Legal Case Summaries

Article

Factual Summary:

In the previous case in 2012, Applicant requested from the court to stop payment by Guarantor due to the reasons that Assignee was not entitled to demand payment from Guarantor as they were not the beneficiary of the guarantee, and Assignee’s false statements constituted abusive use of rights and fraudulent demand under the guarantee. While Assignee instead claimed that they were entitled to make a demand under the guarantee as the new beneficiary of the guarantee because of Applicant’s defaults in the performance of the contract, and there was no fraudulent demand as alleged by Applicant in the case. The trial court decided that Assignee was entitled to demand under the guarantee but the demand was abusive and improper drawing. On appeal, Shanghai Supreme People’s Court overturned trial court’s decision on its right of demand.

Upon petition, the Supreme People’s Court noticed that the focus of disputes was whether Assignee was entitled to demand payment in their own name from the Guarantor under the guarantee and whether such payment request action constituted fraudulent demand under the guarantee or abusive use of rights.

The Supreme People’s Court analyzed:

“The demand guarantee was subject to URDG458, and therefore, the issues of transfer of demand rights should be examined according to the rules of URDG458. According to URDG 458 Article 4, the Beneficiary’s right to make a demand under a Guarantee is not assignable unless expressly stated in the Guarantee or in an amendment thereto. However, this article does not affect the beneficiary’s rights of assigning payment received by it to other parties. Therefore, there are extremely strict conditions for the assignment of the right to make a demand under the guarantee, i.e., the parties of the guarantee should agree such assignment either in the guarantee or the amendments thereto.”

The Supreme People’s Court noticed that on 5 November 2007, Beneficiary and Assignee signed an “Assignment Agreement”, on which the Beneficiary agrees unconditionally and irrevocably to assign to the Assignee all its rights, remedies, liens, power, title and interest that the Assignor has under the advance payment guarantee (abbr. as ‘Assigned Interests’) against the Bank and/or the Guarantor. However, the court also noted that the Assignment Agreement at the same time agreed that the Assignee (if necessary) may select any places for litigation or arbitration against bank and/or guarantor regarding the rights of assignment in the name of assignor.

The Supreme People’s Court further analyzed that “Both parties of the Assignment Agreement agreed that the assignee may demand in the name of assignor under special circumstances. However, simply from the explicit agreement of the Assignment Agreement, it cannot be considered that Beneficiary has fully assigned to Assignee their right to make a demand under the guarantee and to turn the Assignee into a new beneficiary of the guarantee.”

The Supreme People’s Court noted that both the Assignee and Guarantor used the wording “in one’s favor” instead of the special terminology “beneficiary” as stipulated in URDG458 in their correspondence, and further analyzed:

“As both parties interpreted ‘in one’s favor’ completely differently, therefore, it cannot be decided from the contents that both parties have reached unanimous agreement on the issue that Beneficiary assign their right to make a demand to Assignee and Assignee in turn replaces Beneficiary as the new Beneficiary. Instead, Assignee clearly stated in their message to Guarantor on 9^th November 2007 ‘demanded by the applicant directly and／or through us’, while Guarantor replied in their message dated 14th November 2007 ‘Demanded by Seabulk Systems Inc.’

In consideration of the fact that Guarantor clearly requested Assignee to ‘notify beneficiary’ in their message regarding the extension of the validity of the guarantee, while the Assignee did not object to such request, the Supreme People’s Court considers that the related parties of the guarantee did not reach unanimous agreement on the assignments of the right to make a demand.”

The Supreme People’s Court therefore upheld the decision of Shanghai Supreme People’s Court that the Assignee was not the beneficiary of the guarantee and was not entitled to demand under the guarantee.

The Supreme People’s Court considers that, since the precondition is that the Assignee is entitled to demand in their own name, therefore, it is appropriate for the appellant court not to determine the issue as to whether the demand by Assignee constituted fraudulent demand or abusive use of rights under the guarantee any more.

The Supreme People’s Court explained that “the Assignee demanded payment in their own name under the Guarantee, which is different from the situation where the Beneficiary made a demand through the Assignee. As a demand cannot be made simultaneously in one’s own name and in other parties’ name, and the Assignee is not a qualified party to make a demand, the Supreme People’s Court denied the Assignee’s claim that their demand notice satisfies the forms of the requirements of demand forms under the two situations.

The Supreme People’s Court dismissed Assignee’s retrial petition in reference to Article 200 and 204(i) of The Civil Procedure Law of the People’s Republic of China.

1. Comments by Jun XU:

1. Assignment

The Supreme People’s Court of P.R. China correctly upheld the decision by Shanghai Supreme People’s Court in examining both the applicable rule of the guarantee and the Assignment Agreement between the Beneficiary and Assignee.

The case was decided before the enactment of the PRC Independent Guarantees Provisions. However, its rationale is not in conflict with the stipulations in the PRC Independent Guarantees Provisions.

PRC Independent Guarantees Provisions Article 5 states: When the independent guarantee states that it is subject to independent guarantee transactions model rules such as Uniform Rules for Independent Guarantee, or when the issuer and beneficiary unanimously refer to such rules before the conclusion of court debate in the trial court, People’s Court shall determine that the contents of the model rules constitute an integral part of the terms and conditions of the independent guarantee. The People’s Court shall support the assertion by the parties that the independent guarantee applies to relative model rules if the situation does not fall within above scope.

PRC Independent Guarantees Provisions Article 10 states: When the independent guarantee does not simultaneously states that it is transferable and the documents based upon which the new beneficiary may be determined at the same time, People’s court shall support the assertion by the issuer that the assignment of the beneficiary’s right to demand for payment has no effect on the issuer. When the independent guarantee has special agreement for the assignment of the beneficiary’s right to demand for payment, such agreement shall apply.

2. Fraud

The Assignee claimed that the trial court failed to determine that Assignee constituted guarantee fraud while at the same time, without factual and legal basis, affirmed the Applicant’s request to stop the Guarantor’s payment to the Assignee because the demand was considered abusive and improper. The Assignee insisted that whether the court may intervene the drawing under demand guarantee could only be determined if the demand was in compliance with the fraud exception principle. The Assignee stated that they had not committed guarantee fraud as alleged by the Applicant.

However, as the Assignee was not the guarantee Beneficiary entitled to make a demand under the guarantee, both the Supreme People’s Court of P.R. China and the appellant court correctly decided that it was not necessary to further determine whether the Assignee constituted fraudulent demand or abusive use of rights under the guarantee based upon the facts found and related laws. Such point of view makes sense.

URDG458 Article 4 states: “The Beneficiary’s right to make a demand under a Guarantee is not assignable unless expressly stated in the Guarantee or in an amendment thereto.”

Even if when we look at the PRC Independent Guarantees Provisions, it is also the Beneficiary being referred to in determining guarantee fraud. Article 12 of PRC Independent Guarantees Provisions states: Each of the following circumstances shall be considered as guarantee fraud:

(1) The Beneficiary and Guarantee Applicant or any other party colludes or fabricates the underlying transaction;

(2) any of the third-party documents presented by the Beneficiary is fake or the content of which is fictitious;

(3) The debtor of the underlying transaction has no payment nor compensational obligations according to the court judgment or arbitral award;

(4) The Beneficiary acknowledges that the debts of the underlying transaction have been fully performed or the event for payment due as stipulated in the guarantee has not occurred; or

(5) Other circumstances where the Beneficiary clearly knows that it has no right to demand payment but still makes abusive use of such rights.

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