Dispute over Claim for Compensation in an Independent Guarantee

· Source： Model Cases 

· Instrument Type： Judgment

· Source：SPC Gazette,Issue ,

· Procedural status： Other

· Judgment date：10-12-2016

· Type of Dispute： Contract, Negotiorum Gestio, Unjust Enrichment 

Applying the Uniform Rules for Demand Guarantees (ICC) as Agreed and Ensuring the Trading Order of Independent Guarantees
--Hyundai Motor Group Co., Ltd. v. Zhejiang Branch of Industrial and Commercial Bank of China (Case concerning dispute over claim for compensation in an independent guarantee)

[Basic Facts] 
Hyundai Motor Group Co., Ltd. (hereinafter referred to as “Hyundai Company”) was a company registered and founded in South Korea. It concluded a contract on the Supply of Diesel Generating Sets with Zhejiang ZGPT Holding Group Co., Ltd. (hereinafter referred to as “ZGPT Company”). It was stipulated in the contract that ZGPT Company filed an application with Zhejiang Branch of Industrial and Commercial Bank of China (hereinafter referred to as “Zhejiang Branch”) for issuing an irrevocable demand guarantee, namely, an independent guarantee, as the payment manner for underlying transactions. It was stated in the independent guarantee issued by Zhejiang Branch to Hyundai Company that in the claim for compensation, Hyundai Company should submit the “duplicate of the order clean marine bill of lading specifying the informant of freight payable at destination notify as the applicant.” Afterwards, ZGPT Company failed to make payment on schedule. Hyundai Company made a claim for compensation to Zhejiang Branch and submitted the duplicate of a straight bill of lading, but its claim was refused. Hyundai Company filed a lawsuit with the Intermediate People's Court of Hangzhou City, Zhejiang Province and requested that Zhejiang Branch should pay USD6,648,010 under the independent guarantee and the overdue fine. Zhejiang Branch contended that: The claim for compensation made by Hyundai Company according to the independent guarantee was an invalid claim. Zhejiang Branch has issued a telegraph text on refusal of payment according to the stipulations, specified three noncompliance points, and requested the Intermediate People's Court of Hangzhou City to dismiss Hyundai Company's claims.

[Adjudication] 
In the trial of first instance, the Intermediate People's Court of Hangzhou City, Zhejiang Province held that: It was stipulated in the guarantee involved that the  HYPERLINK "javascript:ESLC(100669643,0)" Uniform Rules for Demand Guarantees (ICC Publication No. 758) was applicable and this stipulation was valid. In accordance with the provisions of the Rules, under the circumstance where the terms and conditions of a guarantee were specific and clear, the guarantor only needed to consider whether the receipts were superficially consistent with the terms and conditions of the guarantee and the performance of the underlying contract was not a factor that should be taken into consideration in the examination of receipts. Since there were several noncompliance points between the receipts involved and the terms of the guarantee, the repeated refusals of payment of Zhejiang Branch conformed to the regulations and were valid. Therefore, the Intermediate People's Court of Hangzhou City rendered a judgment to dismiss Hyundai Company's claims. Hyundai Company refused to accept the judgment of first instance and appealed.
In the trial of second instance, the Higher People's Court of Zhejiang Province held that: An independent guarantee was a contract with legal binding effect between the issuing bank and the beneficiary. Once the beneficiary accepted the terms of the guarantee or made a claim for compensation to the issuing bank in accordance with the terms of the guarantee, it showed that the beneficiary voluntarily accepted all terms of the guarantee and was bounded by such terms of the guarantee. The guarantee issued by Zhejiang Branch clearly stated the requirements for receipts. When accepting the guarantee, the beneficiary Hyundai Company raised no objection. In its claim for compensation, it should provide all receipts consistent with the terms and conditions of the guarantee. In accordance with the provisions of  HYPERLINK "javascript:ESLC(100669643,2)" Article 2 of the  HYPERLINK "javascript:ESLC(100669643,0)" Uniform Rules for Demand Guarantees (ICC Publication No. 758), which was the standard for examination of receipts as stated in the independent guarantee, in the examination of receipts, the issuer should apply the doctrines of format compliance and strict compliance. The duplicate of the straight bill of lading submitted by Hyundai Company was significantly different from the duplicate of the order bill of lading as requested by the guarantee involved in terms of the type of bill of lading. These two types of bills of lading were different in international trade and marine transportation. Zhejiang Branch refused the payment on the ground of noncompliance points, which conformed to the stipulations of the guarantee. Hyundai Company alleged that the receipts it submitted were not different from those as requested by the guarantee based on the performance of the underlying contract, which violated the principle of receipt transactions and the doctrine of format compliance in an independent guarantee. Therefore, the Intermediate People's Court of Hangzhou City dismiss the appeal and affirmed the original judgment.

[Significance] 
An independent guarantee has such primary functions as trading guarantee, credit conformation, and financing support. It has become a common financial guarantee instrument that is indispensable in the “Going-Out” of Chinese enterprises and the construction of the “Belt and Road.” In the trial of a case concerning claim for compensation in an independent guarantee, the people's court should fully respect and apply the international trading rules as stipulated by the parties, which is crucial to accurately defining the rights and obligations of the parties and ensuring the trading order of independent guarantees. The independent guarantee involved in this case specified that the  HYPERLINK "javascript:ESLC(100669643,0)" Uniform Rules for Demand Guarantees (ICC) should be applicable. The courts of first instance and second instance adjusted the relationship of rights and interests of the parties in accordance with the Rules, applied the doctrines of strict compliance and format compliance, examined whether the receipts strictly complied with the terms and conditions of the guarantee based on the receipts themselves, and determined the existence of noncompliance points, which has shown the capability of the Chinese court in accurately applying international rules. The judgment of this case specified that a conclusion on format compliance may not be reached on the basis of performance of the underlying contract, which has reflected the full respect of the principle of receipt transactions of independent guarantees and the principle of independence, equally protected the lawful rights and interests of Chinese and foreign parties, and effectively ensured the trading order of independent guarantees. This case also reflects the importance of the Chinese banking industry in learning and applying international financial transaction rules to protect its rights and interests and effectively prevent financial risks.