ABSTRACT
In a guarantee fraud case, the underlying transaction should be reviewed on a necessary and limited basis. If the underlying agreement has already been addressed in an effective award issued by an overseas arbitral institution, the matters verified in such award may serve as evidence for the state of performance of the underlying agreement. If the evidence shows a high probability of a guarantee fraud and the applicant has provided the corresponding security, the court should promptly issue an order to suspend payment under the guarantee.
FACTS
Zhejiang X Group Company (“ZJX Group”), on behalf of its two affiliates engaged in making installations and delivering supplies for an overseas stadium project, arranged for a foreign bank’s overseas branch (as the reissuing bank) to issue performance and advance payment guarantees to the general contractor, and for the Chinese subsidiary of a foreign bank to issue a corresponding counter-guarantee. Disputes later arose during contract performance, and the two affiliates initiated an arbitration proceeding against the general contractor before the ICC International Court of Arbitration (“ICC Court”) pursuant to the arbitration clause in the project contract. On September 26, 2023, an arbitral award was rendered, which, among others, ordered the general contractor to immediately release and return the performance and advance payment guarantees. The general contractor did not comply with the award but instead sent a “pay or extend” demand under these guarantees to the foreign bank’s overseas branch. The latter, in turn, made a similar demand on the Chinese subsidiary of a foreign bank in accordance with the counter-guarantee. ZJX Group thus filedan application for suspension of payment , seeking suspension of payments under the three counter-guarantees issued by the Chinese subsidiary of a foreign bank.
HOLDING
On November 8, 2023, the Shanghai Financial Court (“Court”) issued three rulings ((2023) Hu 74 Xing Bao No. 2, No. 3, and No. 4) ordering suspension of payments under the three counter-guarantees, and served the rulings on the issuer of the counter-guarantees, the Chinese subsidiary of a foreign bank. On December 7, 2023, ZJX Group filed a lawsuit for guarantee fraud, seeking substantive termination of payments under the three counter-guarantees issued by the Chinese subsidiary of a foreign bank, and under the three performance guarantees and the advance payment guarantee issued by the foreign bank’s overseas branch.
On January 8, 2024, ZJX Group applied for withdrawing the lawsuit upon the general contractor’s release of the guarantees. The Court accordingly issued three civil rulings ((2023) Hu 74 Min Chu No. 1529, No. 1540, and No. 1541), approving plaintiff ZJX Group’s withdrawal.
ADJUDICATIVE GUIDANCE
Given that an independent guarantee is independent from the underlying transaction and payable on demand, a court should promptly issue and serve a suspension of paymentorder on the relevant recipient if the applicant furnishes documents that demonstrate there is a “high probability” of guarantee fraud and provides the corresponding security. As suspension of payment is a prerequisite to a lawsuit over guarantee fraud, a court should track the progress of this subsequent lawsuit, accept and handle it in a prompt and appropriate manner, and duly coordinate these two procedures to effectively prevent improper claim or abuse of guarantee.
I. Accurate Application of International Rules. The suspension of payment procedure requires a court ruling on the suspension of payment application within 48 hours. The Court analyzed the materials submitted by the applicant and immediately contacted the Chinese subsidiary of a foreign bank, the counter-guarantor,to ascertain facts. The Court found that the general contractor and the foreign bank’s overseas branch each made an “extend or pay” demand despite the ICC Court’s award ordering the general contractor to return the relevant guarantees and the Chinese subsidiary of a foreign bank’s transmission of the arbitral award to the foreign bank. These circumstances satisfied the two conditions for stop payment under the Provisions of the Supreme People’s Court on Several Issues concerning Trial of Disputes over Independent Guarantee (“Provisions”), namely a high probability that “a beneficiary with no right to demand payment abuses such right on purpose” and “an emergency occurs that warrants suspension of payment or the resulting loss would be irreparable.” Accordingly, the Court issued the suspension of payment rulings one day after receiving the application and served them on the counter-guarantor.
II. Effective Exercise of Judicial Functions. Stop payment is a time-bound relief not designed to resolve a dispute substantively. Hence, the Provisions requires the applicant to file a guarantee fraud lawsuit within 30 days of the suspension of payment ruling. In this case, during the effective period of the suspension of payment order, the collegial bench closely monitored developments in the dispute. After accepting the guarantee fraud complaint filed by the plaintiff ZJX Group, the collegial bench served documents on the Chinese subsidiary of a foreign bank to keep the overseas branch and the general contractor informed about the litigation, while directing the plaintiff to notify the overseas branch and general contractor about the pending lawsuit.
The suspension of payment ruling and the subsequent lawsuit worked together in prompting the general contractor to comply with the arbitral award. As a result, the general contractor voluntarily released the guarantees and made full payment within 40 days. Correspondingly, the Chinese subsidiary of a foreign bank released the counter-guarantees and the 150 percent security deposit held in ZJX Group’s account, marking the final resolution of the dispute. The plaintiff then requested for voluntary dismissal of the lawsuit, which the Court approved.
SIGNIFICANCE
This case represents two firsts for the Court: first suspension of payment ruling on a foreign-related independent guarantee and first case involving a foreign-related guarantee fraud. Following its successful resolution, this case serves as a model for promoting China’s high-standard opening-up policies, and was included in the Supreme People’s Court’s work report delivered at the NPC and CPPCC sessions in 2024.
Through accurate application of international rules and litigation procedures, the Court effectively protected the rights and interests of a Chinese enterprise that does business globally under BRI. This case demonstrates the professionalism and authority of China’s financial justice system and helps build a fairer and more impartial international market environment.
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