Article

Facts: Subcontract agreement

On Jan., 2012, the defendant and the third party signed a subcontract agreement to build the auxiliary system of the power station. In this agreement, the third party shall offer a RMB 60 million advanced payment L/G. If any of parties failed to signed on the equipment acceptance report, the defendant may claim for the indemnity under the L/G.

Later, the defendant and the third party signed 3 supplements. Both parties agreed to extend the performance period and they also agreed that the third party asked the issuer to extend the guarantee period to Jun. 29, 2014.

Advanced payment L/G

On Jan. 10, 2013, the plaintiff issued an advanced payment L/G (Pay on demand). The third party was the applicant and the defendant was the beneficiary. The maximum amount of the L/G was RMB 60 million.

Under the Art.2 of the L/G, the plaintiff shall pay the defendant within 3 banking days if the plaintiff received a written demand, stating that the third party failed to perform its obligations under the subcontract agreement. If any of parties failed to signed on the equipment acceptance report, the defendant may claim for the indemnity under the L/G, 20 days before the L/G expired.

The L/G also stated that if the defendant and the third party agreed to amend the subcontract agreement, they shall notify the plaintiff. And if this amendment made the plaintiff bear more liabilities, they needed to get the plaintiff’s written confirmation, or the plaintiff was not liable for the new responsibilities. The plaintiff was not liable if the defendant transferred its rights under the L/G without plaintiff’s written confirmation. The L/G would expire on Jul. 29, 2013. The Art. 7 stated the plaintiff was not liable if the written demand and the relevant evidence were not sent to the plaintiff within the guarantee period.

On Jul. 11, 2013, Dec. 24, 2013, the plaintiff extended the L/G’s guarantee period to Jun. 29, 2014.

Quartet agreement

On Jan. 2012, the owner, defendant, third party, subcontractor 2 signed a quartet agreement. This quartet agreement had some rules a on the advanced payment of RMB 60 million under the subcontract agreement.

On Mar.15 and 21, 2013, Apr. 2 and 8, 2013, the defendant paid the third party RMB 60 million in total.

And from Apr. 1, 2012 to Dec. 13, 2013, the third party paid the defendant RMB 26,487,434 in total.

Written demand

On May 27, 2014, the defendant filed a written demand to the plaintiff claiming for RMB 50 million under the L/G. Later, on Jun. 17 and 25, 2014, Aug. 8 and 14, 2014, Sep. 1, 2014, the defendant filed its written demand, requesting the plaintiff to pay the defendant RMB 50 million.

On Jul. 28, the third party also asked the plaintiff to pay defendant RMB 50 million.

Purchase agreement

On Sep. 30, 2013, the owner and the new buyer signed a purchase agreement, the power station was sold to the new buyer. And on the following agreements and supplements the owner, new buyer, third party all confirmed the third party did fulfilled its obligation.

Legal Issue(s) Whether the behavior of the defendant constituted a fraud in L/G, and the plaintiff may apply for an injunction to stop paying the indemnity?

Legal Analysis:

Legal Rule(s): 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.

Holding & Reasoning for each issue:

The business under the subcontract agreement did exist. Though the quartet agreement among the defendant, third party, the owner and the subcontractor 2 did exist, having relationship with the subcontract agreement between the plaintiff and the defendant, the L/G was not based on that quartet agreement. Since the quartet agreement agreed to solve the dispute via arbitrate, the court did not have the jurisdiction. And the defendant did not take part in the application or amendment of this L/G, the defendant did not need to disclose the quartet.

Besides, the quartet agreement and the subcontract agreement had relationship and differences, the defendant’s obligation in these 2 agreement could be different. And since the plaintiff showed a lot of evidence to prove the third party had fully performed its obligations under the subcontract agreement.

Thus, the defendant did not conspire with others to make a fictitious trading. According to the Art. 12(1), Provisions on Several Issues in the Trial of Independent Letter of Guarantee Case, the defendant was not fraud in L/G.

According to the Art. 12(2), Provisions on Several Issues in the Trial of Independent Letter of Guarantee Case, the beneficiary was fraud in L/G when it filed forged or false documents, which issued by others. However, in this case, the article 2 of L/G did not require documents issued by others. Thus, the defendant was not fraud in L/G.

The defendant did not abuse its rights under the L/G.

  1. The plaintiff’s guarantee liability under the L/G was not relieved due to the transfer of the power station.
    Under the L/G, if the defendant and the third party agreed to amend the subcontract agreement, they shall notify the plaintiff. And if this amendment made the plaintiff bear more liabilities, they needed to get the plaintiff’s written confirmation, or the plaintiff was not liable for the new responsibilities. Also, the plaintiff was not liable if the defendant transferred its rights under the L/G without plaintiff’s written confirmation.
    However, the defendant did not take part in the transfer of the power station. Although the third party took part in the transfer, the plaintiff failed to prove this transfer had changed the rights and obligations under the subcontract agreement, nor did the plaintiff prove this transfer made it bear more liabilities.
  2. To get its indemnity, the defendant only needed to filed the documents described in the Art.2 of the L/G.
    First, as a professional financial institution, the plaintiff had a better knowledge of the L/G than the defendant. Thus, the plaintiff shall had known all the risks of the L/G. When there was a vague in the L/G, the court shall make an explanation against the issuer (the plaintiff).
    Second, the documents were needed to be clearly described in the L/G. Since Art.2 clearly said the defendant shall file the written demand stating the third party had broken the subcontract agreement, Art.2 was a document clause. As for the Art.7, the “relevant evidence” was vague. It did not clearly refer to the certain documents. And if the Art.7 was a document clause, the defendant had to filed the document to prove the third party broke the subcontract agreement and was against the goal of the independent L/G. Thus, Art.7 was not a document clause.
    Third, on May 27, 2015, the defendant filed a written demand to the defendant. But the plaintiff failed to claim the discrepancy within 3 banking day. Thus, the plaintiff gave up its rights on the discrepancy.
  3. The function of the L/G was not fulfilled and the guarantee amount did not reduce to 0.
    Although the L/G was named “advanced payment L/G”, it also guaranteed the third party performed all of the duties under the subcontract agreement. Thus, the plaintiff could not claim it did not have liabilities because the function of the L/G had been fulfilled.
    And both the defendant and the third party confirmed the third party only paid the defendant security RMB 10 million. Thus, the plaintiff still shall pay the defendant RMB 50 million under the L/G.
  4. The third party broke the subcontract agreement.
    The new buyer bought the power station did not mean the third party had fulfilled its obligations. And actually, the third party, the owner, the new buyer, the defendant confirmed there were many works remained unfinished. Thus, the third party did break the subcontract agreement.
    In sum, the plaintiff failed to prove the defendant had fraud in the L/G.
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