Article

Facts:

On Aug. 13, 2013, the plaintiff and the third party signed a construction agreement at the price of RMB3,688,888, both parties agreed the completion date was Sep. 18, 2014.

On Aug. 18, 2013, the defendant issued No. 20130822001 L/G. The L/G guaranteed that

  1. The maximum amount was 3,688,888.
  2. The guarantee period was from Aug. 18, 2013 to Sep. 30, 2015.
  3. During the guarantee period, the defendant would pay the plaintiff indemnity at maximum amount when the plaintiff filed a written demand signed by its legal represent or authorized person with an official seal.

From May, 2014 to June, 2015, under the construction agreement the third party paid the plaintiff RMB 9.2 million in total.

On Jul. 12, 2015, the plaintiff filed a written demand to the defendant.

Legal Analysis:

Legal Issue(s):

  1. Whether the L/G was an independence L/G?
  2. Whether the defendant should be free from the guarantee liability?

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. 286, Contract Law, Contractor's Remedies in Case of Developer's Failure to Pay Price If the developer failed to pay the price in accordance with the contract, the contractor may demand payment from the developer within a reasonable period. Where the developer fails to pay the price at the end of such period, the contractor may enter into an agreement with the developer to liquidate the project, and may also petition the People's Court to auction the project in accordance with the law, unless such project is not fit for liquidation or auction in light of its nature.

The construction project price shall be paid in priority out of proceeds from the liquidation or auction of the project.

Art. 5, Property Law, The varieties and contents of real rights shall be stipulated by law.

Art. 176, Property Law, Where a secured credit involves both physical and personal security, if the obligor fails to pay its due debts or any circumstance for realizing the property for security as stipulated by the parties concerned occurs, the obligee shall realize the obligee’s rights according to the stipulations; where there is no such stipulation or the stipulations are not explicit, and the obligor provides his/its own property for the security, the obligee shall realize the obligee’s rights firstly by the security by property; and where a third party provides the security by property, the obligee may realize the obligee’s rights with the physical security or may require the guarantor to assume the guaranty liability. The third party for providing the security may, after assuming the security (guarantee) liability, is entitled to recourse payments against the obligor.

Disposition – for each legal issue:

The defendant shall bear the joint guarantee liability to pay the plaintiff RMB 3,688,888.

Holding & Reasoning for each issue:

The L/G was not an independent L/G.
The defendant was neither a bank or non-bank financial institution. According to the Art. 1, Provisions on Several Issues in the Trial of Independent Letter of Guarantee Case, the L/G issued by the defendant was not an independent L/G. This L/G is an ancillary agreement of the construction agreement. And according to (2015) S. Z. C. Zi NO.2860, this L/G was valid. The defendant shall bear the joint guarantee liability to pay the plaintiff at maximum of RMB 3,688,888.

The plaintiff and the third party did not have conspiracy.
The defendant did not file any evidence to prove the plaintiff and the third party had conspiracy. Then, those documents, submitted to the defendant, were not filed by the plaintiff. Third, as a guarantee company, the defendant did not do the due diligence reasonably. The defendant failed to find that there were dozens of pages missing in the construction agreement; the defendant did not have a conversation with the owner and constructor in the construction agreement, on the fact of advance-fund construction; the defendant did not make a statement (either in writing or oral) to be free from the joint guarantee liabilities, under certain circumstance. Thus, the defendant was not free from the joint guarantee liability.

The defendant shall bear the joint guarantee liability.
The defendant argued the priority of compensation in the construction project price was a property right. Since the plaintiff abandoned this right, the defendant was free from the guarantee liability.

However, according to the Art. 5, Property Law, the priority of compensation in the construction project price was not a property right.

Even if the priority of compensation in the construction project price was a property right, according to the Art. 176, Property Law, the defendant still shall bear its guarantee liability.

Further, the priority of compensation in the construction project price was made to ensure the employee of the constructor got paid. If this right was interpreted in the defendant’s way, this right was meaningless.

In sum, the defendant shall bear the guarantee liability.

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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.