Article

Facts:

On Mar. 16, 2016, Dakun Company and the plaintiff signed 2 construction agreements at the price of RMB 65 million and RMB 90 million respectively. Both parties agreed the completion date of construction was Apr. 30, 2017. And later that day, both parties signed supplement 1.

On Jun. 15, 2016, Dakun Company and the plaintiff signed supplement 2. Both parties agreed Dakun Company shall offer a RMB 3 million performance L/G issued by a bank.

On Jul. 27, 2016, the defendant issued a performance L/G. The maximum amount of the guarantee was RMB 3 million. The benefit was the plaintiff, and the applicant was Dakun Company.

The L/G stated

  1. If the Dakun Company failed to perform the obligations described in the construction agreement and supplement 1 & 2, the plaintiff was entitled to get indemnity when it filed (a)the original L/G and a written demand signed by legal represent or authorized person with official seal. (b) The plaintiff’s business license (original and copy), copy of articles of association (with official seal), the identity certificate of the legal representative and the information of the deposit bank and account, above shall be attached to the demand. (c) Certificate issued by supervision company shall be attached to the demand. And if the construction concerned quality issues, the plaintiff shall file test report from certain institution.
  2. After the issuing of L/G, any amendment of the construction agreement and 2 supplements without the written confirmation of the defendant, would relief the defendant from the guarantee liability under the L/G.
  3. The L/G could not be transferred. The defendant only bore the guarantee liability for the behavior of Dakun Company.
  4. The L/G would expire on Oct. 1, 2017.

On Dec. 23, 2016, Dakun company and the plaintiff signed supplement 3, both parties agreed the changes of the original construction agreement.

The supervision company issued a certificate that the construction was delayed. Attached to this certificate was a document of the progress of this construction.

On Mar. 20, 2017, based on the delay of the construction, the plaintiff filed its written demand. Along with the demand, the plaintiff also filed demand with original L/G, the plaintiff’s business license (original and copy), articles of association (copy), the identity certificate of the legal representative and the information of the deposit bank and account, certificate issued by the supervision company, construction agreement and 3 supplements (copy), a summary sheet of claim list and 3 sheets.

On Jul. 21, 2017, with the witness of notarial office, the plaintiff filed the original written demand, original L/G, a summary sheet of claim list and 3 sheets, the plaintiff’s business license (original and copy with official seal), original change of registration, articles of association (copy with seal), the identity certificate of the legal representative (original), account opening license (copy, with official seal), certificate issued by the supervision company (original), a document of the progress of this construction (copy), a document that made comparison between the schedule and the actual completion of the construction (copy), record (copy) and supervision diary (copy).

However, the defendant still did not pay the plaintiff.

Legal Analysis:

Legal Issue(s):

  1. Whether the L/G was an independent L/G?
  2. Whether the provision, stating that the defendant was free from the guarantee liabilities if the plaintiff and Dakun Company made any amendment of the agreement without the defendant’s written confirm, was valid?
  3. Whether the plaintiff’s behavior constituted a fraud in L/G, tendering the defendant free from paying the indemnity?

Legal Rule(s): Art. 1, Provisions on Several Issues in the Trial of Independent Letter of Guarantee Case, The independent L/G means a guarantee that a bank or non-bank financial institution issues in writing to beneficiary. The issuer agrees to pay the beneficiary a certain amount of money or within the maximum amount of the guarantee, when the beneficiary files it’s demand and documents in compliance with the L/G.

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:

......

(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. 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.

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.

Disposition –
for each legal issue:

  1. The defendant shall pay the plaintiff indemnity RMB 3 million.
  2. The defendant shall pay the plaintiff interest loss RMB 58,725.
  3. The court dismissed and overruled the plaintiff’s other claims.

Holding & Reasoning
for each issue:

The L/G was an independent L/G.

The L/G in this case stated that the defendant shall pay the plaintiff if the plaintiff filed a written demand and the relevant documents described in the L/G. According to Art. 1, 3(3) Provisions on Several Issues in the Trial of Independent Letter of Guarantee Case, this L/G was an independent L/G.

Besides, based on the statement and the documents that the defendant filed to the court, this L/G was a separate performance L/G. And that means the L/G was separated from the basic trading (the construction).

This provision in the L/G was invalid.

According to the Art. 6, Provisions on Several Issues in the Trial of Independent Letter of Guarantee Case, the issuer shall pay the money only when the demand and documents are in compliance with the describe in the L/G. Thus, the L/G was separated from the basic trading (the construction) or other relationship. The issuer only needed to examine whether the documents were in compliance with the L/G on its face. Thus, the defendant could not be free from the guarantee liability when the plaintiff and the Dakun Company amend the agreement, without the written confirmation of the defendant.
Except stated in law, an L/G issuer can only argue it is free from the payment based on the discrepancy.

The behavior of the plaintiff did not constitute a fraud in L/G.

The defendant did not argue and show the evidence that the plaintiff’s behavior fitted in the Art. 12(2) (3)(4)(5), Provisions on Several Issues in the Trial of Independent Letter of Guarantee Case.
Although the defendant argued that price in the construction agreement was not true, it cannot prove this constituted a fraud.

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