Letter of Credit Forum

The SUPREME PEOPLES COURT OF PRC

Guidelines on Rigidly Regulating the Adjudication of Independent Bank Guarantee Disputes for the Purpose of Keeping the International Financial Transaction Order

 

(Second Draft for Public Comment)

 (December 28 2012)

English version prepared by Saibo JIN’s team

Beijing Commerce & Finance Law Offices

 

 

Since 2009, affected by the international financial crisis and the weakness of the recovery of the world economy, in the international commercial transactions, the disputes arising out of Independent Bank Guarantee are tending to increase rapidly, which is faced the commercial and maritime adjudication with new challenges. To rigidly regulate the adjudication of independent bank guarantee disputes, and to serious study and timely resolve the complicated legal issues of new kind that in connection with independent guarantee, not only are an important mission of People’s Courts to carry out the strategy of sophisticated adjudication of commercial and maritime cases with foreign element to serve for the opening policy, but also have significant meanings to improve and perfect the credit system of the transnational finance of our nation, to maintain the stability of the international financial order, and to guide and ensure banks and enterprises of our country to participate in the international economic cooperation. On the practice of adjudication of Independent Bank Guarantee Disputes, the Guidelines are as follow:

 

I.         Understand the Principle of Independence of Bank Guarantee Correctly

1.      Independent guarantee refers to any written undertaking, issued by banks at the request of the instructing party, providing for payment within maximum amount upon presentation of the complying demand.

Where, at the request of the instructing party, a counter-guarantee is issued by a bank as the counter-guarantor in favour of the guarantor, the counter-guarantee is subject to the rules governing the guarantee, unless otherwise provided by the Guideline.

 

2.      The nature of independent guarantee is an independent undertaking, which takes the form of documentary transaction. As long as the documents presented by the beneficiary are on their face complying with the terms and conditions of the guarantee, the guarantor is obliged to pay upon the complying presentation.
Independent bank guarantee is by its nature independent of the underlying contract, the application, any counter-guarantee as well as any other contracts. Where a guarantor or an instructing party invokes the claims or defences arising from the underlying contract or any contract other than the Guarantee, the People’s Court shall not support such allegation.

 

 

II.      Support the Utilization of Independent Bank Guarantee in the International Commercial Transactions by Law

3.      Where a bank guarantee expressly indicates it is independent of the underlying contract, and the instructing party waives all the defences arising from the underlying contract, or subject to URDG, People’s Court shall treat it as independent guarantee normally. However where neither a maximum amount payable nor required documents are provided in the guarantee, it shall be considered as a collateral surety with joint liability.

Where the terms and conditions of a guarantee state inconsistently, People’s Court shall scrutiny all the clauses to determine whether the guarantor has the intent to provide an independent guarantee. A reference in an independent bank guarantee to the underlying contract for the purpose of identifying it does not change the independent nature of the guarantee.

 

4.      Independent bank guarantee is new financial product developed in international commercial transaction. For one thing, parties dealing with Chinese domestic commercial transaction have not fully realized the severity of independent guarantee liability; for another thing, independent bank guarantee requires simple documents, which is easy to be abused by fraud. The market credit is being cultivated and the financial innovation is being explored at present in China. In order to guard against the systematic and the regional financial risk, before relevant rules are promulgated, People’s Court shall not recognize the independence of bank guarantees issued for the domestic commercial transaction, but treat it as joint liability surety.

 

5.      Where parties choose to apply for issue of independent bank guarantee in international commercial transactions, People’s Court shall respect the autonomy of parties’ will. If either the guarantee bank or the beneficiary is located outside of PRC, or the facts which cause the establishment, change or cancellation of independent guarantee relationship occurred outside of PRC, it shall be deemed as foreign related independent guarantee. If the interested parties requests for confirmation of the independence of foreign related independent bank guarantee, it shall be supported by People’s court. Where the independent bank guarantee is issued by a branch of the guarantor, the domicile of the guarantor is the place of the branch.

 

6.      With the global stratagem implemented by Chinese enterprises to a further stage, in the need of diversifying risks of guarantee in the large overseas contracting project, a significant volume of independent counter-guarantees, sub-guarantees which embraces no foreign element, has been issued. For the purpose of maintaining the uniformity of the application of law, if a bank guarantee is not foreign related while the corresponding underlying contract is international commercial contract, the independence of such independent bank guarantee shall also be affirmed.

