Article

Facts:

On May 19, 2011, the plaintiff and the third party signed a shipbuilding agreement (basic transaction) to build 4 ships. In this agreement, both parties agreed this agreement would not be effective until the third party offer a performance L/G. The delivery date was not later than Nov.9, 2012.

And on Mar. 6, 2013, the defendant issued a performance L/G. The L/G stated, based on the shipbuilding agreement, the defendant offer a L/G of RMB 4.592 million to guarantee the third party would perform its obligations under the shipbuilding agreement. Under this L/G, the defendant’s duty was to pay the plaintiff indemnity without any evidence or reasons, if the plaintiff filed a written demand stating that the third party failed to perform or broke the agreement, and confiscated the third party’s securities. Any amendment or supplement of the shipbuilding agreement would not need to notify the defendant, and the defendant would not be relieved from such duties. The guarantee period was from Jul. 25, 2011 to Dec. 31, 2013. And the defendant also stated it fully knew the shipbuilding agreement and the performance of the agreement between the plaintiff and the third party.

On Dec.23, 2013, the defendant extended the guarantee period to Dec. 31, 2014.

On Mar.31, 2014 and Aug. 2014, the third party delivered 2 ships to the plaintiff in total, 2 ships were left under the agreement.

On Nov. 10, 2014, the third party subcontracted the left 2 ships to Chuanjiang Ship Company to build. On behalf of Chuanjiang Ship Company, Liu Yan signed on this subcontract agreement.

On Dec. 24, 2014, the defendant again extended the guarantee period to Jun. 30, 2015.

On Jun. 19, 2015 and Jul. 2015, the third party delivered the left 2 ships to the plaintiff.

On Jun. 29, 2015 sent a written demand to the defendant for indemnity.

The court also found the Chuanjiang Ship Company was a subsidiary of the plaintiff

Legal Analysis:

Legal Issue(s):

  1. Whether the L/G was an independent L/G, and whether the L/G was valid?
  2. Whether the defendant should bear the liability of guarantee when the third party subcontracted 2 ships to Chuanjiang Ship Company to build?
  3. Whether the plaintiff and the Chuanjiang Ship Company had malicious collusion, intending to infringe the defendant’s legal rights and interest?

Legal Rule(s): Art. 3(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:

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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.

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Art. 6, Provisions on Several Issues in the Trial of Independent Letter of Guarantee Case, Where the beneficiary submits the documents and the terms of the independent guarantees, the surface of the documents matches the documents, and the beneficiary asks for the issuer to assume the payment obligations according to the independent guarantees, the people's court shall support it.

Where the issuer argues that based on the basic transaction or the relationship of applying the independent guarantees, the issuer shall not pay, the court shall not support it, except for the circumstances of Article 12 under this Rule.

Disposition – for each legal issue:

  1. Defendant shall pay the plaintiff RMB 4.592 million;
  2. Dismiss the plaintiff other claims.

Holding & Reasoning for each issue:

On Mar. 6, 2013, the defendant issued a L/G, stating that the defendant shall pay the plaintiff indemnity without any evidence or reasons, if the plaintiff filed a written demand stating that the third party failed to perform or broke the agreement, and confiscated the third party’s securities. According to theArt. 3(3), Provisions on Several Issues in the Trial of Independent Letter of Guarantee Case, this L/G was an independent L/G. And in this L/G, the defendant stated it fully knew the basic transaction, and extended its guarantee period twice. The L/G would expire on Jun. 30, 2015. Since the third party failed to perform and the plaintiff filed its written demand on Jun. 29, 2015, according to Art. 6, Provisions on Several Issues in the Trial of Independent Letter of Guarantee Case, the defendant shall pay the plaintiff indemnity under the L/G.

The subcontract agreement between the third party and Chuanjiang Ship Company did not change the parties under the shipbuilding agreement. (1) In the subcontract agreement both parties agreed Chuanjiang Ship Company shall build the ships and deliver to the third party, and the third party shall pay Chuanjiang Ship Company. (2) The third party could not be free from its obligation under the basic agreement. (3) Before the signing of the subcontract agreement, the construction of these 2 ship was suspended. Thus, the defendant still bore the liability of guarantee.

Though Chuanjiang Ship Company was a subsidiary of the plaintiff, these 2 companies were separate legal entities. The defendant failed to show these 2 companies intended to infringe the defendant’s legal rights and interest. And Liu Yan, an employee of the plaintiff, was individually commissioned by the Chuanjiang Ship Company to take part in the construction. It could not show that was the action of the plaintiff. Besides, according to the L/G, the defendant shall pay when it got the written demand and the documents described in the L/G. After the defendant paid the plaintiff, the defendant may require the third party to recover its lost.

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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 the ICC or Coastline Solutions.