Legal Case Summaries

Article

Factual Summary: The plaintiff, under the application of Zhejiang Zhonggao Power Technology Co., Ltd (Zhonggao), issued an advanced payment guarantee for RMB 60,000,000. The nature of the guarantee was an irrevocable demand guarantee, and the beneficiary of the guarantee was China National Technology Imp. & Exp. Corp (CNTIC), the Defendant. The underlying transaction of the guarantee was a contract for heavy oil power station project in Liberia between Zhonggao and the defendant. Later, the defendant notified the plaintiff that, due to the applicant’s own reasons, it could no longer perform its obligation under the underlying contract fully and appropriately. Therefore, the defendant demanded the payment under the guarantee. The plaintiff argued that the defendant and Zhonggao had conspired to fabricate the facts to get the payment under the guarantee maliciously.

There were two issues in this case. First, whether the guarantee was an independent guarantee. Second, whether the plaintiff can use fraud exception of independent guarantee to discharge its obligation.

Decision of Jinhua Intermediate People’s Court:

First issue: In this guarantee, the applicant, the guarantor and the beneficiary were all domestic parties. However, the underlying transaction was a contract concerning power station project in Liberia. The performance of the underlying contract had foreign elements, making this guarantee subject to international business transaction. Furthermore, the guarantee explicitly stated that “the nature is an independent demand guarantee” and “the bank has made an unconditional and irrevocable promise that, once the beneficiary make the complying presentation, the bank would unconditionally transfer the amount demand by the beneficiary to a designated account of the beneficiary within three banking days after it receives demand notice”. Therefore, given the nature and the characteristics of the guarantee, it was an independent guarantee.

Second issue: According to Article 68 of the Opinions of the Supreme People's Court on Several Issues concerning the Implementation of the General Principles of the Civil Law of the People's Republic of China, “where a party purposely conveys any false information to the other party, or purposely disguises any fact so as to induce the other party into making any false declaration of will, such act shall be determined as a fraudulent act.” Because the guarantee here was an independent guarantee, the examination by the court to determine the fraud should be “necessary and limited”. The scope of examination is restricted to “whether the beneficiary knows the debtor of the underlying transaction has not breached its contractual duty or there is no other expiry events, yet abuses the right of demand and asks for payment maliciously”. Once the beneficiary has made a complying presentation on its face, the issuer should honor the payment immediately. The issuer is not entitled to refuse to honor, relying on reasons not concerning the guarantee itself. In the present case, the plaintiff had made a complying presentation. Furthermore, Zhonggao has sent a letter to the plaintiff admitting that it could fulfill its contractual obligation due to the circumstances, and asking the plaintiff to make the payment. There was no sufficient evidence to support the fraud exception. Therefore, the obligation of the plaintiff under the guarantee could not be discharged.

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.