Article

Topics: Demand Guarantee; URDG 458

Note: Spain Rick Leepusa Co., Ltd. (Service Provider) entered into a Technology Development Contract on Project AQ7200 with Aux Automobile Company (Client) and Client's import agent, China Ningbo International Cooperation (Agent). The contract required that the Service Provider obtain a bank guarantee in the amount of EUR 300,000 within 15 days after the execution of the contract and obliged Client to pay EUR 300,000 in advance "by T/T" within 15 days after its receipt of the bank guarantee. Service Provider obtained a Bank Guarantee from Banc Sabadell of Barcelona (Guarantor).

The Bank Guarantee stated that Guarantor undertook to pay Agent up to EUR 300,000 upon receiving the first written demand for payment stating that Service Provider had failed to fulfill its contractual obligations and that there had been a tortious breach. It also provided that the Bank Guarantee would enter into effect upon Service Provider's receipt of the advance payment from Client and that the Bank Guarantee was subject to the URDG 458. Subsequently, Agent remitted the advance payment to Service Provider.

Client then sent Termination Notice to Service Provider, claiming Service Provider had breached the contract. Simultaneously, Agent/beneficiary made a written demand for payment to Guarantor stating that Service Provider had breached the contract. Guarantor refused to pay the amount under the Bank Guarantee since Service Provider had already initiated arbitration in China and a temporary remedy procedure for suspending payment on the Bank Guarantee in a Spanish court.

Service Provider brought this action in the Zhejiang Ningbo Intermediate Court, asking the court to hold 1) that given that Service Provider was not in breach of the Technology Development Contract, Agent's demand under the Bank Guarantee was in breach of the contract and 2) that the Agent's demand under the Bank Guarantee was invalid. The Zhejiang Ningbo Intermediate Court entered judgment for Agent on the ground that the dispute was contractual and Service Provider had breached the contract. Therefore, as authorized by Client, Agent had reasonable grounds to make the written demand for payment under the Bank Guarantee. On appeal, the Zhejiang Superior People's Court affirmed the judgment.

The Zhejiang Superior People's court concluded that since the Service Provider did not request that the court ascertain the Agent's breach of the Technology Development Contract, the case should be tried as a bank guarantee dispute instead of a technology contract dispute. Also, the court held that according to the provisions of the guarantee issued by the Guarantor to the Agent, the bank guarantee is subject to URDG 458 and, therefore, the Import Agent need not provide any evidence indicating the breach of contract of the Service Provider but only state that Service Provider did not fulfill its contractual obligations and that there had been tortious conduct. In accordance with the provisions of the Bank Guarantee, the written demand explicitly stated that the Service Provider had failed to fulfill its obligations under the Technology Development Contract. Thus, the Agent's demand under the Bank Guarantee was not in breach and not void. Finally, the court refrained from commenting on the performance of the Technology Development Contract as it was not within the scope of the case.

Text: As reported in the opinion, the Bank Guarantee stated:

[Guarantor] undertakes to make payment up to EUR 300,000 to [Agent] when receiving the [Agent]'s first written Demand, which shall state that [Service Provider] has failed to perform its obligations under the Contract and there has been tortious conduct. The Guarantee enters into effect when [Service Provider] receives the advance payment. The Guarantee is subject to the ICC Uniform Rules on Demand Guarantees (ICC Publication No. 458).

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