Guidelines on Rigidly Regulating the Adjudication of the Cases of Independent Bank Guarantee Disputes for the Purpose of Keeping the International Financial Transaction Order
Since 2009, as a result of the international financial crisis and the weakness of the recovery of the world economy, disputes arising out of independent bank guarantee in the area of international commercial transactions have seen a rapid increasing trend, which brought new challenges to the adjudication of commercial and maritime cases concerning foreign elements. To rigidly regulate the adjudication of independent bank guarantee disputes, and to carefully research on and timely resolve the complicated legal issues of new kind in connection with independent guarantee, shall not only be an important mission of the People's Courts to carry out the sophisticated strategy of adjudication of commercial and maritime cases with foreign elements to serve for the open policy, but also be significant to improve and perfect the national foreign-related financial credit system, maintain the stability of international financial transaction order, and guide the domestic banks and enterprises with protection to proactively participate in the international economic cooperation in good order. The Guidelines in respect of the practical issues on the adjudication of independent bank guarantee disputes are as follows:
I. Understand the Principle of Independence of Bank Independent Guarantee Correctly
- Independent guarantee refers to any written undertaking issued by banks at the request of the instructing party to provide for payment within the maximum amount as specified in the undertaking upon presentation of a 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 independent guarantee, unless otherwise provided by the Guidelines.
- The nature of bank 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, which constitutes a complying presentation, the guarantor is obliged to pay within a reasonable time.
Independent bank guarantee is independent of the underlying contract as well as other contracts such as the application for guarantee and counter-guarantee. Where a guarantor or an instructing party alleges that the guarantor shall not provide for payment based on the grounds of defence under the underlying contract or other contracts, the People's Court shall not support such allegation, except for the fraud cases as specified in the Guidelines.
II. Support the Utilization of Independent Bank Guarantee in the International Commercial Transactions by Law
- Where a bank guarantee provides that it is independent of the underlying contract, and the instructing party waives the defences under the underlying contract, or that the URDG applies, the 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 and several liability.
Where the terms and conditions of a guarantee are inconsistent contextually, the People's Court shall take all clauses into account to determine whether the guarantor has explicit intent to provide an independent guarantee. A reference made in an independent bank guarantee for the purpose of identifying the underlying contract does not change the independent nature of the guarantee.
- Independent bank guarantee is a new financial product developed in international commercial transaction. For one thing, parties dealing with Chinese domestic commercial transactions have not fully realized the severity of independent guarantee liability; for another thing, independent bank guarantee requires relatively simple documents, which are 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 prevent the systematic and the regional financial risks, before relevant rules are promulgated, the People's Court shall not recognize the independent bank guarantees issued for domestic commercial transactions, and shall treat them as joint and several guarantees.
- Where parties choose to apply for issue of independent bank guarantee in international commercial transactions, the People's Court shall respect the autonomy of the parties' will. If either the guarantor or the beneficiary is domiciled outside of the PRC, or the facts which cause the establishment, change or cancellation of the independent guarantee relationship occurred outside of the PRC, it shall be deemed as foreign-related independent bank guarantee. If the interested party requests for confirmation of the independence of foreign-related independent bank guarantee, it shall be supported by the 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.
- With the further implementation of going global strategy by Chinese enterprises, in the need of diversifying risks of guarantee in the performance of large overseas projects, a significant volume of independent guarantees such as independent counter-guarantees and sub-guarantees with no foreign elements has been issued by domestic banks to the domestic parties. For the purpose of maintaining the consistency of the application of law, if the corresponding underlying contract of an independent bank guarantee with no foreign elements is an international commercial contract, the party's request for confirmation of the independence of such independent bank guarantee shall also be supported by the People's Court.
- The Guideline shall not apply to the independent guarantees issued by enterprises and other organizations or natural persons other than banks. The qualification and capacity of issuing independent guarantee of foreign enterprises, organizations or natural persons shall be determined by their respective lex personalis.
III. Properly Determine the Jurisdiction and Lex Causae of Independent Bank Guarantee Disputes
- In case of foreign related independent bank guarantee disputes, including disputes arising out of issue, advice, amendment, acceptance, transfer, payment and reimbursement, 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 dealt with in accordance with the regulations on the jurisdiction of foreign-related independent bank guarantee disputes.
- 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 domiciled. The People's Court shall overrule the objection to jurisdiction raised by the parties according to the disputes resolution clause under the underlying contract.
- Disputes in connection with independent bank guarantee fraud cases belong to tort cases, which shall not be governed by the disputes resolution agreement between guarantor and beneficiary, and shall be subject to the regulations on jurisdiction of tort cases and governed by the court at the place where the defendant is domiciled or where the tort is committed.
- 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.
- The URDG or other international practices 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 made according to the rules accepted by the contracting states, and 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 cite the Convention in an independent bank guarantee, it shall be disregarded by the People's Court.
