Article

Topics: Demand Guarantee; Independent Guarantee; Guarantee

Note: To assure payment under an import agency agreement, Hunan Machinery Import & Export Co., Ltd (Principal) caused Hainan International Leasing Ltd (Guarantor) to issue three irrevocable guarantees in favor of the Principal's agent, Ningbo Oriental Investment Ltd (Agent/ Beneficiary). The guarantees stated that Guarantor was jointly liable with Principal for the payment to Agent/Beneficiary; that the guarantee would not be invalidated by bankruptcy, reorganization or other disputes involving the Principal or Guarantor; that the guarantee was irrevocable and would be valid until the Principal paid the commission and reimbursed advance payments made by Agent/Beneficiary for import goods and other dues; that the guarantee was independent; and that the guarantee would not become invalid even if the import agency agreement became invalid.

Subsequently, in accordance with the import agency agreement, Agent/Beneficiary caused five LCs to be issued in favor of a Hong Kong company (a sham company created by an employee of Principal by a bank (Issuer) to pay for import goods). Principal refused to reimburse Agent/Beneficiary the amount it paid to reimburse Issuer under the LCs and the agency commissions, claiming that Principal should not be responsible for the payment that resulted from the Principal's employee's criminal activities. Agent/ Beneficiary demanded payment and drew under the guarantee, but Guarantor dishonored. The seller never shipped the goods.

Agent/Beneficiary then sued Principal and Guarantor in the Zhejiang Superior People's Court for the Principal's failure to fulfill its obligations under the import agency agreement and Guarantor's dishonor of the irrevocable guarantees. The Zhejiang Superior People's Court concluded that the Principal must reimburse the Agent/Beneficiary for the payment for goods and commission and that Guarantor was jointly and severally liable for the Principal's debt. On appeal, the Supreme People's Court held that the Principal was liable for the payment to the Agent/Beneficiary and that Guarantor was liable for 50% of the Principal's liability.

The Supreme People's Court concluded that the guarantees were invalid since the underlying import agency contract was invalid and that there was no independent guarantee of this kind for domestic civil activities in China even though the guarantees provided that they "would not become invalidated because of the invalidity of the import agency agreement caused by Principal." The court ruled, however, that since the guarantees facilitated the Agent/Beneficiary in issuing the LCs and making the import payment, Guarantor shall be liable for up to 50% of the due payment.

Text: As reported in the opinion, the guarantees stated:

that [Guarantor] is jointly liable for the agency commission, advance payment Agent paid for goods and other dues; that the guarantee will not be invalidated by winding-up, bankruptcy, reorganization, reshuffling or change in personnel and financial condition of Principal or Guarantor; that the guarantee is irrevocable and it is valid until Principal pays up the commission, goods payments and other dues under the import agency agreement and related contracts; that Guarantor shall not dissent from the stipulated amount Principal owed under the import agency agreement and related contracts; that the Guarantee is independent; that the Guarantee is not subject to any extension or changes of the grace period of the payables and the deferment of Agent in exercising its rights as stipulated in the import agency agreement or other related contracts; that the Guarantee will not become invalid even if the import agency agreement becomes invalid.

Comment:

This decision is consistent with the PRC LC Rule Article 4 in that it treats domestic undertakings as ordinary contracts. It may be wondered, however, whether it should be regarded as a Demand Guarantee in any event. The validity turns on actions and not dates or documents.

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