Article

Factual Summary:

In order to purchase cable from Far East Cable Co. Ltd (Applicant), Powers Links International (Beneficiary) signed a “Cooperation Bidding Agreement” (Agreement) with the Applicant.

On July 4, 2014, the Applicant and the Beneficiary signed the Agreement with the signing date remained unchanged as May 26, 2014 (the start day of the Agreement negotiation).

The Applicant submitted the Agreement together with its application for the issuance of a bank guarantee to the Guarantor. The Agreement (Hereinafter called Agreement 1) states that the Beneficiary will act as the bidder to participate in the bidding of QATAR GENERAL ELECTRICITY & WATER CORPORA ATION (Tenderee) directly, and the Applicant will cooperate with the Beneficiary in material supply and technical support. It requires the Beneficiary to submit a bank guarantee in the form of tender bond to the Tenderee, and “the value of the tender bond shall be QAR20,000,000.00 (Equal to USD5,480,000.00) and the duration is 4 months”. It also states that the Applicant “will provide a performance bond of the same value” to the Beneficiary. Agreement 1 further states that “In the successful event, both parties will sigh the sales contract (refer to contract template in annex)”.

The contract template states that payment terms is by “irrevocable L/C of total value” (50% of payment at sight and 50% of payment at 45 days after B/L date), and “5% of total contract value is performance bond for 2 years, 5% of total contract value is quality guarantee for 1 year after sales contract complete”.

On July 15, 2014, the Guarantor issued a performance bond according to the Applicant’s application for an amount not exceeding USD5,480,000.00 subject to URDG758 with validity on September 30, 2014.

The performance bond states:

“WE HAVE BEEN INFORMED THAT FAR EAST CABLE CO., LTD.ADD :….(HEREINAFTER CALLED ‘THE SELLER’), HAS REACHED A COOPERATION BIDDING AGREEMENT CONCERNING THE TENDER NO. GTC/629/2014 OF QATAR GENERAL ELECTRICITY AND WATER CORPORATION (HEREINAFTER CALLED ‘THE CONTRACT’) WITH YOU DATED 26.05,2014 FOR THE SUPPLY OF CABLES.

FURTHERMORE WE UNDERSTAND THAT, ACCORDING TO THE CONDITIONS OF THE CONTRACT, A PERFORMANCE BOND IS REQUIRED.

AT THE REQUEST OF THE SELLER, WE, BANK OF CHINA LTD. WUXI BRANCH, ADD. …..HEREBY IRREVOCABLY UNDERTAKE TO PAY YOU ANY SUM OR SUMS NOT EXCEEDING IN TOTAL AN AMOUNT OF USD5,480,000.00 (SAY US DOLLARS FIVE MILLION FOUR HUNDRED AND EIGHTY THOUSAND ONLY) UPON RECEIPT BY US OF YOUR FIRST WRITTEN DEMAND IN ORIGINAL PAPER FORM STATING THAT THE SELLER IS IN BREACH OF HIS OBLIGATION(S) UNDER THE CONTRACT[Emphasis added].

THIS GUARANTEE SHALL TAKE EFFECT FROM ITS ISSUANCE DATE AND EXPIRE ON SEP.30, 2014 (THE EXPIRY DATE AT THE LATEST. ANY DEMAND IN ORIGINAL PAPER FORM UNDER IT MUST BE SENT TO US VIA COURIER AND RECEIVED BY US AT THIS OFFICE ON OR BEFORE THE EXPIRY DATE. ANY CLAIM SENT THROUGH ELECTRONIC MEANS IS NOT ACCEPTABLE….”

Starting from August 5th, 2014, the Beneficiary made four consequent demands from the Guarantor.

The Guarantor rejected the first demand dated Aug.11, 2014 due to discrepancies and one discrepancy was: “YOUR DEMAND DID NOT INDICATE IN WHAT RESPECT THE SELLER IS IN BREACH OF ITS OBLIGATIONS UNDER THE CONTRACT ACCORDING TO ARTICLE 15A OF URDG758.”