IV. Rigorously Set Criterion of Fraud Exception, Strictly Prohibit Suspending the Payment under the Independent Bank Guarantee ad libitum
- At present, the People's Courts have accepted numbers of independent bank guarantee fraud cases with applications for injunctions. The practice in determination of cause of action, status of parties, constitution of fraud and procedures in granting injunctions of the People's Courts differs from place to place, which not only adversely affects the steady operation of independent bank guarantee system, 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 on timely basis. The People's Court shall rigorously set criterion of fraud exception, instead of interfering with the commercial arrangement of "Pay First, Argue Later" agreed by the parties by way of independent bank guarantee. To suspend the payment under the independent bank guarantee ad libitum is strictly prohibited.
- Beneficiary's demand for payment under any of the following circumstances shall be regarded as a fraudulent claim:
- Beneficiary presents fake or forged documents;
- There is no factual basis or reliable grounds for the beneficiary's claim and: a. the obligor has performed all obligations under the underlying contract; b. the underlying contract is nullified or terminated by the competent court or arbitration institution, and the obligor does not bear any liability to pay; c. the beneficiary improperly and deliberately prevents the obligor from performing the underlying contract; and d. any other circumstances where the beneficiary abuses the right of claim by presenting a fraudulent demand knowing that the risks guaranteed by the independent bank guarantee has not actually happened.
Where a guarantor, with the knowledge of the existence of the circumstances provided by the above paragraphs (1) and (2), makes the payment without good faith, and demands under the independent counter-guarantee as the beneficiary thereof, it constitutes a fraudulent demand under the counter-guarantee.
- 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:
- The court to accept the application shall have jurisdiction over the guarantee fraud case; where the arbitration is agreed, the intermediate court of the place where the guarantor is domiciled has the jurisdiction;
- The applying party submits the evidence to prove that the beneficiary has presented the claim for payment against the guarantor, and the circumstances provided by Article 14 of the Guidelines exist;
- The guarantor has not paid;
- If the injunction is not granted, the legitimate interests of the applying party will suffer irreparable damage;
- Sufficient and effective security is provided by the applying party.
- Application of the parties for injunction during the proceedings of independent bank guarantee fraud case, or application of the parties forwarded by the arbitration institution of the PRC, shall be accepted by the People's Court if the conditions provided by paragraphs (2), (3), (4) and (5) of Article 15 are met.
- The People's 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 the People's Court.
- If the existing evidence produced by the applying parties for injunction can prove that the beneficiary has committed fraudulent claim provided by Article 14, the People's Court may rule that the guarantor can suspend the payment under the guarantee claimed by the beneficiary according to Article 100 or Article 101 of the Civil Procedure Law of the PRC.
After a guarantor makes payment to the beneficiary in good faith in accordance with the regulations on independent guarantee and claims against the counter-guarantor as the beneficiary of the counter-guarantee, it shall not be deemed as fraudulent claim, and the People's Court shall not rule on suspension of payment.
- After the People's Court grants pre-trial injunction, the applying party shall bring an action against the fraud in guarantee or submit the case to arbitration within 30 days from the day when the injunction has been served, otherwise the People's Court shall lift the injunction.
- Where a party objects to the injunction granted by the People's Court, it may apply for review within 10 days from the day when the injunction has been served. If the relevant party is domiciled outside of the PRC, it 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 days from the day when the application has been received. During the procedure of review, the execution of the injunction shall not be stopped. The People's Court shall not accept the application for re-trial on the injunction made by the parties.
- The People's Court may exercise limited examination on the underlying contract with respects to the circumstances provided in Article 14 of the Guidelines 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 the 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 the underlying contract, subject to the examination and confirmation of the People's Court.
- After adjudicating the guarantee fraud case, if the People's Court finds that the demand of the beneficiary clearly and definitely constitutes fraudulent demand as stipulated in Article 14, the court shall rule that the guarantor can terminate the payment demanded by the beneficiary under the independent bank guarantee.
V. Deal with Specific Matters in Connection with Independent Bank Guarantee Correctly
- 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 do not lead to contradictions or different meanings, shall not be deemed as discrepancies.
- A guarantor has the right and obligation to examine the documents presented for demand for payment independently with reasonable due diligence, and to determine, at its sole judgment, 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 whether to waive 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, the People's Court shall support such claim. Where a guarantor rejects to waive the discrepancies and the beneficiary claims that the guarantor shall be held liable to the payment due to the instructing party's waiver of the discrepancies, the People's Court shall not support such claim.
- An independent bank guarantee shall not be revoked once issued and out of the control of the guarantor. A guarantee comes into effect from the date of issue of the guarantee, or such later date or the occurrence of the event as the guarantee provides, if both are specified, the earlier of the two.
- The guarantee period of an independent bank guarantee is not related to the period of the performance of the underlying obligations; the guarantee period is from date of issue of the guarantee to the expiry date which is the last day on which a presentation shall be made according to the guarantee. If the guarantee does not specify an expiry date or the expiry date cannot be ascertained, the guarantee shall be an open date guarantee and the guarantee period shall be determined according to lex cause.
As for the open date guarantee issued by domestic banks, the guarantee period for guarantee shall be three years from the date of issue and the guarantee period for counter-guarantee shall be 30 days from the expiry of the guarantee period of the independent guarantee. The guarantee period of the guarantees issued before the implementation of the Guidelines shall be three years from the date of the implementation of 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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.