Article

Facts

On May. 2, 2011, the Appellant signed a “Contract ofthe 1.2 Million Tons’ Annual Production of Pellet Factory” with the Appellee.

On Jan. 1, 2012, theAppellant signed a “Contract Amendment I” with the Appellee, which modified the list of equipment, as well as the scope of basic and detailed design of the factory and the grinding equipment. It also stipulated that the design fee should be paid in three installments after the Appellant received the blueprint.

On Jul. 11, 2012, the Appellant signed a “Contract Amendment II” with the Appellee, which modified the payment, and the scope of components and accessories. It stipulated “iron mine” to be the material in the Addendum.

On Feb.18, 2012, the Third Party issued a performance guarantee No. PEBSYA121529 according to the Appellee’s application, which agreed to pay theAppellant at most 2134025 dollars if the Appellee violate the contract.

On May. 20, 2014, the Appellee emailed the Appellant to ask for lubrication system installment. Five days later, the parties convened a meeting about the lubrication system, and according to the “Summary”, the Appellant promised to finish installment before May. 31, 2014. But the Appellant admitted it never starting installing.

On Jun. 10, 2014, the Appellant informed the Third Party that the Appellee couldn’t perform the contract and asked for the performance bond. On Jun. 11, 2014, the Appellant contacted the Third Party again and pointed out the Appellee violations.

On Jun. 30, 2014, the Third Party suspended to pay the Appellant according to the “Stop-Payment Order” and the “Execution Notice.”

Legal Analysis:

Legal Issue(s)

  1. Was it fraud that the Appellant asked the Third Party for the performance bond?
  2. Should the Third Party suspended to pay the Appellant 2134025 dollars?

Legal Rule(s): Art. 12, The Provisions of the Supreme People’s Court on Certain Issues Concerning Trial of Independent Guarantee Cases: The court could determine whether it constitute a fraud if the Beneficiary’s demand meets any of the following circumstances: (1) Where the Beneficiary and the Applicant or a third party maliciously collaborates and there is no real underlying transaction; (2) Where the document presented by the Beneficiary contains false information or is forged; (3) Where the demand has no factual or right basis in accordance with the type and purpose of the independent guarantee; (4) Where there is fraud in the demand made by the Guarantor if the Guarantor, though it is or should have been aware that the Beneficiary is committing fraud, pays to the Beneficiary in bad faith, and demands under the counter-guarantee, or demands under the counter-guarantee without receiving a demand from the Beneficiary.

Art. 18, The Provisions of the Supreme People’s Court on Certain Issues Concerning Trial of Independent Guarantee Cases: When the party applies for a stop payment order to a guarantee or counter-guarantee, the court through substantive review of fraud dispute in the independent guarantee, decides conditions of Article 12 of the Provisions exist, shall adjudicate the Guarantor or the counter-guarantor not to pay the amount under the guarantee or counter-guarantee.

Art. 170, Civil Procedure Law of the People’s Republic of China: After trying a case on appeal, the people's court of second instance shall, in the light of the following situations, dispose of it accordingly: (1) if the facts were clearly ascertained and the law was correctly applied in the original judgment, the appeal shall be rejected in the form of judgment and the original judgment shall be affirmed.

Disposition – for each legal issue: The Higher Court reversed and dismissed the Appellee’s claims. The cost of first trial (RMB 101531) and property preservation fee (RMB 5000), as well as the cost of second trial, should be covered by the Appellee.

Holding & Reasoning for each issue: According to the Art. 12 & Art. 18, The Provisions of the Supreme People’s Court on Certain Issues Concerning Trial of Independent Guarantee Cases, the so-called “guarantee fraud”, should be confined to the condition that the Appellant’s abuse of guarantee claims under the circumstance that he knew exactly the Appellee did not violate the contract or there did not exist any payment due events. But the Appellee’s evidence was not enough to prove that he did not break the contract.

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