After receiving the revised demand, the Guarantor rejected the second demand dated Aug.22, 2014stating: “OUR PERFORMANCE BOND IS ISSUED TO GUARANTEE THE SELLER’S FAITHFUL PERFORMANCE UNDER COOPERATION BIDDING AGREEMENT DATED 26 MAY, 2014 (THE UNDERLYING CONTRACT), HOWEVER, THE DEMAND STATE THAT THE SELLER IS IN BREACH OF ITS OBLIGATIONS UNDER THE CONTRACT (POINT NO. 3 TENDER BOND IS NOT ISSUED ON OR BEFORE 28TH MAY 2014 AND NOT ISSUE ON TIME AS PER THE CONTRACT DATED 21ST MAY 2014). THEREFORE, THE CONTRACT DATED MAY 21, 2014 STATED IN YOUR DEMAND IS NOT IN COPLIANCE WITH THE UNDERLYING CONTRACT DATED MAY 26, 2014 STIPULATED IN OUR PERFORMANCE BOND. FURTHERMORE, THERE IS NO REQUIREMENT FOR THE ISSUANCE OF TENDER BOND ON OR BEFORE 28TH MAY 2014 IN THE COOPERATION BIDDING AGREEMENT DATED 26 MAY, 2014.”

The Beneficiary insisted on its claim and argued through its bank by MT799 as follows:

QUOTE

  1. Breach of Minutes of Meeting (Point No. 3 Tender Bond is not issued on or before 28th May 2014 and not issue (d) on time as per the Minutes of Meeting Dated 21th May 2014);
  2. Breach of Contract ( Point No. 2 Tender Bond is not issued on or before Tender Date as per Corporation Bidding Agreement, Dated 26th May 2014) details are mentioned below: “Part A [the Beneficiary] must submit a Bank Guarantee in the form of tender bond to QARTA GENERAL ELECTRICITY AND WATER CORPORATION. According to requirements of Tender (No. GTC/629/2014) if ELECTRICITY AND WATER Corporation, the value to the tender bond shall be QAR20,000,000.00 and the duration is 4 months. In meaning time, Part B [Applicant)]will provide the equivalent to Part A.

Here the ‘equivalent’ means according to requirements of Tender. So Part B [the Applicant] should issue bank guarantee to Part A [the Beneficiary] in time and equal value of Tender. Part B failed to issue the Bank Guarantee before the Tender Date, 28th May 2014 as per Tender requirements.

UNQUOTE

Upon receipt of the above reply and the revised third demand dated Sept.4, 2014, the Guarantor rejected for the following reasons:

“1) CONCERNING THE ITEM 1, JUST AS MENTIONED IN OUR MT799 DD 140829, OUR PERFORMANCE BOND IS ISSUED TO GUARANTEE THE SELLER’S FAITHFUL PERFORMANCE UNDER COOPERATION BDDING AGREEMENT DATED 26 MAY, 2014. AND THE MINUTES OF MEETING HAS NOTHING TO DO WITH OUR PERFORMANCE BOND.

2) CONCERNING THE ITEM 2, WE ARE SURPRISED TO FIND THAT THE CONTENT OF POINT NO.2 OF THE COOPERATION BIDDING AGREEMENT DATED 26 MAY, 2014 WHICH OUR PERFORMANCE BOND IS BASED ON IS DIFFERENT FROM DECLARATION OF POWER LINKS INTERNATIONAL POINT NO. 2 OF THE COOPERATION BIDDING AGREEMENT QUOTED IN YOUR DEMAND.

THE POINT NO.2 OF THE COOPERATION BIDDING AGREEMENT DATED 26 MAY, 2014 IN OUR HAND IS AS FOLLOWS:

QUOTE

2. PART A [the Beneficiary] MUST SUBMIT A BANK GUARANTEE IN THE FORM OF TENDER BOND TO QATAR GENERAL ELECTRICITY AND WATER COOPORATION. ACCORDING TO REQUIREMENTS OF TENDER (NO. GTC/629/2014) OF GENERAL ELECTRICITY AND WATER CORPORATION. THE VALUE OF THE TENDER BOND SHALL BE QAR20,000,000.00 (EQUAL TO USD5,480,000.00 ) AND THE DURATION IS 4 MONTHS. IN MEANING TIME, PART B [the Applicant]WILL PROVIDE A PERFORMANCE BOND OF THE SAME VALUE TO PART A [the Beneficiary].

UNQUOTE

WE FIND THAT THERE ARE ABSENT OF THE WORD ‘THE EQUIVALENT’ WHICH IS RELIED ON BY YOUR PARTY IN THE CLAIM TO ALLEGE OUR LCIENT’S BREACH OF THE CONTRACT. IN FACT, AS REQUIRED IN COOPERATION BIDDING AGREEMENT, OUR CLIENT PROVIDES A PERFORMNACE BOND FOR USD5,480,000 TO YOU.”

