Hyundai Motor Group Co., Ltd. (hereinafter referred to as “Hyundai”) is a company registered and incorporated in South Korea. It concluded a Contract on the Supply of Diesel Generating Set with Zhejiang Zhonggao Power Technology Co., Ltd. (hereinafter referred to as “ZGPT”) , in which the parties agreed that ZGPT should apply to the 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 method for underlying transactions. It was stated in the independent guarantee issued by Zhejiang Branch to Hyundai that in the claim for compensation, Hyundai should submit the “duplicate of the order clean ocean bill of lading specifying the informant of freight payable at destination notify as the applicant”. Afterwards, ZGPT failed to make payment on schedule. Hyundai made a claim for compensation to Zhejiang Branch and submitted the duplicate of a straight bill of lading, but its claim was rejected. Hyundai filed a lawsuit with the Intermediate People’s Court of Hangzhou City, Zhejiang Province and requested Zhejiang Branch to reimburse USD 6,648,010 under the independent guarantee and the overdue fine. Zhejiang Branch contended that the claim for compensation made by Hyundai 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’s claims.
After 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 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 whereas the performance of the underlying contract was not a relevant factor to 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 by Zhejiang Branch conformed to the regulations and were valid. Therefore, the Intermediate People’s Court of Hangzhou City delivered a judgment to dismiss Hyundai’s claims. Hyundai refused to accept the judgment of first instance and appealed.
In the trial of second instance, the High Court of Zhejiang Province held that an independent guarantee was a contract with legally 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 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 Article 2 of the Uniform Rules for Demand Guarantees (ICC Publication No. 758), the standard for examination of receipts as stated in the independent guarantee, the issuer should apply the doctrines of format compliance and strict compliance. The duplicate of the straight bill of lading submitted by Hyundai was significantly different from the duplicate of the order bill of lading as requested by the guarantee involved in the case. There is a difference between the two duplicates in terms of international trade and maritime transport. Zhejiang Branch refused the payment on the ground of noncompliance points, which conformed to the stipulations of the guarantee. Hyundai 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 High People’s Court of Zhejiang Province delivered a judgment to dismiss the appeal and affirmed the original judgment.
An independent guarantee has important functions to serve as trading guarantee, credit confirmation and to provide financing support. It has become a common financial guarantee instrument that is indispensable for the outgoing Chinese enterprises and in the building of the “Belt and Road”. The People’s Court fully respects and applies the international trading rules agreed upon by the parties in hearing an independent guarantee claim, 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 ICC’s Uniform Rules for Demand Guarantee 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, 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 protecting 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 own rights and interests and effectively guard against financial risks.