Article

Factual Summary: To warrant the quality of the equipment, under the request of Zhengda, CCB, Tianxin issued a Quality Guarantee in favour of Mesto. The Guarantee concerned provides that CCB, Tianxin shall honour Mesto's demand for payment upon presentation of Claim Notice in writing supported by a statement alleging that the amount claimed has not been paid by the Applicant for the Guarantee, along with a Statement of Default. The governing law agreed upon in the Guarantee was the law of PRC. On 20 May 2008, Mesto made a demand for the amount of the Guarantee against CCB, Tianxin and presented the Claim Notice and the Statement of Default absent the original copy of the Guarantee concerned. CCB, Tianxin did not honor the demand.

Procedural Posture:

The Trial Court held that the Quality Guarantee concerned qualifies as the Demand Guarantee. Therefore, the Bank Guarantor shall only investigate whether the documents presented appear on the face to comply with the terms of the guarantee. Where such documents do not appear to conform or appear on their face to be inconsistent with one another, they should be refused. In the present case, the original copy of the Quality Guarantee was absent at the time the demand was made. Thus Mesto had made a non-conforming presentation, which entitles CCB, Tianxin to not honour the guarantee.

The Appeal Court found that it was agreed upon in the Quality Guarantee that CCB, Tianxin shall assume joint liability for any loss due to defect of the equipment sold to Mesto by Zhengda. The court also found that the Guarantee should be subject to the laws of PRC. Therefore the Guarantee concerned is not a Demand Guarantee. In addition, the original copy of the Guarantee is not a document of title, and CCB, Tianxin also agreed to be a surety for Zhengda. Therefore, the fact that the original copy of the Guarantee concerned is missing will not exempt CCB, Tianxin from its suretyship obligation. The Appeal Court reversed the Trial Court's Judgment and ordered CCB, Tianxin to pay Metso the amount claimed.

Rationale:

The High People's Court of Hunan Province ruled for the Applicant for Retrial/Appellee/Defendant/ Account Party on the grounds that:

The Quality Guarantee concerned is not a Demand Guarantee for the following reasons: 1) the Parties of the Guarantee concerned chose the laws of PRC instead of the URDG as the governing law of the Guarantee; 2) it was agreed that CCB, Tianjin would assume joint liability for any claim under the amount ceiling prescribed in the Guarantee in the event of default by Zhengda on the Quality Warranty, which means the payment obligation of CCB, Tianjin is premised on the proof of default by Zhengda was not independent.

The court also found that Mesto failed to provide any evidence to establish the default of Zhengda, which was required before the Guarantor could dishonour the guarantee.

Comments:

The case established that the wording "joint liability" mentioned in the Guarantee infers that proof of default is required for the Beneficiary to demand payment under the Guarantee against the Guarantor.

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This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.