Today (1 December 2016) the new judicial interpretation titled “Provisions on Several Questions regarding Trial of Independent Guarantee Letter Dispute Cases” of China’s Supreme People’s Court (“SPC”) comes into force (file No.: Fa Shi  24; issued on 18 November 2016; “SPC Interpretation”). This SPC Interpretation, for the very first time in the People’s Republic, officially recognises the validity of independent guarantee letters (demand guarantees) and addresses several related issues.
I. Definition of “Independent Guarantee Letter”
Pursuant to Article 1 of the SPC Interpretation, the term “independent guarantee letter” refers to:
- a written undertaking;
- issued by a bank or a non-bank financial Institution (yet to be defined) as guarantor to the beneficiary;
- providing for payment of specific amount of funds or up to a maximum amount of funds;
- on presentation of a payment demand together with complying document(s).
Independent guarantee letters can be used for both cross-border transactions and purely domestic transactions (Article 23 of the SPC Interpretation).
In addition, under any of the following circumstances a guarantee letter [issued by a bank or a non-bank financial institution], which stipulates both the complying document(s) and maximum payable amount of funds, shall be treated as an independent guarantee letter:
- Payment on demand is stated in the guarantee letter;
- The application of ICC Uniform Rules for Demand Guarantees or of other model rules on demand guarantee transactions is stated in the guarantee letter; or
- According to the content of the guarantee letter, the payment obligation of the guarantor is independent of the underlying transaction relationship and the guarantee letter application relationship; and is only limited to payment obligation on presentation of a payment demand together with complying document(s) (Article 3 para. 1 of the SPC Interpretation).
II. Independence of Underlying Transaction
Unlike a traditional conditional guarantee, in the case of an independent guarantee letter the undertaking of a guarantor to pay under the guarantee is not subject to claims or defences (such as proof of breach, offset, counter claims etc.) arising from the underlying transaction relationship or the guarantee letter application relationship unless there is a case of the so-called independent guarantee letter fraud (Article 6 of the SPC Interpretation; see below IV.). Upon a complying presentation, the guarantor of an independent guarantee letter is obliged to make the payment to the beneficiary (Article 6 of the SPC Interpretation). The current legal provisions governing the traditional conditional guarantees, which allow the guarantor to reject the payment by referring to claims or defences arising from the underlying transaction relationship, do not apply to the independent guarantee letters (Article 3 para. 3 of the SPC Interpretation).
III. Complying Presentation on Its Face
A guarantor has the independent rights and obligations to examine and determine whether a presentation appears on its face to be a complying presentation and whether to accept and refuse any noncomplying point (Article 8 of the SPC Interpretation). Even if [the data of] a document is on its face not fully identical to [the data of] the independent guarantee letter or other documents, the courts normally will still treat it as a complying presentation on its face provided it will not lead to conflicts among such documents (Article 7 para. 2 of the SPC Interpretation).
IV. “Independent Guarantee Letter Fraud Case”
Any of the following circumstances will be regarded by courts as a case of the so-called “independent guarantee letter fraud” (Article 12 of the SPC Interpretation):
- There is a collusion between the beneficiary and the guarantee letter applicant (obligor) or other parties to fabricate the underlying transaction;
- A third party’s document presented by the beneficiary is falsified or untrue;
- A court verdict or an arbitral award determines that the obligor of the underlying transaction is not liable for payment or compensation;
- The beneficiary confirms that the obligations in the underlying transaction have been fully performed or the event making payment become due does not occur; or
- Any other circumstances under which the beneficiary abuses his/her/its right to claim payment even though the beneficiary is clearly aware that he/she/it is not entitled to do so.
V. Application for Suspension of Payment
ONLY in the case of a so-called independent guarantee letter fraud, the independent guarantee letter applicant (obligor), guarantor or instructor may apply to the competent court for an interim injunction order to suspend payment under the independent guarantee letter (Article 13 of the SPC Interpretation). Such request may be made prior to or during the court or arbitral proceedings. The court will only order the suspension of payment if ALL the following three preconditions have been met:
- The suspension applicant has provided supporting materials that evidence the high possibility of an independent guarantee letter fraud as mentioned above;
- This is an urgent case and if no suspension of payment is ordered, the legitimate rights and interests of the suspension applicant will be irremediably damaged; and
- The suspension applicant has provided security [to the court] that is adequate to compensate the damage might be sustained by the respondent caused by an [improper] suspension of payment.
After acceptance of the suspension application the court shall decide within 48 hours. The applicant must lodge a fraud lawsuit or commence an arbitral proceeding within 30 days after the court’s rendering of the payment suspension order; otherwise the court order will be cancelled (Article 16 of the SPC Interpretation).
VI. Legal Venue and Governing Law
Unless agreed otherwise in writing by the relevant parties, the court at the location where the guarantor or the defendant is domiciled shall have the jurisdiction over cases in relation to a case of independent guarantee letter dispute / fraud (Article 21 of the SPC Interpretation).
Unless agreed otherwise in writing by the relevant parties, the law of guarantor’s habitual residence place shall be the governing law on cross-border independent guarantee letter disputes (Article 22 para. 1 of the SPC Interpretation). In a cross-border independent guarantee letter fraud case, unless agreed otherwise, the law of guarantor’s habitual residence place shall be the governing law; however if the relevant parties have a common habitual residence place, the law of such place shall be the governing law (Article 22 para. 2 of the SPC Interpretation).
VII. Guarantee Deposit for Issuing Independent Guarantee Letter
Pursuant to Article 24 of the SPC Interpretation, the obligor’s guarantee deposit for issuing an independent guarantee letter, which has been administered through a special account and under the possession of the guarantor, can be frozen by the court. However, the court may not order the transfer of such deposit to a designated account unless such deposit has lost its function as the guarantee deposit for issuing the independent guarantee letter. Upon payment and request by the guarantor, the court shall release the corresponding part of the guarantee deposit [in favour of the guarantor].