The Beneficiary disagreed and replied through its bank by MT799 upon receipt of the Guarantor’s above message as follows:

“…the breach of Minutes of Meeting obligation comes within the context of the general breach of your client obligations which stated in the agreement dated 26/May/2015, and it would be considered as supererogatory performance, and it’s not the base of our demand, as the main ground of our demand based on the breach of the stated agreement dated 26/May/2014, point No: (2) as it’s explained herein…

…the word ‘the equivalent’ despite it’s not expressly mentioned in the referred agreement, but we believe that, it has the same meaning of ‘the same value’ which is already mentioned in the agreement dated 26/May/2014…”

In the meantime, the Applicant sued the Beneficiary for fraudulent demand under the guarantee. The Applicant claimed that the Beneficiary made false statements and concealed the actual signing date and process of the Cooperation Bidding Agreement, and intentionally lied that the Applicant defaulted so as to defraud the proceeds under the guarantee. The Applicant claimed that the signing date of the Agreement is May 26, 2014 instead of July 4, 2014.

On September 19, 2014, Wu Xi Intermediary People’s Court issued court injunction at the petition of the Applicant, and the Guarantor advised that they were unable to honor because of the court injunction order upon receipt of the fourth revised demand on September 21, 2014 which was found complying.

Upon appeal, the Jiangsu Supreme People’s Court affirmed.

1
Jun Xu, Deputy General Manager, Bank of China, Jiangsu Branch, China; a Member of ICC Banking Commission’s Executive Committee, a Member of ICC DOCDEX, and a DCW Editorial Advisory Board Member

2
On line instant conversation services provided by the IT company Tencent

3
see 2015 Annual Review of International Banking Law & Practice

Legal Analysis:

1. Underlying contract

The Beneficiary argued that they did not commit fraudulent actions, instead, it was the Applicant who defaulted for not issuing the guarantee with 4-month duration in the same amount of the guarantee issued by the Beneficiary to the Tenderee according to the underlying contract.

Point 2 in Agreement 1 differs in certain wording from the document bearing the same name submitted by the Beneficiary to the courts (Hereinafter called “the Agreement 2”) which reads as:

“2. Part A [the Beneficiary] must submit a bank guarantee in the form of tender bond to QATAR GENERAL ELECTRICITY AND WATER COOPORATION. ACCORDING TO REQUIREMENTS OF TENDER (No. GTC/629/2014) OF GENERAL ELECTRICITY AND WATER CORPORATION, the value of the tender bond shall be QAR20,000,000.00 and the duration is 4 months. In meaning time, Part B [the Beneficiary] will provide the equivalent to Part A [the Applicant]”. [Emphasis added]

Both of the documents were signed on May 26, 2014 and the contents of the two agreements were almost the same except for following two differences in Point 2:

(1) “(Equal to USD5,480,000.00)” was missing in the Agreement 2 submitted by the Beneficiary;

(2) The last sentence of Agreement 2 reads as “Part B will provide the equivalent to Part A” instead of “Part B [the Beneficiary] will provide a performance bond of the same value to Part A [the Applicant]” as indicated in the Agreement 1.

The Applicant argued that Agreement 1 should be treated as the final enforceable agreement, and Agreement 2 was just a draft document.

The Applicant explained that the actual signing date of the Agreement 1 was July 4, 2014. The reason for the signing date of May 26, 2014 in Agreement 1 was that both parties did not amend date in the initial draft of the agreement.

The Beneficiary considered both agreements were enforceable and the Applicant should be bound by the Agreement 2.

While reviewing the process of the agreement negotiation and the contents of the guarantee, the courts supported the Applicant’s arguments and decided that Agreement 1 should be treated as the enforceable agreement under the guarantee in question to determine whether the Applicant had delayed in the issuance of the guarantee. Agreement 2 was considered by the courts a draft document in process of negotiation and should not be treated as the final version.

Wuxi Intermediary People’s Court’s analyzed:

“(1) In independent guarantee legal relationship, there were more than one underlying contracts with legal relationship, and when both of the contracts bore the signatures and stamps of the two parties, the underlying contract relied upon which the bank guarantee was issued should be considered as the underlying contract relative with the guarantee disputes, and such contract was relative with the decision of the guarantee legal relationship and liabilities. The court observed that the guarantee issued by the Guarantor was based upon Agreement 1 and the contents of the guarantee was confirmed by the Beneficiary before its issuance, therefore the underlying contract relative to the guarantee should be considered as Agreement 1.

(2)The time and contents of the notarized emails and QQ2 conversation records provided by the Applicant may be cross-verified and their authenticity may be confirmed.

