Exploring validity of cross-border futures trading contracts

By Xu Zhihe and Wang Yuan, SHIAC
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Determining validity of cross-border future trading contracts
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The claimant, a Chinese citizen, and the respondent, a Singaporean citizen, entered into an Account Mandate Management Contract dated 20 September 2017. The contract provides that the claimant entrusts the respondent with the opening of a dedicated portfolio account at a dealer’s foreign exchange market identified by both parties, and stipulates in the “risk allocation mechanism” clause that the manager (the respondent) undertakes to protect the investor (the claimant) from any kind of losses. The dispute resolution clause of the contract stipulates that all disputes related to the contract shall be submitted to the Shanghai International Arbitration Centre for arbitration.

The claimant then remitted investment funds to the account in two instalments as agreed in the contract. The trading password of the account was established and controlled by the respondent, and all futures trading through the account was decided and operated by the respondent on its own. During the performance of the contract, the respondent failed to disclose to the claimant the fact that the loss of the account had reached the critical point for termination of the contract.

It was only after the claimant repeatedly pressed the respondent that the respondent informed the claimant, via WeChat, that the funds in the futures account had been substantially lost. After that, the respondent continued to operate the account, which eventually led to the loss of all the money and the cessation of trading. The claimant then applied for arbitration based on the arbitration clause in the contract.

The claimant argued that the “risk allocation mechanism” clause of the contract was clearly a guarantee clause, but the high investment risk in the futures market could not be avoided, and the guarantee clause that guaranteed the principal against loss was contrary to the most important element of the entrusted financial contract.

If the guarantee clause was found to be invalid, the claimant’s contracting purpose was almost lost, and it would be meaningless to continue to perform other parts of the contract. Therefore, the claimant requested that the respondent return the entrusted funds and pay interest for the corresponding period.

TRIBUNAL’S OPINION

The arbitration tribunal considered that the main issues in the case included: (1) the application of the law regarding the dispute; (2) the validity of the contract; and (3) the allocation of responsibility after the contract was found to be invalid.

After hearing the case, the arbitration tribunal found that the contract was silent on the application of the law, but in view of the fact that the domicile of the claimant in the case, the domicile of the other signatory to the contract, the place of arbitration and the place of signing the contract were all in China, and that both parties invoked Chinese law during the hearing of this case, then in accordance with the provisions of article 41 of the Law on the Application of Law to Foreign-related Civil Relations, the law applicable to this case was Chinese law.

With respect to the validity of the contract, the arbitration tribunal noted that the main contractual content of the transactions under the contract at issue involved the respondent’s futures trading on behalf of the claimant. With respect to futures trading, according to the Regulations on the Administration of Futures Trading, cross-border futures trading is an authorised business subject to financial regulatory provisions, and without the approval of the China Securities Regulatory Commission (CSRC), no one may establish or disguise a futures company to operate futures business (including offshore futures brokerage business).

Furthermore, the measures for domestic units or individuals to engage in offshore futures trading shall be formulated by the CSRC and the relevant departments of the State Council. In this case, the respondent performed the act of opening accounts on overseas websites and providing electronic trading systems for futures trading on behalf of domestic customers under the contract.

But since the CSRC had not yet issued overseas futures brokerage business licences to any institution, and had not yet issued measures for domestic units or individuals to engage in overseas futures, the respondent’s conduct of introducing customers to overseas futures investment and acting for them in overseas futures trading was not approved by the competent state authorities, which violated the prohibitions of laws and administrative regulations, resulting in the contract at issue, which was mainly about overseas stock index futures trading on behalf of the respondent, was fundamentally invalid and all its agreements were not binding on the contracting parties.

On this basis, the arbitration tribunal further held that, according to article 58 of the Contract Law, after the contract was invalid or revoked, the property acquired by the contract should be returned. If it could not be returned or was not necessary to be returned, it should be compensated at a discount. The party at fault should compensate the loss suffered by the other party, and if both parties were at fault, they should each bear the corresponding responsibility.

Although the respondent was the main party at fault for the loss of the claimant’s funds, the claimant, however, also failed to exercise its due diligence and should bear part of the loss itself. Therefore, the arbitration tribunal found that two-thirds of the loss of the claimant’s investment money should be borne by the respondent, and did not support the loss of interest on the claimant’s investment money in bank loans.

SOME TAKEAWAYS

Due to the special nature of strong regulation in the financial industry, commercial subjects, when engaging in cross-border financial transactions, should pay more attention to the legal risks of the transactions before valuing the business risks of the transactions.

Accordingly, for the adjudication of disputes on cross-border financial transactions, it is reasonable to fully judge the financial security, market order and national macro policies involved in the mandatory provisions behind the financial regulation, fully examine the subject matter of the transactions, transaction methods, trading venues, franchise regulations, etc. For those that violate public order and morality involving financial security, market order and national macro policies, the contract should be deemed invalid ex officio.

It is worth noting that although the main issue of the dispute between the parties in this case was the validity of the contract, the claimant merely claimed that the invalidity of the guarantee clause in the contract led to the invalidity of the contract as a whole. At this point, according to article 19 of the Arbitration Law, the arbitral tribunal is entitled to examine the validity of the contract as a whole, and thus in this case the tribunal delivered a comprehensive and accurate judgment on the validity of the contract at issue.

The tribunal’s opinion on the validity of the contract in the case can be said to be a useful attempt by it to properly deal with the relationship between civil and commercial trials and financial regulation so as to find the best balance between respecting private law autonomy and protecting the rule of law and order, in accordance with the statutory authority to review the validity of contracts granted by the Arbitration Law.


Xu Zhihe is the deputy director of the research and information department and Wang Yuan is a senior case manager at SHIAC

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