Article

Factual Summary: To secure the performance of a sales contract, under the request of ANTECH, SBI issued a Performance Guarantee in favour of Oswal that was counter guaranteed by BOC, Anhui. Both the Guarantee and the Counter Guarantee are demand guarantees providing for payment upon presentation of the written Claim Notice in written. The amount and Validity Period of the guarantees were modified several times at the request of ANTECH. After the last modification, the amount of the guarantee was increased to USD 999,000 and the Validity Period was extended to 31 September 2002. Oswal made a claim for the full amount under the guarantee against SBI. 13 June 2002, SBI requested BOC, Anhui to honour the Counter Guarantee.

The Trial Court held that the Account Party ANTECH had duly fulfilled its Underlying Obligations. Therefore, the claim by Beneficiary Oswal alleging that ANTECH was in breach was made in bad faith, which entitles the Guarantor to withhold the payment.

The Appeal Court ruled for the Appellee/Plaintiff/ Account Party on several grounds. The present case pertains to a dispute of Tort Liability. The de facto payee/Indemnifying Party is ANTECH. The cause of action is tort rather than dispute over the Underlying Contract or the guarantee concerned. Pursuant to the relevant laws of the PRC, the Court of jurisdiction shall be the Court located where the tort occured. In respect of the Applicable Laws, under the PRC laws, tort liabilities shall be governed by the laws of the place of tort. Thus, the present case shall be governed by the laws of PRC and supplemented by International Conventions and Practice. Since Demand Guarantee have not been regulated by the PRC laws so far, the Court chose The Uniform Rules for Demand Guarantees (ICC Publication No. 458 as the governing law.

Secondly, pursuant to URDG 458, fraud committed by the Beneficiary constitutes an exception to the payment undertaking of the guarantor. In determining if fraud has occurred, the court shall investigate the performance status of the Underlying Contract. In the present case, the Account Party ANTECH had duly fulfilled its Underlying Obligations, which means the demand of Oswal has no merit. Therefore, the guarantor is not bound to honour the demand.

Comments:

The case established that the Cause of Action of the case as to guarantee fraud shall be tort liability dispute, which nullifies the choice of the Parties in the Underlying Contract concerning the Jurisdiction and the Applicable law.

The case also established that to find fraud on the part of the Beneficiary, the Court has the right to investigate the performance status of the Underlying Contract.

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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.