…the contents of the email and the QQ conversation records evidenced that the employee of the Applicant Miao Xuan and Zou Shi Guo negotiated the specific issues regarding the cooperation bidding project. Zou Shi Guo, acting in the name of the Beneficiary, negotiated with Miao Xuan regarding the issues of the agreement and issuance of the guarantee and forwarded emails sent by the Beneficiary’s employee to Miao Xuan, which was sufficient evidence that Zou Shi Guo was acting on behalf of the Beneficiary in the cooperative bidding project and was the responsible person of the Beneficiary rather than the middleman. At the same time, Zou Shi Guo was also named as the contact person in the guarantee according to his agreement and such fact could further prove that Zou Shi Guo was acting as representative of the Beneficiary.

Furthermore, the contents of the email and QQ conversation records showed that the Agreement 1 was formed after Agreement 2 and the contents of Agreement 1 were amended as well. According to usual business negotiation practice, it may be determined that Agreement 1 reached afterwards should be the final contract version for the rights and obligations of both parties, and shall naturally replace the previous Agreement 2.

(3)When comparing the two agreements, it is evident that Agreement 1 revised “Part B will provide the equivalent to Part A” to “Part B will provide a performance bond of the same value to Part A”. According to the Guarantor, the Applicant initially presented Agreement 2 making queries regarding issuance of guarantee, and the Guarantor considered that according to Agreement 2, the type of the guarantee the Applicant was to issue should be the same as the one the Beneficiary was to issue in favor of the Tenderee, i.e., a bidding bond, however, since the Applicant was not the bidder, it should issue a performance guarantee instead. Thereafter, the Applicant presented Agreement 1 and applied for the issuance of the performance guarantee in question”.

The court further analyzed:

“There were various types of guarantees including payment guarantee, borrowing guarantee, performance guarantee, lease guarantee, bidding guarantee and etc according to different purposes of the guarantee. Bidding guarantee is applicable to bidding legal relationships. No matter from the contents of Agreement 1 or Agreement 2, it could be seen that the Applicant was to cooperate with the Beneficiary in bidding issues and was responsible for providing cable and authorizing the Beneficiary as its agent after the Beneficiary winning the tender. It was obvious that the legal relationship between the two parties was sales contractual relationship rather than bidding relationship. The amendment of Agreement 1 to the contents of Agreement 2 was just to clarify that the Applicant should issue a performance guarantee. Therefore, the statement of the Guarantor was reasonable. The Agreement was reached by revising Agreement 2 and should be considered as the final contract version between both parties”.

Jiangsu Supreme People’s Court agrees with the trial court’s decisions that Agreement 1 should be considered as the basis for determining whether the guarantee was delayed in issuance.

Jiangsu Supreme People’s Court noted that the Guarantor issued a performance bond in favor of the Beneficiary on July 15, 2014. The contents of the guarantee were confirmed by the Beneficiary prior to its issuance. The notarized emails and QQ conversation records also evidenced that Agreement 1 was reached after Agreement 2 and there were amendments in Agreement 1 regarding the contents of Agreement 2. The court found out that, during the appeal, all parties confirmed that the underlying contract based upon which the guarantee issued by the Guarantor was Agreement 1.

Therefore, Jiangsu Supreme People’s Court affirms that Agreement 1 reached after the Agreement 2 should be considered as the final version of the underlying contract.

2. Fraud and Abusive Demand:

The Applicant argued that the actual signing date of Agreement 1 was July 4, 2014 instead of May 26, 2014. The Beneficiary disagreed and argued that the Applicant should have issued the guarantee no later than May 28 as agreed in the Minutes of Meeting, however, the Applicant did not issue the guarantee until July 15, less than 4 months prior to the expiry date of the guarantee, hence the Applicant was in breach of the contract.

In determining whether the Beneficiary has committed fraud in making abusive demand, Wuxi Intermediary People’s Court states that when examining whether the documents presented by the beneficiary of the guarantee are fake, fraudulent or whether there exists other abusive uses of the right of demand so as to determine if fraud exists, the People’s Court may make necessary limited examination as for the contents and performance of the underlying contract related to the guarantee. Such examination should be limited within the scope when the beneficiary makes abusive demand when he has clearly known that there is no breach of the underlying transaction by the debtor.

Wuxi Intermediary People’s Court’s decided that the Beneficiary’s demand constituted fraud based on following reasons:

  1. The underlying contract under the guarantee in question should be Agreement 1 instead of Agreement 2.
  2. The Applicant was not in default as alleged by the Beneficiary.

