Representing a large commercial bank in an arbitration case involving claims of millions under a performance guarantee, Zhenghan Law Firm successfully argued that the guarantee in question did not constitute an independent “demand guarantee” and had expired prior to the claim. Through precise legal analysis and compelling factual arguments, the firm persuaded the arbitral tribunal to dismiss all of the applicant’s claims, completely absolving the bank client of payment liability.
Keywords: Dispute over Independent Guarantees
Case Background
An automotive technology company (the applicant and guarantee beneficiary) initiated arbitration against a client (the bank) based on a Performance Guarantee issued by the client, following a dispute with a contractor over a construction contract. The applicant’s core contention was that although the guarantee contained the phrase “joint and several liability guarantee,” its substantive terms stipulated “unconditional payment,” thereby constituting an independent guarantee that the bank should pay upon demand.
Key Points and Difficulties
1. Difficulty in determining the nature of the guarantee: Independent or accessory?
The central dispute of the case lay in the legal nature of the guarantee. The text of the guarantee contained contradictions: it stipulated that the bank provided a “joint and several liability guarantee” for the contractor, yet also promised to “pay unconditionally within 7 days without any defense.” Accurately defining its legal nature was the primary challenge in determining whether the bank bore payment liability.
2. Difficulty in judging the validity period: Had it expired before the claim?
The guarantee stipulated that its validity would last until “the date the applicant issues or should have issued the project acceptance certificate.” In fact, the applicant did not issue a formal “project acceptance certificate,” but had signed a “Project Handover (Approval) Form” and actually began using the venue for an opening ceremony before making the claim. A major difficulty in this case was convincing the arbitral tribunal that the applicant’s actual acceptance of the project was equivalent to the situation where they “should have issued the project acceptance certificate,” thereby confirming the guarantee had expired before the claim was made.
Case Highlights
1. Deep textual analysis to address the core nature of the guarantee
Moving beyond the surface of “unconditional payment,” the firm analyzed the overall terms of the guarantee and linked the validity period to the “project acceptance certificate” of the underlying contract. This effectively demonstrated that the payment obligation was not independent of the underlying transaction and did not meet the core characteristics of an independent guarantee; in essence, it remained an accessory joint and several liability guarantee.
2. Identifying key facts to establish the basis for expiration
By identifying the critical facts that the applicant had signed the “Project Handover (Approval) Form” and held an opening ceremony to put the project into use, the firm successfully argued to the tribunal that these actions legally constituted actual acceptance and approval of the project. This aligned with the “should have issued the project acceptance certificate” condition stipulated in the guarantee, effectively proving that the validity period had expired before the applicant filed the claim.
Key Points of the Judgment
1. Determination of the nature of the guarantee
The arbitral tribunal adopted Zhenghan Law Firm’s view, ruling that although the Performance Guarantee contained demand-style language, the payment prerequisites, the nature of the guarantee liability, and its connection to the underlying contract all indicated it was not an independent guarantee, but rather an accessory contract providing security for the underlying contract.
2. Determination of the validity period
The tribunal determined that the applicant’s signing of the “Project Handover (Approval) Form” and the actual use of the project in November 2019 should be regarded as the act of issuing a project acceptance certificate. Accordingly, the validity of the guarantee terminated in November 2019. As the applicant did not file a claim until February 2020, the right to claim had exceeded the guarantee period.
Ultimately, the arbitral tribunal ruled to dismiss all of the applicant’s arbitration requests.
Case Insights
This case serves as an important example for clarifying the boundaries between independent and accessory guarantees. It clarifies that even if a guarantee contains expressions such as “unconditional payment” or similar demand-style language, one must still consider all terms, the background of commercial cooperation, and the overall arrangements to determine whether it is truly independent of the underlying transaction.