 

7.      If an independent guarantee is issued by enterprises, institutions or nature persons of PRC other than banks, the Guideline does not apply. The capacity of issuing independent guarantee of enterprises, institutions or nature persons of a foreign country shall be determined by their respective personal law.

 

 

III.   Determine the Jurisdiction and the Governing Law of Independent Bank Guarantee Disputes Properly

8.      In case of foreign related bank guarantee disputes, including disputes arising out of issue, advice, amendment, acceptance, transfer, pay and reimburse, etc., intermediate courts or upper level courts which exercise jurisdiction over foreign related civil and commercial cases shall have the jurisdiction over such disputes.  The independent bank guarantee disputes provided by Article 6 of the Guidelines, shall be handled in accordance with the rules of jurisdiction on the foreign related independent bank guarantee disputes.  

 

9.      Unless otherwise provided in guarantees, disputes arising out of independent bank guarantee between guarantor and beneficiary shall be governed by the court at the place where the defendant or guarantor is located. People’s Court shall overrule the objection to jurisdiction raised by parties according to the disputes resolution agreement in the underlying contract.

 

10.  Disputes in connection with independent bank guarantee fraud cases belong to tort cases, which shall not be bound by the disputes resolution agreement between guarantor and beneficiary, but shall be subject to the rules of jurisdiction of tort cases, which is to be governed by the court at the place where the defendant is located or where the tort is happened.

 

11.  Unless otherwise agree on the governing law by the guarantor and the beneficiary of a foreign related independent bank guarantee, the law of the place of guarantor applies. PRC laws shall apply to the differentiation between independent guarantee and collateral surety, guarantee fraud and the criterion of granting injunction.

 

12.  URDG or other international practice shall apply if the independent bank guarantee expressly provides so. The United Nations Convention on Independent guarantees and Stand-by Letters of Credit (“the Convention”) is decree that accepted by contracting states, which is not the model contractual terms that can be incorporated in guarantees subject to the choice of parties. Where parties from a non-contracting state invoke the Convention in an independent bank guarantee, People’s court shall not allow.  

 

 

IV.   Set Criterion of Fraud Exception Strictly, Forbid to Suspend the Payment under Independent Bank Guarantee Randomly  

13.  At present, People’s Courts have accepted numbers of independent bank guarantee fraud cases with applying for injunctions, People’s Courts of different areas diversify in determining the cause of action, construction of litigation, constitution of fraud and procedures of granting injunctions, which not only adversely affects the operation of independent bank guarantee system steadily, but also deviates from the long-term interest of Chinese banks and enterprises in participating in the international competition and exploring global market, and shall be regulated immediately. People’s Court shall set rigid criterion of determining fraud, instead of interfering with the commercial arrangement of “Pay First, Argue Later” of the parties by way of independent bank guarantee. To suspend the payment under Independent Bank Guarantee randomly is strictly forbidden.

 

14.  Fraudulent claims under the independent bank guarantee can be described as any one of the following:

 

(1)   Beneficiary presents fake or forged documents;

(2)   Claim by beneficiary is not based on any factual or reliable grounds, which is as any of the following:

a.       Obligor has performed all the obligations under the underlying contract;

b.      Underlying contract is terminated or nullified by court or arbitration institution, and obligor does not bear any liability to pay;

c.       Beneficiary improperly and deliberately prevents obligor from performing underlying contract;

d.      Any other circumstances where Beneficiary abuses right of claim by fraudulent demand knowing that the risk guaranteed by the Independent Bank Guarantee has not actually happened.

Where a Guarantor, with the knowledge of the existence of the circumstances provided by Paragraph (1) and (2), makes the payment without good faith, and demands under the independent counter-guarantee as the beneficiary thereof, it constitutes the fraudulent demand under the counter-guarantee.

 

15.  Where an instructing party, a guarantor or other interested parties applies for injunction before bringing an action or arbitration, it is acceptable when the following conditions are met:

(1)   Court to accept the application shall have jurisdiction over the guarantee fraud case; where the arbitration is agreed, the intermediate court of the place of guarantor has the jurisdiction;

(2)   The applying party submits the evidence to prove that beneficiary has presented claim against guarantor, and the circumstances provided by Article 14 exist;  

(3)   The guarantor has not paid;

(4)   If the injunction is not granted, legitimate interests of the applying party will suffer from irreparable damage;

(5)   Sufficient security is provided by the applying party.

