the debtor to receive an unjustified windfall.
Justice Newbury agreed with the summary trial judge’s application of the criteria, and the conclusion that notional severance can be applied to foreign judgments. Justice Newbury held that “it is simply not open to a Canadian court to leave the interest provision in the Chinese Judgments as it is, notwithstanding that it is an “integral part” of the debt […]. Some “interference” is therefore inevitable.” Justice Newbury based this assertion on the idea that international comity is an important objective of reciprocating foreign judgments. As such, the summary trial judge did not err in law in applying the Transport N.A. Factors.
Justice Newbury, and Justice Smith agreeing, dismissed the appeal, upholding the judgment of the summary trial judge which required GL and ZM to jointly and severally pay $16,308,923.21 CAD in interest.
Justice Willcock dissented, and would have granted the appeal and set aside the judgment of the court below. Justice Willcock does not agree with the conclusion that the Chinese Judgments can be enforced by notionally severing the interest. In citing the principle that an enforcing court should not be considering the merits of the case, a court is not in a position to modify the judgments because the scope of the inquiry is limited. In citing SHN Grundstuecksverwaltungsgesellschaft MBH & Co. Seniorenresidenz Hoppegarten-Neuenhagen KG v. Hanne, Justice Willcock agreed that a foreign judgment is evidence of a debt, and it is not appropriate to engage in the Transport N.A. Factor analysis.
The appropriate remedy in cases where the interest rates violates s. 347 of the Criminal Code will fall on a spectrum depending on the specific contract. One such remedy allows a court to sever only the provisions of the contract that dictate the interest rate and put it over the 60% per annum limit. Only in the most egregious of cases would notional severance be available, based on the same factors discuss in Transport North American Express.
From a practical standpoint, sometimes judgments obtained in foreign jurisdictions will place companies over the 60% per annum interest rate threshold when the judgment is enforced in a Canadian court. One of the issues with the interest rate provision in the Criminal Code is that it is difficult for companies, specifically foreign companies, to comply with. The issue is that determining compliance requires a “look back” test, meaning the question becomes “has the loan party paid more than 60% per annum in interest?”. In an attempt to circumvent the 60% per annum threshold, loan document provisions can deem overages as payments of principal, and not interest payments.
It is important to note that this case applies the remedy of notional severance instead of severing the interest provision all together, which would cause a creditor to lose all payable interest. Instead, the application of notional severance serves as a cap to preserve the creditor’s rights to interest payments up to a certain threshold. It would be reasonable to suggest that sophisticated loan documents in commercial transactions would have no issue meeting the Transport N.A. Factors to qualify for notional severance.