Article

Procedural History:

The Plaintiff: Anhui Foreign Economic Construction Co., Ltd. (the Appellee; the Retrial Respondent)

The Defendant: Orient Real Estate Co., Ltd. (the Appellant; the Retrial Petitioner)

Intermediate People's Court of Hefei City, Anhui Province verdict for the Plaintiff, and the Defendant appealed. Higher People's Court of Anhui Province affirmed and dismissed. The Defendant applied for retrial. Supreme People’s Court withdraw these judgements and dismissed, the Plaintiff should bear the litigation fees.

Facts:

On Jan. 16, 2010, the Defendant, as the developer, cooperated with the Plaintiff, as the contractor, Anhui Foreign Economic and Trade Construction Co., Ltd. in Central America, as the constructor signed the "Costa Rica Lake Washington Project Construction Contract" in San Jose, Costa Rica.

After the signing of the contract, on May 26, 2010, the Plaintiff applied to China Construction Bank Anhui Branch, and the Bank of Costa Ricaas a switch to open aL/G to ensure that the matter is Costa Rica Lake Washington project. The Defendantwas the beneficiary.

On May 28, 2010, the Bank of Costa Rica opened a No. G051225 L/G, with the guarantee amount of $ 2008000. The guarantor was China Construction Bank Anhui Branch. The principal was the Plaintiff and the beneficiary was the Defendant. Then China Construction Bank Anhui Branch issued a counter-guarantee letter as guarantornumbered 34147020000289 to the Costa Rica Bank

On Feb. 7, 2012, Anhui Foreign Economic and Trade Construction Co., Ltd. in Central America filed the arbitration request with the Defendant as the respondent to the Dispute Settlement Center of the Association of Architects and Engineers of Costa Rica, and requested the Arbitral Tribunal to award the contract of dismissal and adjudication that the Defendant should compensate its loss totaling $ 1,213,487.3, on the ground that the Defendant owed the amount of the construction projectand the corresponding interest payable in arrears and constituted a serious default.

On Feb. 10, 2012, the Bank of Costa Rica sent a message to China Construction Bank Anhui Branch claiming that the Defendant filed a claim for payment of $ 2008000 under L/G G051225, and the bank therefore requested China Construction Bank Anhui Branch to pay the above payments before Feb. 16, 2012.

On Feb. 12, 2012, the Court of First Instance of Cassation of Costa Rica's Administrative Court of Justice issued a ban on interim measures of protection, ordering the Bank of Costa Rica to suspend the L/G G051225.

On Feb. 23, 2012, the Defendant filed a lawsuit against the L/Gfraud withIntermediate People's Court of Hefei City, Anhui Province and also applied for the suspension of the payment under L/G G051225 and 34147020000289.

On Mar. 6, 2012, the Court of First Instance of Costa Rica Administrative Court of Justice ruled that Anhui Foreign Economic and Trade Construction Co., Ltd. in Central America applied for preventive measures and lifted the ban on interim measures of protection. On Mar. 20, the Bank of Costa Rica requested China Construction Bank Anhui Branch extended the validity period of the L/G 34147020000289. On Mar. 21, the Costa Rican Bank paid the Defendant under the L/G G051225.

On Jul. 9, 2013, the Association of Architects and Engineers of Costa Rica ruled that it found the Defendant was in serious breach of contract during the performance of the contract and should paid a total of$ 800058.45 to Anhui Foreign Economic and Trade Construction Co., Ltd. forconstruction progress from No.1 to No.18 and interest. In the opinion of the Plaintiff, the Defendant violated the principle of good faith and abused the principle of independence of bond and constituted fraud.

Legal Analysis:

Legal Issue(s): According to the arbitral award, it was found that the Defendant constituted contract breaching and required the right of guarantee under the basic transaction, could it be considered as fraudulent?

Legal Rule(s):

Art. 25, Provisions of Supreme People 's Court on Some Issues Concerning the Trial of Cases of Disputed Indemnities and Guarantees: These Provisions shall apply to the cases that have not yet been finalized after the implementation of these Provisions; if the cases have been finalized before the implementation of these Provisions, the parties concerned have applied for retrial or the People's Court retrial has been conducted in accordance with the procedures for trial supervision, these Provisions do not apply.

Art.12, Provisions of Supreme People 's Court on Some Issues Concerning the Trial of Cases of Disputed Indemnities and Guarantees: Where the judgment of the court or the arbitral award finds that the debtor of the transaction does not have any payment or liability for compensation, the People's Court shall conclude that it constitutes an independent guarantee fraud.

Disposition – for each legal issue: Supreme People’s Court withdraw the judgement from Intermediate People's Court and Higher People's Court and dismissed the Plaintiff’s request, The Plaintiff should bear the litigation fees.

Holding & Reasoning for each issue:

According to the Art. 25, Provisions of Supreme People 's Court on Some Issues Concerning the Trial of Cases of Disputed Indemnities and Guarantees, this case belongs to the cases of retrial in accordance with the procedures of trial supervision and should not apply the provisions of the above judicial interpretation. But the Plaintiff still insisted that the spirit of judicial interpretation of independent L/Gs should not be violated. Therefore, based on the facts of the case, the court interprets the relevant issues concerning judicial interpretation of independent L/Gs.

According to the Art. 12, Provisions of Supreme People 's Court on Some Issues Concerning the Trial of Cases of Disputed Indemnities and Guarantees, the L/G is independent from the basic transaction between the principal and the beneficiary. The bank issuing the independent L/G is only responsible for checking whether the documents submitted by the beneficiary comply with the terms of the L/G. The bank has the right to decide whether to pay or not. The L/G obligation is not influenced by defenses on basic transactions between people and beneficiaries.

If there are ongoing litigation or arbitration proceedings under the basic contract, as long as the relevant dispute resolution procedures have not yet made. The ultimate determination of whether the debtor should pay or be liable for compensation will not affect the realization of the beneficiary's letter of guarantee.

Even if the effective judgment or the arbitral award determines that the beneficiary constitutes a breach of contract under the basic contract, the fact of such a breach of contract does not necessarily mean that it is necessary and sufficient to constitute a "fraud" on the L/G.

Although the Dispute Settlement Center of the Association of Architects and Engineers of Costa Rica has made an arbitral award, the applicant was Anhui Foreign Economic and Trade Construction Co., Ltd. in Central America, and it has not been determined that a foreign company shall be exempt from payment or liability for the other party's breach of contract. It has not been determined that the Plaintiff shall be exempt from payment or liability for the Defendant's breach of contract.

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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.