The PRC Supreme Court's Judicial Interpretation on Disputes over Independent Letter of Guarantee ("Interpretation") has entered into force on 1 December 2016. Various special rules will be applied to this type of guarantee, which are different from the general principles adopted in the PRC Guarantee Law.
URDG Rules or similar rules in relation to independent letters of guarantee will be deemed as a part of an independent letter of guarantee in the circumstances where the said rules have been specified in the letter of guarantee or the guarantor and the beneficiary have agreed to apply the said rules before the conclusion of the court debate stage of the first instance proceedings.
According to the Interpretation, the guarantor of an independent letter of guarantee must undertake its payment responsibility when the claim documents specified in the letter of guarantee have been presented, and the guarantor cannot defend itself based on the arguments which could be raised by the guaranteed under the underlying contract.
An application for withholding payment could be filed on the basis that the demand for payment is fraudulent, and the Interpretation has set out the fraud standards concerned.
Although there are various provisions in relation to the places where relevant claims and application should be filed, the Interpretation has made it clear that jurisdiction clauses or agreements will in principle be respected by the Chinese Courts. Similarly, governing law clauses or agreements will in principle be respected by the Chinese Courts.
According to the Interpretation, only "banks or non-bank financial institutions" are entitled to issue independent letters of guarantee, which means that guarantees issued by any other entities, even if they meet the other criteria, may not be recognised as independent letters of guarantee under Chinese law.
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