Fa Shi [2016] No.24

The Provisions of the Supreme People's Court on Several Issues concerning Trial of Disputes over Independent Guarantee, adopted by the Judicial Committee of the Supreme People's Court at the 1688th meeting, is hereby promulgated and is to be effective as of December 1, 2016.

November 18, 2016

Provisions of the Supreme People's Court on Several Issues concerning Trial of Disputes over Independent Guarantee

 (Adopted at the 1688th meeting by the Judicial Committee of the Supreme People's Court on July 11, 2016; to be effective on December 1, 2016)

With a view to properly handling disputes over independent guarantee, protecting the legitimate rights and interests of parties concerned, serving and securing the development of the "Belt and Road" and promoting the opening up, these Provisions are enacted in light of the actuality and in accordance with the General Principles of Civil Law of the People's Republic of China, the Contract Law of the People's Republic of China, the Security Law of the People's Republic of China (the "Security Law"), the Law of the People's Republic of China on Application of Law in Foreign-related Civil Relations and the Civil Procedure Law of the People's Republic of China. 

Article 1 For the purpose of these Provisions, the "independent guarantee" refers to a written commitment made by a bank or a non-banking institution as the issuer to pay the beneficiary a certain amount or an amount within the maximum guaranteed amount upon demand accompanied by the documents in conformity with the guarantee.  

The aforesaid documents refer to the written documents set out by the independent guarantee that the beneficiary should submit to prove the due payment, including demand for payment letters, statements of default, documents issued by a third party, court decisions, arbitration awards, bills of exchange and invoices.

 The independent guarantee may be given at the request of the applicant or on the instruction of another financial institution. In the event of issuance upon instruction, the issuer may request the instructing party to issue an independent guarantee to secure the recovery right.

Article 2 For the purpose of the Provisions, the "dispute over independent guarantee" refers to the dispute arising out of issuance, withdrawal, amendment, transfer, payment or recovery regarding the independent guarantee.

Article 3 Except that the letter of guarantee fails to state the documents and the maximum guaranteed amount necessary for making payment, the people's court shall uphold the assertion by the parties concerned that the nature of the letter of guarantee is independent in nature if-   

 1. the guarantee states payment on demand;

 2. the guarantee states that the model rules for independent guarantee transactions, such as the International Chamber of Commerce (ICC) Uniform Rules for Demand Guarantees, apply;

 3. pursuant to the content of the guarantee, the payment obligation of the issuer is independent of the underlying transaction relation and the legal relation resulting from the guarantee application and the issuer only assumes the payment obligation matching the documents presented. 

The people's court shall not uphold the assertion by the parties concerned that the independent guarantee is in nature a general undertaking or a joint and several undertaking on the ground that it records the underlying transaction.

The people's court shall not uphold the assertion by the parties concerned that the provisions of the Security Law on general undertaking or joint and several undertaking apply to the independent guarantee.

Article 4 The issuance date of an independent guarantee is the date when the issuer issues the guarantee.

The independent guarantee is effective upon issuance, unless it specifies the date of effectiveness or the event triggering effectiveness.

 The people's court shall uphold the assertion by the parties concerned that the independent guarantee is irrevocable upon issuance if it fails to state it is revocable.

Article 5 Where the independent guarantee states that the model rules for independent guarantee transactions, such as the ICC Uniform Rules for Demand Guarantees, apply, or both the issuer and the beneficiary have referred to such model rules prior to the conclusion of the debate before the court of first instance, the people's court shall hold that the content of such model rules constitute the terms of the independent guarantee.

 The people's court shall uphold the assertion by the parties concerned the relevant model rules apply to the independent guarantee in the circumstances other than those specified in the preceding paragraph.

Article 6 Where the documents presented by the beneficiary are in facial conformity with the terms of the independent guarantee and are consistent with one another, the people's court shall uphold the beneficiary's demand for payment by the issuer under the independent guarantee.

 The people's court shall not uphold the issuer's defense against its payment obligation relying on the relation resulting from the underlying transaction or the independent guarantee application, except for the circumstances stipulated in Article 12 hereof. 

Article 7 When determining the facial conformity, the people's court shall follow the document examination standards stated in the independent guarantee; in case of no such standards, have due regard to the relevant applicable document examination standards set by the ICC.

