Article

Facts:

On Nov. 27, 2008, the plaintiff and the third party signed aa supply agreement that the plaintiff shall supply the equipment, information and technical service etc., to the third party.

On Feb. 8, 2010, the owner, third party and the plaintiff signed a subcontract agreement, that after making a notification to the plaintiff, the owner may intervene the supply agreement and the subcontract agreement to replace the third party, if the third party breach the EPC agreement rendering that the owner terminated the EPC agreement. If so, the plaintiff shall perform its covenant to the owner

On Jun. 9, 2010, the defendant to issue a L/G. The beneficiary was the third party. The L/G was a pay on demand L/G. And the defendant shall pay the third party at maximum amount of RMB 25.65 million when the third party filed a written demand to the defendant without any reason or evidence.

On Nov. 29, 2013, the owner made a notification to the plaintiff, terminated the EPC agreement and intervened into the supply agreement and subcontract agreement. And the plaintiff fulfilled its covenant under these agreements.

On Dec. 27, 2013, the third party filed a written demand to the defendant claiming for RMB 25.65 million.

The Singapore ICC Arbitral Tribunal made an award that the owner had legally terminated the EPC agreement.

Legal Analysis:

Legal Issue(s):

  1. Whether the L/G in this case was an independent L/G?
  2. If the L/G was an independent L/G, whether the defendant’s claim was fraud in L/G?

Legal Rule(s): Art. 3, Provisions on Several Issues in the Trial of Independent Letter of Guarantee Case If the parties claim that the nature of the L/G is an independent L/G, the people's court shall support it, unless the L/G does not contain the documentary evidence of the payment and the maximum amount：

  1. The L/G reads “pay on demand”;
  2. The applicable rules of the L/G are like URDG provided by the ICC;
  3. According to the text of the L/G, the issuer’s payment obligation is independent of the basic transaction relationship and the legal relationship of the guarantee application, and it only bears the payment responsibility of the corresponding delivery note.

……

Art. 12, Provisions on Several Issues in the Trial of Independent Letter of Guarantee Case, The court shall confirm the fraud in L/G. if (1) the beneficiary and applicant or others conspired and made fictitious trading. (2) the beneficiary filed forged or false in contents documents which were issued by the third party. (3) the court or the arbitral tribunal decided that the debtor did not have the liability to pay. (4) the beneficiary knew the debtor had fully performed its duties or the moment that L/G required the issuer to pay did not occur. (5) other circumstances that the beneficiary knew it was not entitled to get indemnity but abused its rights.

Holding & Reasoning for each issue:

The L/G in this case was an independent L/G. Since the L/G read this L/G was a pay on demand L/G. And the defendant shall pay the third party at maximum amount of RMB 25.65 million when the third party filed a written demand to the defendant without any reason or evidence. In accordance with the Art. 3, Provisions on Several Issues in the Trial of Independent Letter of Guarantee Case, this L/G was an independent L/G.

In accordance with the subcontract agreement among the plaintiff, the third party and the owner, and the EPC agreement between the third party and the owner, the owner legally intervened into the subcontract agreement and replaced the third party in the subcontract agreement. After the intervention, the third party was replaced by the owner, and the plaintiff fulfilled all its covenant to the owner under the supply agreement. Thus, the third party clearly knew that it had no claim under the L/G. However, it still filed a written demand for the compensation under the L/G. This claim constituted a fraud in L/G in accordance with the Art. 12(5), Provisions on Several Issues in the Trial of Independent Letter of Guarantee Case.

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