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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