Article

Factual Summary: To assure timely construction of a sewage expansion project, Outsourcer/Beneficiary required Contractor/Principal to submit a cash security deposit. Instead, Contractor/ Principal obtained a Guarantee in the amount of NT$85,987,039 from Guarantor in favor of Outsourcer/Beneficiary with the permission of Outsourcer/Beneficiary. The Guarantee stated that "the validity period of the guarantee is from its date of issuance to 30 June 2007."

When Contractor/Principal found itself unable to finish the construction before the deadline in the construction contract and the pending expiry date of the Guarantee, it requested a release of its liability of the outstanding balance, 75% of the Guarantee amount (NT$64,490,179). Outsourcer/Beneficiary refused the request and in turn demanded that Contractor/Principal obtain an extension of the pending expiry date of the Guarantee. However, Contractor/Principal did not do so. Provision 7(9) of the construction contract provided that

"if [Contractor/Principal] could not perform its duty within the time limit as stated in the contract, or if the project could not be examined and accepted [by the administration] within the validity of the security deposit due to the fault of [Contractor/ Principal], the validity of the security deposit should be extended in accordance with the period of the delay".

Provision 7(8) of the contract provided that "if [Contractor/Principal] could not extend the validity of the security deposit in pursuant to the contract, the security deposit not being extended would not be refunded."

After the expiry date had passed, Outsourcer/ Beneficiary drew on the Guarantee in the amount of NT$64,490,179. Claiming that the Guarantee had expired, Guarantor refused to honor. Outsourcer/ Beneficiary then sued Guarantor for wrongful dishonor.

The trial court ruled in favor of Guarantor but intermediate appellate court reversed the trial court's decision and decided in favor of Outsourcer/ Beneficiary. On appeal, the reversal by the intermediate appellate court was affirmed.

Legal Analysis:

1. Classification: The Supreme Court noted that the intermediate appellate court "recognized that the guarantee issued by the appellant was a promise of payment, which differed from that in the accessory guarantee or suretyship under the civil law system." but the Supreme Court opinion did not itself address the classification of the Guarantee.

2. Interpretation, Intent and Purpose; Guarantee as substitute of security deposit: The Supreme Court stated that in interpreting a Guarantee, courts should explore the intent and purposes of the parties in their totality: "Courts should also consider a contract in view of its underlying facts, purposes, economic value, social recognition and the legal effect the parties intended to achieve." The opinion also warned that courts "should not confine themselves to the exact expression of the terms." In this respect, the Supreme Court was influenced by the role of the Guarantee, namely that it was used "as a substitute for the performance security deposit." Accordingly, the Supreme Court concluded that a decision against the Guarantor "[wa]s consistent with the intent of the agreements and [wa]s thus legally proper."

3. Expiry; Validity: The Supreme Court regarded the Guarantee as "an undertaking to pay" in the same sense as a cash security deposit for which it was substituted. The opinion noted that the Principal was in breach before the expiry date and "the conditions to forfeit the performance security deposit were met." The court approved of Beneficiary's argument that "the expiry date stated in the provision 4 of the Guarantee did not mean that the Guarantee would be ineffective after the expiry date", noting that Beneficiary claimed that Guarantor "had an obligation to pay under the Guarantee if [Principal] failed to perform before the project deadline and the conditions to forfeit the performance security deposit were met in accordance with the contract." The opinion concluded that "[t]he validity of the Guarantee means the performance period of [Principal], and [Principal] failed to provide a performance security deposit in cash within the validity period."

Comment:

1. While the opinion is correct in looking to the totality of the undertaking in interpreting it, the question is which undertaking is being interpreted, the Guarantee or the underlying transaction. It is not clear from the opinion whether the Supreme Court regarded the undertaking as independent or dependent. If it thought that the Guarantee was dependent, then the decision is perfectly consistent with international commercial law. If the Guarantee is independent, then it must be asked what relevance the intent and purpose of the underlying agreement has on a unilateral undertaking by the issuer of an independent guarantee.

2. A similar observation obtains with respect to the treatment of the "validity date". The term has appeared in some situations as signifying a period beyond the expiry date, a practice that is most troublesome. The notion of expiry signifies the last day on which an independent undertaking is available for drawing. Use of any other term leads only to total confusion. Here, however, the sense is that the "validity date" is less than what would be understood as the "expiry date".

[JEB/ny]

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