Article

Factual Summary: Principal and Beneficiary entered into two irrevocable and non-transferable bonds - an advanced payment guarantee of Egyptian 3,980,000.00 and a performance guarantee of Egyptian 497,500.00, under which Principal undertook to reimburse Issuer after Issuer paid Beneficiary on receiving required documents. In addition, Principal agreed that the Bank may follow international custom in handling the bonds. Two Accessory-Guarantors also gave guarantees to Issuer, under which they were jointly and severally responsible for Principal for the bond. Issuer made payment under the two guarantees.

Legal Analysis:

1. Validity of Guarantees and Accessory- Guarantee: The bond between Principal and Issuer and the accessory-guarantee between Accessory- Guarantor and Issuer were both valid and legally binding.

2. URDG458 as Governing Rule: As for the governing rule of the bonds and relevant issues, Principal agreed to follow international custom. The court held that international customs had the feature of universal acceptance, certainty and flexibility1. Universal acceptance meant such custom shall be familiarized and accepted by international business and had been used constantly for a long time. URDG was not as universally used as UCP500, and it was applicable only when parties designated it as the governing rule. In the present case, although Principal and Issuer did not designate URDG as the governing rule, the parties did not object to following URDG during the court hearing. Therefore, the court held that it was proper to use URDG as the governing rule on the bond.

1. On its face, the Chinese court's usage of word expressed the meaning of arbitrariness. Given the language circumstances, however, the Chinese word could also be interpreted as flexibility.

3. Automatic Reduction of the Amount of the Guarantee: The court held that the demand bond was an unconditional guarantee, and Issuer had the obligation to make payment immediately once it was served with the required documents, regardless of the performance of the underlying contract.

4. Fraud of Exchange Rate: The court held that there was no fraud.

5. Breach of Contract by Principal: The court held that Art. 9, 11 and 15 of URDG was the governing rule, according to which Issuer assumed no responsibility on the authenticity of the required documents or on discerning fraud. Issuer made payment without fault in that it received required documents in accordance with the URDG, and therefore, Principal shall reimburse the bank.

6. Breach on the part of Principal: According to the accessory-guarantees, Accessory-Guarantors were jointly and severally liable with Principal for the bonds.

Comments by Jin SAIBO:

The case is concerned with Issuer claiming reimbursement of the demand guarantee from Principal and Accessory-Guarantor, rather than simply a guarantee dispute over whether Issuer made payment in fault, which is also important since it decided the liabilities of the parties. It is also a typical case in which the court applied URDG458 to demand/ independent bonds even when the URDG was not designated in the bonds as the governing rule and the parties did not reach a consensus in the use of URDG before going to court.

[JS/CQ/ny]

* Jin Saibo is partner of Commerce & Finance Law Offices, jinsaibo@tongshang.com. Assisted by CHEN Qiang. Niu Yue, J.D. Candidate 2012, George Mason University School of Law, assisted in the edits.

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