 

16.  Application for injunction during the proceedings of litigation of independent bank guarantee fraud case, or application of parties forwarded by arbitration institution of PRC, shall be accepted by People’s Court if the conditions provided by Article 15 Paragraph (2), (3), (4) and (5) are met.

 

17.  Court shall make a decision within 48 hours after it accepts the application for injunction. The decision shall list the applying party, respondent and the third party. Guarantors and counter-guarantors may join the proceedings by application or by notice of People’s Court (injunction).

 

18.  Applying parties for injunction produce evidence that proves the beneficiary has committed fraudulent claim provided by Article 14, People’s Court may order to suspend the payment under the Guarantee claimed by the beneficiary according to Article 100 or Article 101 of the Civil Procedure Law of PRC.

After a guarantor makes payment to the beneficiary in good faith in accordance with the rules of independent guarantee and claims against the counter-guarantor as the beneficiary of the counter-guarantee, it shall not be deemed as fraudulent claim, and People’s Court shall not order to enjoin the payment. 

 

19.  After People’s Court grants pre-trial injunction, the applying party shall bring an action against the fraud in guarantee or submit the case for arbitration within 30 days from the day when the injunction has been served, otherwise People’s Court shall lift the injunction. 

 

20.  Where a party objects to the injunction issued by People’s Court, one may apply for review within 10 days from the day when the injunction has been served. If the relevant party domiciles outside of PRC, one may apply for review within 30 days from the day when the injunction has been served. The People’s Court at a higher level shall make the decision on the application for review within 10 day from the day when the application has been accepted. During the procedure of review, the execution of the injunction shall not stop. People’s Court does not accept the re-trial on the injunction application filed by parties.

 

21.  People’s Court may exercise limited examination on the underlying contract with respects to the circumstances provided in Article 14 of the Guideline when dealing with guarantee fraud cases or injunction application. The allegation of parties that the court shall not examine the underlying contract due to the disputes resolution clause thereof shall be disregarded by People’s Court.

The binding judgment or arbitral award rendered by foreign jurisdiction on the underlying contract may be produced as evidence in connection with the facts of underlying contract, which is subject to the examination and confirmation of People’s Court.

 

22.  After adjudicating the guarantee fraud case, if People’s Court finds that the demand of beneficiary clearly and definitely constitutes fraudulent demand stipulated in Article 14, the court shall rule that guarantor is enjoined from payment eternally under the independent bank guarantee upon the beneficiary’s claim.  

 

V.      Deal with the Specific Matters in Connection with Independent Bank Guarantee Correctly   

 

23.  Independent bank guarantees follow the principles of documentary transaction and strict compliance. Inconsistencies between documents and terms of independent bank guarantee, or among documents on their face, which does not lead to contradictions or different meaning, shall not be deemed as discrepancies. 

 

24.  A guarantor has the duty and right to examine the documents presented for claim with reasonably due care, and to determine, at its sole judgment, to whether the presentation is complying, and when it is not whether to approach to the instructing party for a waiver of the discrepancies. If the instructing party waives the discrepancies, it does not affect the decision of the guarantor on waiver of the discrepancies or not, unless otherwise agreed by the guarantor and the instructing party. 

Where a guarantor expresses to the beneficiary that the discrepancy is waived, and the beneficiary claims that the guarantor shall be held liable to the payment, People’s Court shall support such claim. Where a guarantor rejects to pay due to the discrepancies and the Beneficiary claims that the guarantor shall be held liable to the payment due to the instructing party has waived the discrepancies, People’s Court shall not support such claim.

 

25.  An independent bank guarantee is irrevocably issued when it leaves the control of the guarantor. A guarantee takes its effect from the time of issue of the guarantee, or such later time or event as the guarantee provides, if both are specified, the earlier of the two.

 

26.  The guarantee period of an independent bank guarantee is not related to the period within which the underlying obligation shall be performed; the guarantee period is from date of issue of the guarantee to the expiry date which is the date on or before which a presentation may be made. If the guarantee states neither an expiry date nor an expiry event, the guarantee period shall be determined according to the governing law.  
The guarantee that states neither an expiry date nor an expiry event issued by banks of PRC, the guarantee shall terminate after the lapse of three years from the date of issue and the counter-guarantee shall terminate 30 days after the guarantee terminates. Guarantees issued before the implementation of the Guidelines shall terminate after the lapse of three years from the date of the implementation the Guidelines.

 

The Guidelines shall be implemented on the date of issue. When problems occur in the implementation, please report level by level to our Court.