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Note: In order to obtain an LC, Haiwei Investment Co., Ltd. (Principal) approached Lifeng Industrial Co., Ltd. (Applicant) to assist it in obtaining an LC in the amount of US$1,371,199.08. For this service and to assure its reimbursement, Applicant required that Principal procure a guarantee, which it obtained from China Everbest Financial Co., Ltd (Guarantor). The guarantee provided that Guarantor would assume any responsibility and obligation that Principal might fail to fulfill. Principal paid Applicant US$56,903.22 as a deposit. When the LC was honored, Issuer claimed reimbursement from Applicant, which it paid, and in turn Applicant demanded payment from Principal and Guarantor.

Principal paid US$230,769.22 and another US$287,672.44 for charges arising from issuing the LC, leaving a balance of US$946,406.74 for other bank charges and interest and US$56,903.22 for unpaid commission. Subsequently, Principal signed a mortgage agreement with Applicant, in which 60% of its interest in Chongqing Hong Tai Building was used as collateral. After the agreement was signed, the parties did not discuss the details of the collateral or complete the registration procedures.

When Principal and Guarantor refused to reimburse, Applicant sued Guarantor and Principal for reimbursement. Guarantor argued that its General Manager who issued the guarantee did not have the authority to do so and, therefore, the guarantee was invalid.

Chongqing No. 1 Intermediate Court applied Hong Kong law and ruled in favor of Applicant, ordering Guarantor and Principal to pay (1) US$1,177,175,96 for the advance payment guarantee with 9% per annum interest from the date of the guarantee until the date of full reimbursement, (2) US$56,903.22 for commission, and (3) litigation costs. Guarantor appealed. The Chongqing Superior People's Court, Tang Wen, Zhao Hong and Fu Pei Yi, JJ., affirmed in part, vacated in part.

The appellate court reasoned that according to Hong Kong law the issuance of the Guarantee was valid when Applicant had reasonably relied on the authority of the General Manager in good faith and without negligence. Also, Guarantor was responsible for the Guarantee under a theory of promissory estoppel. Under Chinese law, the mortgage agreement was void because the registration procedures were not followed and, therefore, did not terminate Guarantor's liability. Since the applicable law was Hong Kong law and the limitation period was six years under Hong Kong law, the case was still within the limitation. However, the award for the commission should be set aside because it was not pled in the complaint. The court ordered Guarantor and Principal to pay Applicant US$946,406.74 plus 9% per annum interest within 30 days after the judgment took effect.

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* This summary is based on transcripts in English and Chinese of decisions provided by Mr. JIN Saibo, a partner of Commerce & Finance Law Offices. jinsaibo@tongshang.com

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