Rules of judgment determining cross-border guarantee disputes

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Cross-border guarantee disputes
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This case illustrates legal issues of cross-border guarantees, explaining how the Shanghai International Arbitration Centre (SHIAC) applied extraterritorial law, namely Hong Kong law, and interpreted multiple contracts.

In June 2015, Hong Kong company A intended to finance its affiliate, company B, by issuing euro-convertible bonds (ECBs). The investor, Hong Kong company C, entered into an ECB subscription agreement with A and B, under which A and B agreed to issue ECBs to be subscribed by C for a total amount of USD5 million.

After signing a subscription agreement, C paid A the subscription amount of USD5 million.

In September 2015, A and B issued a letter of commitment to C and other bond subscribers, committing to the listing and setting out indemnity clauses.

In March 2017, A, B and C, together with D (a mainland-based investment company) and E (a natural person as guarantor), signed the Supplemental Agreement III to set further terms on the listing and subsequent exits, while E would be jointly and severally liable for the redemption principal and interest of the convertible bonds.

In May 2018, A, B, C and E signed the Repayment Agreement, under which E would redeem the convertible bonds from C on behalf of A at a redemption price of USD10 million before the redemption deadline the following January. However, the agreement was never fulfilled.

In January 2019, A, B, C, D and E jointly entered into a repayment plan under which E would redeem the convertible bonds from C on behalf of A at a redemption price of USD10 million, with A, B and D assuming joint and several guarantee liabilities. The redemption period would end on the date of the repayment plan. Additionally, E undertook to return USD3.3 million and USD6.7 million by March and May 2019, respectively, as well as pay accrued interest.

The arbitration clause named the SHIAC as the arbitration venue; and with the redemption obligation unfulfilled, investor C submitted the dispute to the SHIAC for arbitration, requesting E to pay the redemption funds and accrued interest, with B and C, respectively, as financier and guarantor, held jointly and severally liable.

Submission and rebuttal

The respondents argued that:

    1. The dispute should be applied to provisions under the “Contracts” chapter of the Civil Code, or most similar contract-related provisions under other laws;
    2. The redemption claim of USD10 million under the repayment plan was excessive and unfair; and
    3. As the guarantee period had expired, these claims exceeded the arbitration statute of limitations.

The claimant, on the other hand, responded that:

    1. Hong Kong law should be applied in this case;
    2. The redemption price agreed in the Repayment Agreement and repayment plan was not prohibited by Hong Kong law; and
    3. As the two contracts did not specify a fixed guarantee period, according to the precedent set in Holme v Brunkskill (1877), B and D were not exempted from liability by expiration of the guarantee period.

Tribunal opinions

Determining the governing law. The arbitration tribunal considered that, as the parties were based in Hong Kong, the case was foreign-related under the Law on the Application of Foreign-related Civil Legal Relations.

Both the Repayment Agreement and repayment plan stated that the two contracts had the same legal effect as previous agreements between the relevant parties, and in case of any inconsistency the two new agreements shall prevail. The parties did not intend for the two new contracts to replace earlier ones, so both the prior and later agreements remained valid.

As a result, the “inconsistency” mentioned in the later agreement only refers to any overlapping content, and anything not covered by the later agreements will abide by terms under prior contracts.

In the earlier agreements, the parties agreed on Hong Kong law as the governing law to any potential disputes. Therefore, it was determined that Hong Kong law would apply to the case.

Guarantee liabilities of the respondents. The tribunal noted that all agreements involved in this case contained terms relating to guarantees. With all batches of agreements remaining valid, a later contract would supersede a prior one only where the terms covered identical grounds.

According to historic precedence established in Holme v Brunskill (1877), the tribunal held that B and D should fulfil their joint and several guarantee liabilities in accordance with the repayment plan. Meanwhile, according to rules established in National House-Building Council v Fraser (1983), B and D were not exempted from liability due to expiration of the guarantee period.

Legitimacy of the redemption price. The tribunal determined that the redemption price and liquidated damages agreed in the Repayment Agreement – as well as the redemption price, interest and payment method and liquidated damages for late payment agreed in the repayment plan – represented the true intent of all parties. Therefore, B shall pay the redemption price and interests as agreed. Ultimately, the tribunal supported all of the claimant’s requests.

Matters of note

The legal issues of cross-border guarantees in this case involved the application of extraterritorial law, namely Hong Kong law, and the interpretation of multiple contracts. Particularly of note is the guarantor’s liability under different legal systems when the duration of the guarantee was not agreed between the parties.

According to relevant Hong Kong case law and precedents, if there is no agreement on a fixed guarantee period, the guarantee liability assumed by the guarantor cannot be exempted due to expiration of the guarantee period.

However, according to article 692 of the Civil Code and article 34.2 of the Judicial Interpretation on the Application of the Relevant Guarantee System of the Civil Code, if the creditor and guarantor have not agreed on a guarantee period, the guarantee period shall be six months from the date of expiration of the principal debt.

If the creditor does not request the guarantor to assume guarantee liability within the said period, the guarantee liability shall be extinguished (similar to article 26 of the now defunct Guarantee Law).

Therefore, when drafting a cross-border guarantee contract, parties should pay attention to the agreement on applicable law, as well as differences on guarantees between different legal systems.

Rearding the issue of multiple contracts, one of the interpretative effects intended by the decision-makers after applying various tools for contract interpretation is that “the final agreement excludes an earlier agreement”.

In this repayment plan, the parties agreed that “if there is any inconsistency between this agreement and the previous ones, this agreement shall prevail”, which obviously gave the repayment plan a final and definite authority on its expressions.

However, the interpretative effect of “exclusion” is not absolute, otherwise the parties’ performance under earlier contracts would be rendered baseless. Therefore, if content of the former contract is not covered or contradicted by a latter contract, the tribunal should continue to recognise the binding effect of such content in the prior contract, as long as it is still valid.

The logic is reflected in this case, as the tribunal held that relevant terms under prior contracts should continue to apply to disputes arising from the Repayment Agreement and repayment plan.


Li Tingwei is a senior case manager at the Shanghai International Arbitration Centre (SHIAC)

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