When determining whether the Applicant defaulted in the underlying contract, the trial court analyzed:

“The guarantee in question was issued on July 15,2014 in compliance with the agreement stipulated in Agreement 1, and the court considered that the Applicant had performed its obligation in issuing the guarantee in the same value…

In the fraud disputes of guarantee, when the party applying for injunction order could sufficiently and clearly prove that it had fully performed the obligations of the underlying contract, while the Beneficiary could be clearly considered as making fraudulent demand under the guarantee without any doubts, the People’s Court may decide to suspend payment under the guarantee”.

It should be subject to the underlying contract in relation to the guarantee when determining whether the party applying for injunction order has fully performed the obligations of the underlying contract, in other words, the obligations the party applying for the injunction order should fulfil shall be subject to the contents stipulated in the underlying contract relationship with the guarantee instead of the contents outside of the contract”.

The court analyzed in details as follows:

QUOTE

(1)According to Point 2 of Agreement 1, the Beneficiary must provide a bank guarantee in the form of tender bond to the Tenderee and the tender bond shall be equal to USD5,480,000 and the duration is 4 months. The Applicant must provide a performance bond of the same value in the meantime. Both parties held different interpretations regarding the wording “same value”. The Applicant considers that “same value” refers to the amount same as the tender bond amount, i.e., the Applicant’s responsibility was to provide a performance guarantee to the Beneficiary in the amount of USD5,480,000. While the Beneficiary considers that “same value” refers to the same elements including not only amount but also time, duration, beneficiary etc.

In the lawsuits, both parties had disputes in the interpretation of “same value”. The Applicant argued that beneficiary should be interpreted as “in the same amount of the bidding bond mentioned in the Agreement”, while the Beneficiary argued that “same value” should be interpreted as “the same elements not only amount but also time, duration, beneficiary and etc”. From its context, it would be more accurate and close to the intention of both parties by interpreting the word “value” as the amount of the guarantee. Therefore, based from the context of “same value”, the Applicant’s duty as stipulated in point 2 of the Agreement was to provide a performance guarantee to the Beneficiary. Based on the facts in the case, the Applicant had performed its obligations.

(2)Both parties acknowledged that they had meeting on May 20-21, 2014, and the Applicant confirmed that one of their employee signed the Minutes of Meeting. Despite of the fact that two other senior managers of the Applicant did not sign the Minutes of Meeting as requested by the Beneficiary, the contents of the Minutes of Meeting were the true intention of both parties could not be affected. Since the underlying contract relative to the guarantee was Agreement 1 instead of Minutes of Meeting, therefore, Minutes of Meeting were also a procedural document in the cooperation bidding actually replaced by Agreement. In its third demand to the Guarantor, the Beneficiary’s claim stated the Applicant defaulted for its violation of the Minutes of Meeting, and the Guarantor rejected due to the reason that the Minutes of Meeting had no relation with its guarantee. Then, in its fourth demand, the Beneficiary acknowledged that the breach of Minutes of Meeting obligation were within the context of the general breach of the Applicant’s obligations in Agreement 1 and were not the base of their demand. Therefore, the Minutes of Meeting could not be considered as a stipulated document for demand under the guarantee. Similarly, although there was the Applicant’s commitment regarding the time for the issuance of the guarantee in the commitment letter submitted by the Beneficiary, such commitment letter was also a procedural document not called for by the guarantee, hence the commitment letter cannot be considered as a stipulated document for demand under the guarantee.

(3)According to the emails and QQ conversation record, the draft of the Cooperation Bidding Agreement sent by Miao Xuan, an employee of the Applicant, to Zou Shi Guo, was dated May 26, 2014. Afterwards both of them had several emails exchanges and the signing date of the Agreement had never been revised and remained as May 26, 2014 on the final version (Agreement 1) sent by Zou Shi Guo to Miao Xuan on July 4, 2014. From the process, it appears that both parties actually neglected the revision of the signing date of the contract. At the same time, according to the emails and QQ conversation records, it can also be concluded that the Beneficiary had confirmed all the contents of Agreement 1 and the guarantee. Furthermore, after the issuance of the guarantee by the Guarantor on July 15, 2014, the Beneficiary no longer discussed with the Applicant about the issues of the bidding,and made four demands subsequently from the Guarantor starting from August 5, 2014, and claimed in its demand that the Applicant did not issue the guarantee according to Point 2 of Agreement 1 dated May 26, 2014.

