Article

Fact summary: The Appellant Mei Te and Hua Lian appealed the judgment of the trial court in favor of the Plaintiffs.

Zhabei Sub-branch signed an issuing guarantee contract with Mei Te, Hua Lian signed a maximum amount guarantee for Mei Te. Since Zhaibei Subbranch did not have the capacity to issuing an international counter-guarantee, it requested its supervising bank, Shanghai Branch to issue the counter-guarantee in favor of Mashreq Bank at the application of Mei Te. After several amendments, the counter-guarantee stated that the counter-guarantee would become effective when Shanghai branch received an advance-payment from Mashreq Bank, to be paid within 79 days after its issuance. However, the money arrived at Aug 9th 2008, which is 4 days after the 79 days deadline, Aug 13th 2008, a fact that is undisputed. No challenge was ever made by Mei Te, Zhaibei sub-branch, or Shanghai Branch before the trial regarding the late advance-payment.

On Feb 11th 2010, Mashreq Bank sent a demand to Shanghai branch requesting for payment. Mei Te filed a claim in Shanghai No.2 Intermediate Court claiming counter-guarantee fraud. The court granted a preliminary injunction that stopped the payment by Shanghai Branch to Mashreq Bank. On April 12th 2010, Mei Te withdrew and branch agreed to pay the amount under the counter-guarantee to the Mashreq Bank plus interest and legal fee.

After deducting Mei Te's funds in its account, Shanghai branch and Zhaibei Sub-branch sued Mei Te and Hua Lian for the excess amount it paid to Mashreq Bank according to the counter-guarantee.


Legal Analysis:

The court also determined that the legal relationship between the issuing guarantee contract is separate from the counter-guarantee itself. Although the counter-guarantee was a de facto reflection of Mei Te's intention, they did not have the de jure capacity to interpret the counter-guarantee because of its status as a party to the contract. Moreover, in the counter-guarantee, it clearly stated that bank has the exclusive right to determine whether to pay or not, and prior consent from Mei Te is not required. Since the independent guarantee rule applies to international guarantees and counter-guarantees, the counterguarantee is independent with the issuing guarantee contract. Both Mashreq Bank and Shanghai branch did not argue the validity the counter-guarantee, and had already performed its obligations under the counter-guarantee, therefore Mei Te's argument had no legal standing.

As to the discrepancy claim, the court decided that the minor mistake of not indicating the date of counter-guarantee in its demand could be treated as discrepant. However, citing the counter-guarantee number, which was unique and unambiguous, in its demand, sufficed to avoid any misunderstandings that justified the trial court's finding that no discrepancy exist.

Finally the court found that Mei Te, as the party to the issuing guarantee contract, should observe its terms when Shanghai Branch has acted accordingly and paid under the counter-guarantee, Mei Te shall reimburse Shanghai Branch. As for Hua Lian, it should honor its role as a guarantor and perform as required in the guarantee contract.

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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.