Article

Factual Summary: The Appellant CMEC subcontracted part of a project in Indonesia to the Third Party, ZTPC. Under the request of CMEC, ZTPC procured a guarantee in favour of CMEC to be issued by CCBC Baoshi, of which the value is 15% of the price of the Underlying Contract. The guarantee provides that CCBC Baoshi shall make payment to CMEC upon presentation of a complying demand by CMEC, without the requirement to obtain consent from the Principal, ZTPC, and regardless of any dispute arising from the Underlying Contract. CMEC made a demand for payment under the concerned guarantee by sending a Claim Notice to CCBC Baoshi which contained the assertion of default by ZTPC. CCBC Baoshi dishonoured the guarantee on the ground that the performance status of the Underlying Contract was still moot and, as a result the guarantee liability could not be established.

CCBC Baoshi appealed on the grounds that: 1) the guarantee concerned provides that, as the guarantor, CCBC shall assume joint liability which conflicts with the nature of demand guarantee and therefore the guarantee is still dependent on the Underlying Contract; 2) domestic transaction parties are not allowed to reach agreements regarding the guarantee and the guarantee shall be independent from the Underlying Dispute under the current PRC laws and neither the Underlying Contract nor the guarantee involved a foreign element; 3) the Underlying Contract is invalid because the subcontract was made without consent from the project employer, which further nullifies the guarantee; 4) CMEC intentionally concealed the fact that the subcontract lacked approval of the project employer, which is fraud; and 5) the claim of default by CMEC is unfounded and CMEC committed fraudulent demand.

The Appellee defended the case on the grounds that the wording "joint liability" has no impact on the nature of the guarantee concerned as the demand guarantee. Appellee also pointed out that it was ZTPC who applied for the guarantee and submitted the relevant application documents. Therefore, the claim that the Appellee fraudulently induced the Appellant to issue the guarantee was unsustainable.

Rationale: The Appeal Court ruled for Appellant/ Defendant/Beneficiary on the grounds that: 1) though the Parties of the case are all domestic entities, both the Underlying Contract and guarantee concerned were executed to facilitate the performance of a international construction contract between a Chinese Party and an Indonesian Party; 2) the meeting of minds of the Parties on the independence of the guarantee concerned is clear and express; and 3) the bank guarantor fails to provide evidence on the fact that the document to support the demand presented by the Beneficiary is not genuine or that it had been falsified.

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.