Article

Note: To assure its performance of an underlying sales contract, Jiangsu Soho International Group Co. (Seller/Applicant) obtained a USD 7,467,037 bank guarantee subject to URDG 458 issued by Bank of Communications, Jiangsu Branch (Issuer) in favor of Damen Shipyards Gorinchem (Buyer/Beneficiary). The issuer of the guarantee undertook to pay Buyer/Beneficiary upon a written “claim for repayment” demand that also stated how Seller/Applicant was in breach. Apparently, the guarantee was intended as a means of recovering a prepayment made by Buyer/Beneficiary to Seller/Applicant. When Buyer/Beneficiary demanded payment, however, Seller/Applicant sued for and obtained a temporary injunction, preventing Issuer from paying. Buyer/Beneficiary filed an objection, challenging the injunction. The Wuhan Maritime Court discharged the preliminary injunction.

The first issue for the court was whether the Provisions of the Supreme People’s Court of the People’s Republic of China on Several Issues Concerning the Trial of Disputes over Independent Guarantees (PRC Independent Guarantee Provisions) or general guarantee law of China applied to the guarantee. PRC Independent Guarantee Provisions Article 3 (Independence) states, in part:

Except where a Guarantee does not specify any document against which the payment shall be made or the maximum amount payable, a party’s claim that the guarantee is an Independent Guarantee shall be supported by the People’s Court if: (1) The guarantee states that it is payable on demand; (2) The guarantee states that it is subject to the ICC Uniform Rules for Demand Guarantees or other model rules …; or (3) Based on the text of the Guarantee, the Issuer’s payment obligation is independent from the underlying transaction relationship or guarantee application relationship, and the Issuer is liable for payment only against a complying presentation.

Based on this Article, the court concluded that the guarantee was an independent guarantee as it was subject to URDG 458 and payable on demand. Accordingly, the court then turned to PRC Independent Guarantee Provisions Article 14 (Suspension of Payment) containing the factors necessary to uphold a suspension of payment. Article 14 states:

The People’s Court shall issue a ruling to suspend payment under Independent Guarantee, provided all the following conditions are met: (1) The evidence filed by the [Seller/]Applicant for payment suspension supports a high probability of existence of any of the circumstances provided in Article 12 [factors evidencing fraud]; (2) It is under such urgent circumstances that the [Seller/]Applicant’s lawful rights and interests will suffer irreparable damage if payment is not suspended; and (3) The [Seller/]Applicant has provided security sufficient to cover the damage probably caused by the payment suspension … .

An Applicant’s application for payment suspension on the ground of the [Buyer/]Beneficiary’s breach of contract in the underlying transaction shall not be supported by the People’s Court. …

Because Seller/Applicant failed to provide any evidence that Buyer/Beneficiary had made a fraudulent demand or otherwise met any of the criteria in PRC Independent Guarantee Provisions Article 12 (Fraud), the court discharged the preliminary injunction.

Excerpts of Guarantee: The follow text is derived from an unofficial translation of the guarantee provided to the Wuhan Maritime Court:

“1. This guarantee shall be governed by the laws of the People’s Republic of China;

2. ‘40C’ is the project code of the guarantee on demand under the international banking communication system (SWIFT), ‘URDG’ is the abbreviation of The Uniform Rules for Demand Guarantees ICC Publication No.458.1992Edition;

3. [Issuer] hereby irrevocably and unconditionally guarantees: if the [Seller/Applicant] fails to deliver the products in accordance with the terms of the contract, we promise to return the payment received by the [Seller/Applicant] (Jiangsu Soho) to [Buyer/Beneficiary] (Damen Shipyard), but the amount returned shall not exceed the amount specified in this guarantee;

4. When [Issuer] receives the first original copy of ‘Claim for repayment’ from [Buyer/Beneficiary], the repayment will start immediately. The claim should state the circumstances of [Seller/Applicant]’s breach of its delivery obligation under the contract and the right of [Buyer/Beneficiary] to claim the repayment of the advance payment pursuant to the terms of the contract.

5. However, before [Issuer] received the claim for payment, or within 14 working days after receiving the ‘claim for payment’, if [Seller/Applicant]’s bank raised questions that (1) whether [Seller/Applicant] is obliged to return the advance payment to [Buyer/Beneficiary], (2) whether [Buyer/Beneficiary] has the right to demand the advance payment from [Issuer] and notifies [Issuer] about these two issues, [Issuer] has the right to suspend and delayed the payment, but no more than 14 working days from the date of notification.

6. At the same time, the following provisions shall apply: If the dispute is submitted to arbitration within 14 working days from [Issuer] receving the notice of dispute, [Issuer] shall suspend and delay the payment to [Buyer/Beneficiary] until the final arbitration award is made. Unless the arbitration award requires [Seller/Applicant] to return the payment, [Issuer] has the right not to make the payment to [Buyer/Beneficiary].

If the [Seller/Applicant] fails to comply with the arbitration award, [Issuer] will make the payment to [Buyer/Beneficiary] within 14 working days as required by the arbitration award. In addition, if [Issuer] does not receive the notice of application for arbitration award within 14 working days after the dispute arises, [Issuer] will make the payment to [Buyer/Beneficiary] according to the ‘Claim for repayment’.”

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Saibo JIN, Attorney at Law, and Chenhao ZHANG, Assistant, are with Beijing Jincheng Tongda & Neal Law Firm (Beijing, China).

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