 Where the documents are not totally in facial conformity with the terms of the independent guarantee and are not totally consistent with one another, but there is no ambiguity among each other, the people's court shall confirm the facial conformity.

Article 8 The issuer has the right and obligation to examine the documents independently, and may, in its sole discretion, determine whether the documents are in facial conformity with the terms of the independent guarantee and are consistent with one another, and decide to accept or reject the unconformity.

 If the issuer clearly expresses to accept the unconformity, the people's court shall uphold the beneficiary's demand for payment by the issuer.

 If the issuer refuses to accept the unconformities, the people's court shall not uphold the beneficiary's demand for payment by the issuer on the ground that the applicant has accepted the unconformity.

Article 9 Where the issuer claims against the applicant subsequent to payment under the independent guarantee, the people's court shall uphold the claim, except that there is any unconformity in the documents presented by the beneficiary.

Article 10 Where the independent guarantee fails to state it is transferable and specify the documents used to determine the new beneficiary, the people's court shall uphold the assertion by the issuer that the transfer of the beneficiary's right to demand payment has no effect on it, unless otherwise the independent guarantee has specific agreement on the transfer of the beneficiary's right to demand payment.

Article 11 The people's court shall uphold the assertion by the parties concerned on termination of the rights and obligations under the independent guarantee in any of the following circumstances where-

 1. the beneficiary fails to present the documents in conformity with the terms of the independent guarantee until the expiry date or the occurrence of the expiry-triggering event stated in the independent guarantee; 

 2. all amounts payable under the independent guarantee have been paid off;

 3. the sum of the independent guarantee has been reduced to zero;

 4. the issuer has received a document issued by the beneficiary on release of the payment obligation under the independent guarantee; or

 5. other termination circumstances provided by law or agreed on by the parties concerned.

 In the aforesaid circumstances where the rights and obligations under the independent guarantee are terminated, the people's court shall not uphold the beneficiary's assertion for the right to demand payment on the ground that it holds the text of the independent guarantee.

Article 12 The people's court may determine that an independent guarantee fraud is committed in any of the following circumstances:

 1. the beneficiary makes up a false underlying transaction by colluding with the applicant or other people;

 2. the third party's documents presented by the beneficiary are counterfeit or contain false information;

 3. the debtor under the underlying transaction is deemed to be free of payment or indemnity liability by the court decision or arbitration award;

 4. the beneficiary confirms that the debt obligation under the underlying transaction has been fulfilled in full or that the expiry-triggering event stated in the independent guarantee does not occur; and 

 5. other circumstances where the beneficiary having no right to demand payment abuses such right on purpose.

Article 13 Upon identifying any circumstance stipulated in Article 12, the applicant, the issuer or the instructing party of the independent guarantee may, prior to bringing a lawsuit or applying for arbitration, or in the lawsuit or arbitration process, apply for ceasing the payment under the independent guarantee to the people's court in the locality of the issuer's domicile or having jurisdiction over independent guarantee fraud disputes.

Article 14 The people's court may rule to cease the payment under the independent guarantee provided that all the following conditions are met:

 1. the proofs filed by the cessation claimant demonstrates that there is a high possibility of existence of the circumstances stipulated in Article 12 hereof;

 2. it is in an emergency and failure to cease the payment immediately would significantly harm the legitimate rights and interests of the cessation claimant; and

 3. the cessation claimant has provided a security sufficient to compensate the possible loss incurred to the respondent. 

 The people's court shall not uphold the cessation claimant's claim for cessation of payment on the ground that the beneficiary has defaulted the agreement under the underlying transaction.

 Where the issuer has, in bona fide, made the payment under the independent guarantee issued on instruction, the people's court shall not rule cessation of payment under the independent guarantee which safeguards the recovery right of the issuer.

Article 15 The people's court shall uphold the claim by the party concerned for compensation by the cessation claimant of the loss caused by false cessation application.

Article 16 The people's court shall make a written ruling within 48 hours upon acceptance of the cessation application. The ruling shall state the cessation claimant, the respondent and the third party, as well as the facts ascertained in the preliminary investigation and the reasons for approval or rejection of the cessation application.

