Provisions of the Supreme People's Court on Several Issues Relating to Trial of Independent Letter of Guarantee Dispute Cases (the 'Provisions') has come into force on 1st Dec. 2016

With the frequent use of guarantee in the commercial transactions, the relevant disputes become more and more. Although the laws and international rules, such as the “Guarantee Law”, and the “The Uniform Rules for Demand Guarantees” issued by the International Chamber of Commerce, could be applied in hearing the relevant cases. In the judicial practice, there are still many confusions in distinguishing an independent letter of guarantee from a guarantee, or a document fraud from a breach of contract. Therefore, the Provisions has clarified those issues.

The key to distinguishing the application of laws for the independent letter of guarantee and the guarantee

Article 5 of the Provisions has prescribed a rule as, if an independent letter of guarantee has stated that the application of the Model Rules for Independent Guarantees Transactions such as the “The Uniform Rules for Demand Guarantees”, or the invoking of the applicant and the beneficiary before the end of the debate of the court of First Instance, the people’s court shall affirm the Model Rules Constitute an integral part of the terms of the independent undertaking.

To furtherly emphasize the 2 characteristics of the independent letter of guarantee: independence and documentary

Article 6 of the Provisions has prescribed that normally, where a person opens a defense in respect of a payment obligation under a basic transaction relationship or an application for an independent guarantee, the people’s court shall not support it.

To specify the requirements on examining the relevant documents

The holder has the right to determine whether the documents and the documents are in line with each other and decide whether to accept or reject the discrepancies. If the beneficiary expressly accepts the discrepancy from the beneficiary and the beneficiary requests the issuer to bear the payment responsibility, the people’s court shall support it.

Where an independent guaranty document does not contain the negotiable document and the document for which the new beneficiary is determined, the people’s court shall support the claim that the assignment of the beneficiary’s claim for payment is not effective to the beneficiary.

Where there is a special agreement on the assignment of the right to claim payment, such agreement shall prevail.