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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2010 LC CASE SUMMARIES Civil Ruling (2004) Shen Zhong Min Si Chu Zi No. 12 (Liaoning Shenyang Interm. Ct., 2004) [PRC] Abstracted by Jin Saibo and Chen Qiang *
Topics: Demand Guarantee; Guarantee; Advanced Payment Bond; Independence; Accessory Guarantee; Jurisdiction; Applicable Law; URDG458; Limitations, Statute of; Letter of Claim; Freeze; Injunction.
Type of Lawsuit: Beneficiary sued Guarantor for wrongful dishonor of Demand Guarantee.
Parties: Plaintiff/Buyer/Beneficiary - Malaysia KUB Power Sdn. Bhd. Defendant/Guarantor - China Everbright Bank Shenyang Branch
Underlying Transaction: Purchase of Electronic Equipment.
Guarantee: Advanced Payment Bond for US$374,150.00. Silent as to governing rules.
Decision: The Liaoning Shenyang Intermediate Court held that the Guarantee was a demand guarantee independent of the underlying contract, and that URDG458 was applicable to such guarantee in litigation like the present case. The court further held that the complaint was filed within the Statute of Limitations. Based on the identified facts and according to the undertakings designated in the Guarantee, the court decided that the Guarantor was obligated to pay US$174,150.00 plus interest to the Buyer/ Beneficiary.
Rationale: A demand guarantee is independent of the underlying contract. The Statute of Limitations under PRC law for a suit on a demand guarantee is two years.
Article
Factual Summary: Buyer/Beneficiary and Seller/Principal entered into the underlying contract, under which Buyer/Beneficiary made an advanced payment of US$374,150.00 to Seller/Principal. Following an application by Seller/Principal, Guarantor issued an irrevocable Guarantee, stipulating that if Seller/Principal received the advanced payment but did not fulfill its contractual obligations, Guarantor shall pay the advanced payment of US$374,150 to Buyer/Beneficiary within reasonable time once a written notice was sent by Buyer/Beneficiary's bank stating that Seller/Principal did not perform its contractual obligations, and such notice must be received by Guarantor before a certain date.
Subsequently, Buyer/Beneficiary demanded payment from Guarantor, stating that Seller/Principal had received the advanced payment but did not perform its contractual obligations.
Then Guarantor paid US$200,000.00 under the Guarantee to Buyer/Beneficiary, with US$174,150.00 still left unpaid. Beneficiary sued Guarantor for the balance. The intermediate appellate court found for Beneficiary.
Legal Analysis:
1. Nature of Undertaking: Was the Guarantee a demand guarantee or accessory guarantee? Given the provision for demand payment in the Guarantee, the court held that it was a demand guarantee and was independent of the underlying contract. Given the lack of explicit provisions regulating independent demand guarantees under PRC law, the court decided that URDG 458 was applicable and should be deemed as international commercial custom, and thus the Guarantee in question shall be enforced in accordance with its own stipulations and the URDG.
2. Statute of Limitations: Was the complaint by Buyer/Beneficiary beyond the expiry date of the Guarantee and the Statute of Limitations of PRC Civil law? Based on the identified facts, the court upheld Buyer/Beneficiary's argument that the demand under the Guarantee was made before the expiry time designated by Guarantor in the guarantee, and that the action was also within the Statute of Limitations of PRC Civil Law.
Comments by Jin Saibo:
1. Lack of rules under PRC law on foreignrelated independent guarantees may result in the application of international commercial customs such as URDG by PRC courts, though the involved parties have not chosen such customs as their governing rules. This case is an exact reflection of it.
2. Another important issue in the case is the Statute of Limitations for Independent Guarantee transactions under PRC law. The judges in this case ruled that the Statute of Limitations was two years.
[JS/CQ/yn]
* 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 and translation.
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