The ruling shall be executed at once.

 If the cessation claimant does not file a lawsuit or apply for arbitration over the independent guarantee fraud dispute within 30 days of the ruling, the people's court shall cancel the ruling.

Article 17 Where the party concerned has any objection to the ruling made by the people's court on ceasing the payment, it may apply for reconsideration to such people's court within 10 days as of the date when the ruling is served. The ruling shall not be suspended from execution during the period of reconsideration.

 The people's court shall make a review within ten days after the receipt of the reconsideration application and inquire the party concerned.

Article 18 When hearing the dispute over independent guarantee fraud or handling the payment cessation application, the people's court may review and determine the facts related to the underlying transaction based on the specific circumstances stipulated in Article 12 hereof which the party concerned asserts.

Article19 Where the applicant brings a lawsuit only against the beneficiary in the dispute over independent guarantee fraud, the issuer and the instructing party may participate as a third party by application or with the notification of the people's court.

Article 20 If, upon hearing the dispute over independent guarantee fraud, the people's court determines the constitution of independent guarantee fraud beyond a reasonable suspicion and the circumstance under paragraph 3 of Article 14 hereof does not apply, the people's court shall adjudicate that the issuer may cease the payment under the independent guarantee.

Article 21 Any dispute between the beneficiary and the issuer over the independent guarantee is under jurisdiction of the people's court located in the domicile of the issuer or of the defendant, unless the independent guarantee states the specific people's court for jurisdiction or dispute resolution via arbitration. Where the parties concerned assert to determine the competent court or settle the dispute via arbitration according to the dispute resolution clause of the underlying transaction contract, the people's court shall not uphold such assertion.

The dispute over independent guarantee fraud is under jurisdiction of the people's court located in the domicile of the issuer of the independent guarantee under which payment cessation is claimed or the domicile of the defendant, unless the parties concerned reach a written agreement on other specific court for jurisdiction or resolution via arbitration. Where the parties concerned assert to determine the competent court or settle the dispute via arbitration according to the dispute resolution clause of the underlying transaction contract or of the independent guarantee, the people's court shall not uphold such assertion.

Article 22 Where a foreign-related independent guarantee does not state the applicable law, and the issuer and the beneficiary fail to agree on the applicable law prior to the conclusion of the debate before the court of first instance, the disputes between the issuer and the beneficiary over the foreign-related independent guarantee shall be subject to the law of the place of the issuer's habitual residence. Where the independent guarantee is issued by a legally registered branch of a financial institution, the law of the place where the branch is registered applies.

 For disputes over foreign-related independent guarantee fraud, if the parties concerned fail to agree on the applicable law, the law of the place of the habitual residence of the issuer of the independent guarantee under which payment cessation is claimed applies; where the independent guarantee is issued by a legally registered branch of a financial institution, the law of the place where the branch is registered applies; where the parties concerned have the habitual residence in the same place, the law of such place applies.

 The preservation procedure for payment cessation the foreign-related independent guarantee is subject to the law of the People's Republic of China.  

Article 23 Where the parties concerned agree that the independent guarantee applies to domestic transactions, the people's court shall not uphold the assertion by the parties concerned that the agreement on the independence of the guarantee is invalid on the ground that the independent guarantee involves no foreign elements. 

Article 24 Where the deposit for issuance of the independent guarantee is managed under a special account and held by the issuer, the people's court may freeze the deposit but not transfer it. In case the funds in the special account fails to serve as the deposit for guarantee issuance, the people's court may transfer such funds by law.

Where the issuer has performed the foreign payment obligation, the people's court shall, at the request of the issuer, release the corresponding portion of the deposit for guarantee issuance. 

Article 25 These Provisions apply to the cases not reaching last instance; do not apply to the cases that have gone through last instance prior to effectiveness of these Provisions but the parties concerned apply for retrial or the people's court initiate retrial pursuant to the trial supervision procedures.

Article 26 These Provisions are effective as of December 1, 2016.

Source : https://www.globalchinalaw.com

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*The original text is Chinese and has been translated into English for reference only. If there is any inconsistency or ambiguity between the Chinese version and the English version, the Chinese version shall prevail.