Article

Topics: Advance Payment Guarantee; Demand Guarantee; Counter-Guarantee; URDG 458

Note: Shenzhen Shuguang Information Technology Co., Ltd. (Principal) contracted with the General Authority for Investment and Free Zones of Egypt (Local Beneficiary) to implement an information system project. Principal applied to Export-Import Bank of China (Counter Guarantor) for a Counter Guarantee for a local performance guarantee in the amount of 5 % of the total contract price, EGP 497,500, and a Counter Guarantee for a local bank advance payment guarantee in the amount of 40 % of the total contract price, EGP 3,980,000 (Local Guarantees). To assure reimbursement from Principal, Counter Guarantor requested a guarantee. Principal caused Shenzhen Diantong Data Co., Ltd. (Guarantor) to issue a Guarantee in favor of Counter Guarantor, assuming joint liability with Principal for obligations arising from the Counter Guarantees. Counter Guarantor then instructed the National Bank of Egypt (Local Bank) to issue the local performance guarantee in the amount of EGP 497,500 and the local advance payment guarantee in the amount of EGP 3,980,000 in favor of Local Beneficiary, which it did.

The Counter Guarantees were payable upon receipt of demand regardless of any contractual disputes between Principal and Local Beneficiary. The Local Guarantees provided that with the maturity of each term of the project, the amounts in the Local Guarantees were to decrease proportionally upon presentation of invoices by Principal or the written statement from Local Beneficiary to Local Bank. There were, however, no corresponding terms in the Counter Guarantees.

To assure reimbursement from Principal, Counter Guarantor requested a guarantee. Principal caused Shenzhen Diantong Data Co., Ltd. (Guarantor) to issue a Guarantee in favor of Counter Guarantor, assuming joint liability with Principal for obligations arising from the Counter Guarantees.

Counter Guarantor then instructed the National Bank of Egypt (Local Bank) to issue the local performance guarantee in the amount of EGP 497,500 and the local advance payment guarantee in the amount of EGP 3,980,000 in favor of Local Beneficiary, which it did.

When Local Bank later demanded payment from Counter Guarantor, Counter Guarantor informed Principal of the demand and requested information about any deduction in the amounts of the Local Guarantees from for partial performance. Principal informed Counter Guarantor of a 70% deduction and another EGP 300,000 in the local advance payment Guarantee after corresponding with the Local Beneficiary. With the approval by of the State Administration of Foreign Exchange, Counter Guarantor paid Local Bank EGP 497,500 (US$84,489) under the Counter Guarantee on the local performance guarantee and EGP 894,000 (US$151,825.40) after the deduction on the local advance payment guarantee.

Local Bank notified Counter Guarantor that Local Beneficiary denied allowing any deduction in payment and demanded the remaining amount. Counter Guarantor informed Principal of this demand and requested payment as the funds in Principal's account were insufficient. After negotiation with Local Bank, Counter Guarantor notified Principal that the amount to be paid was EGP 3,680,000 (US$473,134.46) and requested funds for the payment. Subsequently, Counter Guarantor paid Local Bank US$473,134.46. Principal, therefore, owed Counter Guarantor US$691,376.86. Counter Guarantor demanded reimbursement and Principal refused. Counter Guarantor sued Principal and Guarantor for reimbursement.

Beijing No. 2 Intermediate People's Court, Judges Wu Bao Sheng, Pei Ning Yang and Hu Jun, JJ., ruled in favor of Counter Guarantor. The court decided both Principal 's application for Counter Guarantees and Guarantor's guarantee were valid and ordered Principal and ordered Guarantor to jointly pay Counter Guarantor US$691,376.86 and litigation fees jointly. Principal and Guarantor appealed. Beijing Superior People's Court, Judges He Bo, Yan Hui, Tan Li Ming, JJ., affirmed in a per curiam decision. The court decided held that (1) although the Counter Guarantees were not issued under URDG 458, URDG 458 was applicable as an international practice; (2) Counter Guarantees were valid with approval of the State Administration of Foreign Exchange; (3) Principal knew Counter Guarantor issued Counter Guarantees instead of Guarantees and that, Counter Guarantor did not act beyond its authority; (4) there was no fraud in this case; (5) the demand was made by Local Beneficiary and not instead of Local Bank, thus Guarantor had was jointly liabileity to pay; (6) all documents complied with the terms of the Guarantees and Counter Guarantees; (7) Counter Guarantor gave prompt notices to Principal about the demand; and (8) there was no obligation for Counter Guarantor in the deduction ofto reduce the amount of the Counter Guarantees in the absence of any such term in the Counter Guarantees.

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