If it was for the reasons stated by the Beneficiary, the Beneficiary had actually already violated the agreement at the time when the Beneficiary was signing the final underlying contract and applying for the issuance of the guarantee from the Guarantor. However, neither did the Beneficiary claim that the Applicant had violated the agreement nor did it refuse to accept the guarantee during that process. Instead, it was just by taking advantage of the so-called default action by the Beneficiary that the Beneficiary succeeded in becoming the beneficiary of the guarantee whereby it was able to have the opportunity of making demand under the guarantee.

It can be seen from the above actions that the Beneficiary clearly knew that the signing date of Agreement 1 was not the actual signing date, while it intended to make demand by taking advantage of the non-amended signing date. The Beneficiary’s action was not in good faith and should be considered as making malicious demand.

(4)After signing Agreement 1, the Applicant again discussed with and the Beneficiary regarding the form, contents and change of the advising bank of the guarantee and reached agreement. The Guarantor issued the guarantee according to the agreed contents by both parties. According to the guarantee, the expiry date was September 30, 2014, therefore, the duration of the guarantee was two and half months. The Beneficiary considered that the Applicant defaulted because the duration was not up to four months.

However, just as analyzed above, the underlying contract based upon which the guarantee was issued did not stipulate the duration of the guarantee, and the reason of the demand by the Beneficiary was not covered by the guarantee. In addition, the Beneficiary had already confirmed all the contents of the guarantee before its issuance including the expiry date of the guarantee as September 30, 2014. Based on such facts, it can be concluded that, when the Beneficiary was knowingly aware that the Applicant did not default and still made demand under the guarantee, the Beneficiary constituted the fraudulent action of abusive demand…

UNQUOTE

On appeal, Jiangsu Supreme People’s Court affirms and supports the intermediary court’s positions that the Applicant was not delayed in the issuance of the guarantee.

Jiangsu Supreme People’s Court states:

“According to the independent legal nature of the guarantee, the obligations of the party applying for injunction should be determined from the contents stipulated in the underlying contract under the guarantee instead of from other contents outside the scope of the contract.

First of all, Agreement 1 based upon which the guarantee issued in the case did not stipulate that the Applicant must issue the guarantee on or prior to May 26, 2014. According to Point 2 of Agreement 1, the Beneficiary must provide a bank guarantee in the form of tender bond to the Tenderee in the amount of USD5,480,000 with four months duration, and the Applicant must provide a performance bond in the same amount to the Beneficiary”.

Jiangsu Supreme People’s Court also agrees with the trial court’s decision regarding the interpretation of “same value” that, from the context of Agreement 1, “same value” should be interpreted as the obligation of the Applicant to provide a performance guarantee in the amount of USD5,480,000. However, the court remarked that Agreement 1 did not stipulate the time for the issuance of the guarantee.

Secondly, Jiangsu Supreme People’s Court also objects the Beneficiary’s arguments that the Minutes of Meeting required the Applicant to provide the guarantee prior to May 28, 2014. The court considers that the Minutes of Meeting was a document in process during the bidding cooperation and was dated earlier than Agreement 1 dated July 4, 2014, hence cannot be treated as the basis for demand under the guarantee.

Finally, Jiangsu Supreme People’s Court affirms that, according to the emails contents and QQ records between Miao Xuan(employee of the Applicant) and Zou Shi Guo (responsible person of the Beneficiary), the draft of the Cooperation Bidding Agreement emailed by Miao Xuan to Zou Shi Guo was dated May 26, 2014. Afterwards, both parties exchanged views several times, but the signing date remained un-amended till July 4, 2014 when Zou Shi Guo forwarded Agreement 1 to Miao Xuan. The courts also notes that, according to the contents of the emails and QQ records, it may be determined that the Beneficiary had confirmed Agreement 1 and the complete contents of the guarantee, and in the meantime the Beneficiary did not mention that the Applicant failed to issue guarantee prior to May 26, 2014 and thus had violated the agreements in Agreement 1. After the issuance of guarantee by the guarantor on July 15, 2014, the Beneficiary no longer discussed any issues with the Applicant regarding the bidding and started making four demands from August 5, 2014.As such, the court considers that the Beneficiary did not mention the Applicant’s default during the negotiation process of Agreement 1, while claimed afterwards that the Applicant defaulted and made demands from the Guarantor based on the reason that the Applicant failed to issue the guarantee prior to May 26, 2014, and the Beneficiary’s such action is an abusive use of the rights of demand and constitutes fraud.

