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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2010 LC CASE SUMMARIES Shen Zhong Zi Wai Chu Zi No.34 (Shenyang Intermediate People's Court 2005), aff'd, Liao Min Si Zhi Zhong Zi No.102, Civil Order (Liaoning People's Superior Court Jul. 6, 2007) [P.R. China]
* 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
Topics: Demand Guarantee, Independent Guarantee, Jurisdiction, URDG 458, Misrepresentation, Demand, Underlying Transaction.
Type of Lawsuit: Seller sued to prevent Buyer from making a fraudulent demand on an advance payment guarantee.
Parties: Principal/Seller/Plaintiff/Appellee-Shenyang Mining Machinery Import & Export Corp. (Counsel: Jin Saibo, Sun Wei, Beijing Zhong Lun Law Firm) Beneficiary/Buyer/Defendant/Appellant-Electrotherm (India) Ltd. (Counsel: Fang Guoqing, Xu Fubin, J.D. Hands Law Firm) Guarantor-China CITIC Bank, Shenyang Branch.
Underlying Transaction: Advance payment for sale of goods.
Undertaking: Advance payment guarantee for US$237,500. Subject to URDG 458.
Decision: Liaoning Superior People's Court, Wang Yu Xian, Wang Jia Li and Li Yi Min, JJ., in a per curiam opinion, affirmed the decision of the Shenyang Intermediate People's Court's ruling in favor of Applicant.
Rationale: A Demand Guarantee is a guarantee that is independent of the underlying contract. Issuer must make the payment as long as the demand requirements are met; however, there is a fraud exception for demand guarantees. If the beneficiary demands the payment when he knows the principal has not breached contract, then the demand is fraudulent. A decision regarding fraudulent demand should be made with the underlying contract in consideration.
Article
Factual Summary: Principal/Seller contracted with Buyer for the sale of chain grate stokers. The contract required Principal/Seller to obtain an advance payment guarantee in favor of Beneficiary/Buyer to assure performance or return of the 10% advance payment (US$237,500). Beneficiary/Buyer was also required to obtain a commercial LC in favor of Principal/Seller for 90% of the sale price payable at sight. The contract provided that all disputes arising from the execution of the contract would be settled through negotiation between the parties and, that failing, through arbitration by the China International Economic & Trade Arbitration Commission (CIETAC).
The guarantee provided that Guarantor would pay on demand if Principal/Seller did not fulfill its obligation under the contract. The guarantee was subject to URDG 458. On receipt of the guarantee, Beneficiary/Buyer made an advance payment of US$237,500 to Principal/Seller. Principal/Seller later sent Beneficiary/Buyer the designs and materials for the stokers.
Principal/Seller changed the details of the stokers in response to Beneficiary/Buyer's requirements, but the parties could not reach agreement about the details. Since the guarantee was about to expire, Beneficiary/Buyer requested Principal/Seller to send more details and to extend the guarantee. Principal/ Seller did not reply instantly, so Beneficiary/Buyer sent a letter to Principal/Seller, requesting rescission of the contract and demanding payment under the guarantee. Beneficiary/Buyer's bank requested Principal/Seller to instruct Guarantor to pay $237,500 based on Principal/Seller's failure to fulfill contract obligation. Beneficiary/Buyer sent a letter to Guarantor demanding payment for the same reason. Principal/Seller sued Beneficiary/Buyer for making a fraudulent demand and sought a declaratory judgment from the court to prevent Guarantor from making the payment.
Legal Analysis
1. Jurisdiction; Application of Law. Beneficiary/ Buyer argued that the dispute arose out of the execution of a contract and should, therefore, be arbitrated in CIETAC. Accordingly, Beneficiary/ Buyer asserted that the trial court did not have jurisdiction over the dispute. Principal/Seller argued that the legal basis of the case was not breach of contract but fraudulent demand, which is a tort. The Principal/Seller, therefore, submitted that the agreed means of dispute settlement in the contract should not apply, but, rather, tort law. Principal/Seller accordingly requested the trial court to declare that Beneficiary/Buyer's demand was fraudulent and to order Guarantor to stop payment to the Beneficiary/ Buyer.
The trial court ruled that the dispute concerned fraudulent demand. The governing law of the guarantee, URDG 458, however, is silent in regard to fraudulent demands. The trial court held that fraudulent demand is a question in tort and that based on Chinese conflict of law jurisprudence, the law of the place of tort should apply. The consequences of the tort occurred in China; therefore, Chinese law should apply, the trial court held.
The appellate court affirmed the classification of the claim and the application of law, reasoning that it was an action for declaratory judgment. The appellate court held that Beneficiary/Buyer's demand for payment constituted guarantee fraud and, therefore, the arbitration clause in the contract did not apply.
2. Fraudulent Demand. Beneficiary/Buyer argued that Principal/Seller did not fulfill its obligation under the contract because it did not send the requested materials to Beneficiary/ Buyer in time. The trial court stated that Principal/Seller's obligation under the contract was to sell Beneficiary/Buyer stokers, which it did. Principal/Seller, therefore, did not fail to perform under the contract. Because Principal/Seller did not fail to fulfill its contractual obligation, Beneficiary/Buyer's demand for payment was without basis and constituted fraudulent demand. The appellate court affirmed without explanation.
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