Article

Topic: Domestic Independent Guarantee; Joint Liability; Independence; Guarantee

Note: In accordance with a loan agreement between Xishan Branch of Bank of China (Lender) and Yangshi Steel (Borrower), Tengyue Co. (Guarantor) issued a Guarantee in favor of Lender/ Beneficiary to assure the repayment of a US$3.16 million loan from Borrower. The Guarantee stated that Guarantor undertook all the loan liabilities resulting from the loan agreement and that the Guarantee was an independent one. Subsequently, Borrower used the loaned funds to reimburse the Wuxi Branch of Bank of China for an LC in the same amount that Borrower had caused the Wuxi Branch to issue in favor of a party not named in the opinion. However, Borrower and Guarantor failed to repay the principal and interest to Lender/ Beneficiary when the loan agreement came to maturity.

Lender/Beneficiary then sued the People's Government of Luoshe Town (owner of the Borrower and Guarantor) in the Jiangsu Superior People's Court for repayment due under the loan agreement and presumably the Guarantee. The Jiangsu Superior People's Court ruled that Borrower must repay the loan of US$3.16 million and corresponding interest and that Guarantor is jointly liable with Borrower on the above loan. On appeal, the Supreme People's Court affirmed the judgment.

The Supreme People's Court concluded that the loan agreement was valid even without a use-of-theloan clause because Lender/Beneficiary had explained to Borrower on the approval of the loan that the loan was a working capital loan and neither Borrower nor Guarantor objected. The court also noted that Lender/Beneficiary had actually performed by delivering the loan proceeds. Moreover, the court noted that Lender/Beneficiary and Borrower entered into the contractual relationship based on mutual assent and without any contravention of law. Thus, the Guarantee should be deemed valid since Guarantor's seal on the Guarantee was genuine and Lender/Beneficiary relied on it to issue the loan.

The court further concluded that Guarantor should not be exempted from liability under the Guarantee because Lender/Beneficiary and Borrower did not collude with each other in repaying Borrower's debt under an LC with another loan and the amount of the debt and the loan were almost the same, which did not increase the guarantee risk for the Guarantor.

Finally, the appellate court ruled that the People's Government of Luoshe was responsible for Guarantor's civil liability since Luoshe Co. (company responsible for Guarantor's credits and debts after liquidation) had inherited all the Guarantor's credits and debts and that the People's Government of Luoshe is legally responsible for Luoshe Co.

Text: The Guarantee provided:

[T]he guarantee shall cover the total indebtedness the borrower owed to the lender under the Contract of Loan including principal, interest, fine for overdue repayment, liquidated damages, litigation costs and lawyers fees on the lender's part; the guarantor shall be jointly liable for the total indebtedness; the guarantee liability shall not be subject to the changes in the organization or management (including restructure, reorganization into joint stock companies, transfer of property right or management right by leasing or contracting) of either the guarantor or the lender; the guarantor unconditionally and irrevocably guarantees that any losses occurred to the lender due to the debtor's nonperformance or delay of performance of any stipulations herein, will be an independent and demand claim for the guarantor to the lender; the guarantee term becomes effective upon the day the guarantee is signed till the debtor pays off the whole debt under the underlying contract.

Comment:

The court did not address whether or not the Guarantee was independent. It contains elements of an independent and dependant guarantee. Although it expressly states that it is "independent", it is doubtful that it would be so treated under PRC LC Rule Article 4 since it appears to be domestic without any international dimension.

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