Rules on the Adjudication of the Independent Guarantee Cases by the Supreme Court of China

source：　 date：2016-12-05　 author：

Though it is a common practice in China that advance payment guarantee or performance guarantee shall be provided as the terms of the contract require, the parties, when in dispute, found no clear legal rules on these guarantees and different courts tend to have different treatment on ICC sample rules. Often, the beneficiary faced the big burden of proving its position in the underlying deal and its entitlement to the money, which means it takes long time and complicated procedure for the beneficiary to cash out the guarantee. Hopefully this situation will be changed by the new Rules on the Adjudication of the Independent Guarantee Cases issued by the Supreme Court of China.

On Nov. 22, the Supreme Court of China published the Rules on the Adjudication of the Independent Guarantee Cases (the “Rules”) through a news release, effective from December 1st, 2016. These are complete new rules on guarantee letters and a big step forward to keep up with international practices. 

Before these Rules, there was no concept of Independent Guarantee in Chinese law, but only the “joint and several liability guarantee” and “ordinary liability guarantee” under the Guarantee Law of China, in which cases, the guarantor stands in the shoe of the debtor – the guarantor has the same duty as the debtor and may also raise the debtor’s defenses.

By the Rules, Independent Guarantee is defined as a promise to pay with documentary conditions—when the documents provided by the beneficiary meet the conditions prima facie, the issuer of the guarantee shall make the payment as promised. The issuer of the guarantee cannot argue whether the debt exists between debtor and the beneficiary. In summary, the Independent Guarantee works in the same manner as L/C.

What qualifies as an Independent Guarantee? According to the Rules, a guarantee stating a maximum amount of payment duty, the documents conditions for claims, and one of the following: A. payment on demand; B. it is governed by The Uniform Rules for Demand Guarantees (ICC publication) or other similar sample rules; or C. the wording that the issuer’s duty to pay is independent of the underlying deal and the issuance of the guarantee.

The Rules further provide that where the guarantee incorporates The Uniform Rules for Demand Guarantees (ICC publication) or other similar sample rules by reference, the court shall determine such sample rules are part of the terms and conditions of the guarantee.

Meanwhile, the Rules provide that in case the beneficiary makes claims while knowing itself has not right to the money, it is a fraud by the beneficiary, and the issuer may apply to the court to suspend payment with the condition that the issuer shall provide corresponding guarantee and immediately bring a fraud lawsuit against the beneficiary.

The Rules also provide the governing law on an independent guarantee case- the law of the place where the issuer is located.

Disclaimer

This law update has been produced and made available by JLCD Law Firm and is strictly for informational purposes only. No client or other user should act or refrain from acting on the basis of any information contained herein without seeking appropriate legal or other professional advice on the particular facts and circumstances at issue.