3. Fraud Exception

Jiangsu Supreme People’s Court analyzes that fraud exception is the exceptional case of the independence rule of the independent guarantee and shall not be subject to the principle of the guarantee’s independence from the underlying contract. When examining the statement made by the beneficiary of the guarantee presented to the obligor regarding the debtor’s default in the underlying contract, although the People’s Court should not make overall examination about the relationship of the underlying contract, it may make necessary and limited examination regarding the contents of the underlying contract in relation with the guarantee and the its performance so as to determine whether the beneficiary’s action constitutes fraud. The scope of the limited examination should be restricted to whether the beneficiary makes malicious demand even when it clearly knows that the debtor of the underlying contract is not in default.

The court concludes that the essence of the dispute is whether the Applicant delayed in the issuance of the guarantee as required. The court considers that there was no default action by the Applicant regarding late issuance of the guarantee in this case, and the Beneficiary constitutes fraud when it clearly knew that fact and still made demand under the guarantee.

4. Jurisdiction:

Wu Xi Intermediary People’s Court considered that the case was foreign business dispute and the applicable law had to be determined.

The court remarks:

“Since the performance bond is subject to URDG758, according to Article 34 of URDG758, unless otherwise provided in the guarantee, its governing law shall be that of the location of the guarantor’s branch or office that issued the guarantee. Therefore, the dispute in question shall also be subject to the law of the Guarantor’s location, that is, the laws of People’s Republic of China. At the same time, the nature of the guarantee fraud disputes should be considered as disputes of tort. According to article 44 of The Law of the Application of Law for Foreign-related Civil Relations of the People’s Republic of China, the laws at the place of tort shall apply to liabilities for tort, but if the parties have a mutual habitual residence, the laws at the mutual habitual residence shall apply. If the parties choose the applicable laws by agreement after any tort takes place, the agreement shall prevail”.

The court concluded that “since the Applicant and the Beneficiary did not have a mutual habitual residence, neither did them reach an agreement as to the applicable law after the tort taking place, therefore, the laws at the place of tort shall apply”.

The court decided that “as the performance bond was issued and honored by the Guarantor, if there were any fraud in the demand under the guarantee, the Applicant would be the actual party suffering damages incurred or may be incurred out of the tort behavior, the place of tort was therefore in China and PRC’s laws were applicable”.

5. Authorized representative

The courts considered that Zou Shi Guo was the legitimate authorized representative of the Beneficiary in the cooperative bidding agreement.

Jiangsu Supreme People’s court noted that, according to the emails and QQ conversation records between Zou Shi Guo and Miao Xuan, Zou Shi Guo negotiated with the Applicant in the name of the Beneficiary regarding the signing of the Agreement, issuance of the guarantee and etc, and forwarded the emails of the Beneficiary’s relative employee and Agreement. The court further observes that “in fact the Beneficiary also quoted the contents from Zou Shi Guo’s emails and QQ conversation records in its defense and confirmed the Agreement negotiated between Zou Shi Guo and Miao Xuan”.

Comments by Jun XU:

1. Fraud

From the case of Jiangsu Taihu Boiler Co. Ltd. v. Pt. Kraktau Engineering3, we could see that the courts in P.R. China are becoming more and more cautious in the decisions regarding fraud under independent guarantees.

The Supreme People’s Court in China promulgated PRC Supreme People’s Court’s Provisions on Several Questions about Independent Guarantees Disputes Cases (Hereinafter called “PRC Independent Guarantees Provisions”) which has become effective since December 1st, 2016

PRC Independent Guarantees Provisions set very high standards for the issuance of injunction order. Fraud is among one of the three standards. However, according to Article 14 of the law, injunction order may be issued only when three conditions are met, among which, one of the standards is that there must be high possibility of the existence of the fraud supported by the evidence submitted by the injunction order applicant.

It is worth mentioning that the case was trialed before the enforcement of, but during the drafting process of the law. It can be seen that the judgment falls within the scope of the circumstances for fraud in the law.

According to Article 12 of PRC Independent Guarantees Provisions, each of the following circumstances shall be considered as guarantee fraud when

  1. The beneficiary and guarantee applicant or other people colludes or fabricates the underlying transaction;
  2. The third-party document(s) presented by the beneficiary is(are) fake or the contents of which is(are) fictitious;
  3. The debtor of the underlying transaction has no payment nor compensational obligations according to the judgment by the court or the arbitration award by the arbitral tribunal;
  4. The beneficiary confirms that the debts of underlying transaction has been fully performed or the event for payment due as stipulated in the guarantee has not occurred;
  5. Other circumstances where the beneficiary clearly knows that he has no rights of demand while still makes abusive use of such rights.

In the case, from the examination of the Agreement negotiation process and the related underlying transaction, it is clear that the Beneficiary acted in bad faith when it clearly knew that the Applicant did not default as alleged while still made abusive demand.

