A Study on Chinese Court Cases Regarding an Injunction Against a Counter-Guarantee

Abstract

Purpose Focusing on recent Chinese court cases, this study aims to review the perspective of Chinese courts on fraud exceptions under a demand guarantee, and derive precaution points for a guarantor in demanding payment under a counter-guarantee. Design/Methodology/Approach A literature study is conducted in relation to recent Chinese court cases with reference to International Standard Demand Guarantee Practice and ICC official opinion related to guarantees or counter guarantees. Findings First, Chinese courts have restricted application of fraud exception since the provisions of China’s Supreme People’s Court on independent guarantees were enacted in 2016. Second, Chinese courts judged that it was a manifest fraud that a guarantor falsely made a demand despite discrepancies in the beneficiary’s demand under a guarantee. Third, counter guarantors must decide whether to pay within five business days following the day of presentation, but often times they delay payment thus being informed from the local court that the applicant has filed for an injunction. Research Implications Chinese courts’ frequent allowance for fraud exception in the past aroused worldwide complaints. However, since enactment of independent guarantee provisions, Chinese courts have rarely issued injunctions. Thus, guarantees and counter-guarantees issued by Chinese banks these days have accordingly been considered trustworthy.