Article

Note: In connection with the supply of steel piles through a series of subcontracts by Luoyang Aviation Engineering Construction Co. Ltd (Sub-Supplier/Applicant), a Mainland Chinese Company, Hyundai Engineering & Construction Co. (Contractor/Beneficiary), a Korean Company, made an advance payment of USD 5,980,833.40. To assure performance, UBAF (Hong Kong) Ltd (Guarantor) issued an advance payment guarantee and a performance guarantee in favor of Contractor subject to URDG 758.

The Advance Payment Guarantee of USD 5,980,833.40 provided for honour "upon receipt by [Guarantor] of a first demand in writing stating the following information: (i) the reference number and date of the guarantee under which the claim is made; (ii) the amount which is claimed; and (iii) the supplier . . . and [Sub-Supplier/Applicant] as a consortium is in breach of its obligation under the Contract."

To induce Guarantor to issue the guarantees, Sub- Supplier obtained two back-to-back guarantees in favor of Guarantor issued by the Henan Branch of Bank of China (Back-to-Back Guarantor).

When Applicant/Sub-Supplier failed to deliver the goods, Contractor/Beneficiary demanded payment for USD 5,552,787.75 under the Advance Payment Guarantee. Although it was conceded that at least one demand complied, Guarantor failed to honour its undertaking because Sub-Supplier had obtained an injunction in the courts of Henan Province, China against Beneficiary/Contractor and the Back-to-Back Guarantor against drawing on it or honouring it and later filed a civil complaint.

Subsequently, Beneficiary sued Guarantor for wrongful dishonour in Hong Kong and moved for summary judgment whereupon Guarantor applied for a stay of proceedings in deference to the Mainland litigation. The Hong Kong SAR High Court, Lok, J., granted summary judgment in favor of Beneficiary and dismissed the application for a stay of proceedings.

Citing case law, the Judge ruled that the only manner in which a party could dispute a drawing on an irrevocable LC was on the basis of fraud because an LC is not dependent on the merit of the underlying contract and that all that is required is that the documents be in order. The Judge also ruled that the Applicant/Sub-Supplier and Guarantor had failed to meet the applicable heightened test for fraud stating, "particularly cogent evidence is required to establish the fraud exception." (¶20) The Judge ruled that in the matter at hand, "the defence of fraud here is just a mere allegation without sufficient proof." (¶22) The Judge also reasoned that "[t]he demand for payment dated 19 December 2011 states that [supplier to Sub- Supplier] has failed to meet the contractual delivery schedule as provided for in the Contract. It also refers to the fact that the advance payment of US$ 5.98 million has not been returned. The question then has to be asked is whether there is evidence to suggest that [Contractor/Beneficiary] could not have honestly believed in the validity of this demand." (¶24)

The Judge stated that "since there is no reason given by the Mainland Court for its decision, I do not know the factual and legal basis as to why the Mainland Court has granted the Injunction against the relevant defendants. As I have mentioned above, the materials contained in the Civil Complaint hardly support an allegation or inference of fraud, and I do not know whether the Mainland laws on the issues of fraud and performance bond are the same as those in Hong Kong. Hence in my judgment, [Guarantor] has simply failed to discharge the burden of establishing a meritorious defence in the present case." (¶33)

The Judge also noted that "[t]he Advance Payment Guarantee was governed by [URDG 758]. Since the [Advance Payment Guarantee] was issued by [Guarantor] in Hong Kong, the governing law is Hong Kong law (see: Article 34(a) of [URDG 758]) and there is an exclusive jurisdiction clause in favour of the Hong Kong courts in relation to any dispute between [Contractor/Beneficiary] and [Guarantor] relating to the [Advance Payment Guarantee] (see: Article 35(a) of [URDG 758]). Given such circumstances, [Guarantor] has simply failed to demonstrate that the Mainland Court is clearly and distinctly the more appropriate forum to adjudicate [Contractor/Beneficiary]'s claim." (¶36)

Guarantor had also argued that it was excused from its obligations because it had not been paid on the Back-to-Back Guarantees in its favor. The Judge stated that the failure of the Back-to-Back Guarantee "is not a valid reason . . . since Article 5 of [URDG 758] provides that the two instruments are separate and independent. Hence, to the extent that the Mainland proceedings are relevant to the Back-to-Back Guarantees and the ability of [Back-to-Back Guarantor] to effect payment thereon, this has no relevance to this case." (¶42)

[JEB/sb]

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