2. Discrepancy

The performance bond requires a written demand in original paper form stating that the seller is in breach of his obligation(s) under the contract. The Beneficiary did not indicate in what respect the seller is in breach of its obligations under the contract in its first demand. In the revised second and third demand, the Beneficiary stated that the seller was in breach of its obligations in Minutes of Meeting which was not mentioned in the guarantee, and the third demand additionally addressed the contents of Agreement 2.

URDG758 Article 15(a) stipulates: “A demand under the guarantee shall be supported by such other documents as the guarantee specifies, and in any event by a statement, by the beneficiary, indicating in what respect the applicant is in breach of its obligations under the underlying relationship [Emphasis added]. This statement may be in the demand or in a separate signed document accompanying or identifying the demand”.

According to Article 5 of URDG758, “A guarantee is by its nature independent of the underlying relationship and the applicant, and the guarantor is in no way concerned with or bound by such relationship. A reference in the guarantee to the underlying relationship for the purpose of identifying it does not change the independent nature of the guarantee. The undertaking of a guarantor to pay under the guarantee is not subject to claims or defenses arising from any relationship other than a relationship between the guarantor and the beneficiary”.

Article 19(a) of URDG758 stipulates: “The guarantor shall determine, on the basis of a presentation alone, whether it appears on its face to be a complying presentation.”

URDG758 adopts the approach of “non-conflict rule” of UCP600 in the determination of compliance. Article 19(b) stipulates: “Data in a document required by the guarantee shall be examined in context with that document, the guarantee and these rules. Data need not be identical to, but shall not conflict with, data in that document, any other required document or the guarantee”.

The guarantor was justified in its first refusal according to Article 15(a) of URDG758. The second and third demands obviously were in conflict with the guarantee in the aspect of Minutes of Meeting according to URDG758 Article 19(b).

3. Underlying contract

The Applicant and the Beneficiary had disputes regarding the choice of two Cooperation Bidding Agreements signed on the same day but with different contents in certain areas.

In this case, the courts consider that they may make necessary limited examination as for the contents and performance of the underlying contract related to the guarantee [Emphasis added]. Such approach is not in contradictory with PRC Independent Guarantees Provisions and the standards for the examination are even narrower than those stated in PRC Independent Guarantees Provisions.

According to Article 18 of PRC Independent Guarantees Provisions, when hearing the independent guarantee fraud disputes cases or processing the application for injunction order, the People’s Court may examine the relative facts of the underlying transaction regarding the specific circumstances as stipulated in Article 12 the party(ies) claimed.

In order to determine the underlying contract in force, the courts examined the overall process of the Agreement negotiation and the testimony during the trial, and the conclusion regarding the enforceable underlying contract is reasonable.

4. Jurisdiction

According to Article 14 of The Civil Law of the People’s Republic of China, “The application of law in civil relations with foreigners shall be determined by the provisions in this chapter. If any international treaty concluded or acceded to by the People’s Republic of China contains provisions differing from those in the civil laws of the People’s Republic of China, the provisions of the international treaty shall apply, unless the provisions are ones on which the People’s Republic of China has announced reservations. International practice may be applied to matters for which neither the law of the People’s Republic of China nor any international treaty concluded or acceded to by the People’s Republic of China has any provisions.

The Supreme People’s Court further clarified in 2005 in its Notice of the Supreme People’s Court Meeting Memorandum of the 2nd National Foreign Business and Maritime Affairs Trial Issues that, for foreign related contractual disputes cases, the People’s Courts should decide the applicable laws according to following methods: (1) the proper law chosen by the parties, including international treaty, international practice, foreign laws or laws of relative areas…; (4) International practice may be applied to matters for which neither the law of the People’s Republic of China nor any international treaty concluded or acceded to by the People’s Republic of China has any provisions.

The guarantee in the case was issued subject to URDG758, and the courts correctly interpreted URDG758 regarding the choice of the applicable law.

Even in consideration of Article 21 of The PRC Independent Guarantees Provisions, the courts’ decision regarding jurisdiction is not in conflict. Article 21 addresses that unless otherwise agreed by the parties in writing that the dispute cases of independent guarantee shall be subject to jurisdiction of other courts or subject to arbitration, fraud dispute cases of independent guarantee shall be settled by the people’s court of the guarantor’s location or that of the appellant’s location, and the people’s court shall not support the arguments by the parities that the dispute resolution articles of the underlying contract or independent guarantee shall be the basis for determining the jurisdiction or arbitration.

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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.