Article

* 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

Topic: Demand Guarantee

Note: Guilin Chenshan Technology Co. (Borrower) entered into a loan agreement with the Guangxi Branch of China Investment Bank (Lender) (subsequently renamed Nanning Branch of China Investment Bank and later merged to become the Xinhu Branch of China Everbright Bank). To assure Borrower's performance, Guilin South Rubber (Group) Co. (Guarantor) issued an "irrevocable guarantee" in favor of Lender/Beneficiary. The guarantee stated that Guarantor would be liable for repayment of the principal plus interest due under the above loan agreement if Borrower failed to repay. When Borrower failed to repay the amount due at the maturity of the loan agreement, Lender/ Beneficiary demanded payment from Borrower and Guarantor but neither repaid the amount due.

Lender/Beneficiary then sued Borrower and Guarantor in the Superior People's Court of Guangxi Zhuang Autonomous Region for repayment under the loan agreement. The court ordered Borrower to repay the debt on which there was default under the loan agreement and ruled that Guarantor was jointly liable for Borrower's due payment to Lender/Beneficiary. On appeal, the Supreme People's Court affirmed the judgment.

The Supreme People's Court concluded that both the loan agreement and the irrevocable guarantee should be deemed valid since Borrower, Lender/ Beneficiary and Guarantor entered into the agreements with mutual assent and were acting in compliance with the law. The court further concluded that Guarantor shall be jointly liable for Borrower's debt because Guarantor voluntarily issued an irrevocable demand guarantee for the loan and Lender/Beneficiary indeed transferred the loan to a branch company of Borrower. The court also ruled that Guarantor's defense that it should not be liable for Borrower's due payment because Borrower did not comply with the contract requirement by transferring the loan funds to a separate legal person without Guarantor's consent should be rejected.

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