Stop-payment procedure of foreign-related independent guarantees

By Zhang Guanglei and Cai Xiaoxia, Jingtian & Gongcheng
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In foreign-related commerce, especially international trading of goods and foreign-related engineering, independent guarantees are fairly common for securing payment.

The stop-payment procedure of independent guarantees refers to a pre-litigation or inter-litigation procedure in which the applicant, issuer or instructing party of the independent guarantee applies to the court for suspending payment under the guarantee to avoid difficulty of recourse in any independent guarantee fraud dispute.

It is listed in the Provisions on Causes of Action for Civil Cases as the cause of action for “application for suspension of payment under the guarantee” under the “application for preservation cases”.

The Provisions of the Supreme People’s Court on Several Issues concerning the Trial of Cases of Disputes over Independent Guarantees systematically stipulate the procedures for stop-payment of independent guarantees.

The Supreme People’s Court (SPC) further clarified the judgment criteria for stop-payment procedure of independent guarantees in the Minutes of the National Court’s Symposium on Foreign-related Commercial and Maritime Trials, released on 31 December 2021.

This article enumerates relevant key points concerning stop-payment procedure of foreign-related independent guarantees from case rulings.

Competent court

Zhang Guanglei, Jingtian & Gongcheng, Stop-payment procedure of foreign-related independent guarantees
Zhang Guanglei
Jingtian & Gongcheng

According to article 13 of the provisions, application for stop-payment of independent guarantees should be submitted to the local court of the issuer’s domicile or other court with jurisdiction over independent guarantee fraud disputes.

According to article 21, independent guarantee fraud disputes shall be subject to jurisdiction of the local court of the issuer or defendant’s domicile, unless the parties agreed in writing to submit to other courts or arbitration.

In this regard, it should be noted that even if the underlying transaction contract or independent guarantee stipulates the competent court or submission to arbitration, the dispute resolution clause in such contract or independent guarantee will not apply if parties did not reach clear agreement on jurisdiction of dispute.

For example, in Duro Felguea Australia v Dalian Huarui Heavy Industry International (2017), the SPC held that the arbitration clause in the underlying contract was not applicable to the foreign-related independent guarantee fraud dispute. In Changsha Jincheng Construction v China Metallurgical (2021), the court also held that the dispute resolution clause specified in the guarantee could not be used to determine jurisdiction over the dispute, which should be subject to jurisdiction in the domicile of the issuer of the independent guarantee or the defendant.

Applicable law

Article 22.3 of the provisions provides that “preservation procedures in the proceedings of suspension of payment for foreign-related independent guarantees should be governed by the law of the People’s Republic of China”.

Substantive review

Cai Xiaoxia, Jingtian & Gongcheng,Stop-payment procedure of foreign-related independent guarantees
Cai Xiaoxia
Jingtian & Gongcheng

According to the provisions, for a court to support the application for stop-payment, all of these three conditions must be met: (1) evidence submitted by the stop-payment applicant proving a high probability of independent guarantee fraud; (2) the situation is urgent and irreparable damages may be caused to the applicant’s legitimate rights and interests for stop-payment if such measures are not taken immediately; and (3) the stop-payment applicant provides corresponding security.

The minutes specifically point out that, with respect to the application for stop-payment of independent guarantees submitted by a party, the court should conduct a preliminary substantive review on whether there are fraudulent reasons for stop-payment in accordance with article 12 of the provisions, and specify in its ruling the preliminary identified facts and reasons for approving a stop-payment application.

Therefore, the stop-payment review focuses on whether evidence provided by the applicant could prove a high likelihood of guarantee fraud.

For example, in Shanghai Marine Diesel Engine Research Institute v Fatima Energy (2019), the Shanghai Financial Court – after conducting a preliminary substantive review of the underlying transaction contract and evidence provided by the applicant – held that evidence provided by the applicant failed to prove a high probability that “the beneficiary abused rights while knowing there was no claim for payment”, and rejected the application for stop-payment of guarantee.

In addition, if the court directly requests the issuer to cease payment for an independent guarantee in the execution procedure of a preservation ruling without preliminary substantive review and ruling on stop-payment of independent guarantees, it will constitute a procedural impropriety.

For example, in Jiangsu Suhao International Group v Damen Shipyards Gorinchem (2018), Hubei High People’s Court determined that Wuhan Maritime Court did not formally judge whether the guarantee involved in the case was an independent guarantee and conduct a review and ruling in accordance with the law, but simply issued a notice on assistance with execution requiring the guarantee issuer to cease payment under the guarantee, which lacked legal basis.

Accordingly, execution of the stop-payment was revoked.

Legal effect

For foreign-related independent guarantees, foreign courts or arbitration agencies may also have jurisdiction over independent guarantee disputes.

Therefore, even after a Chinese court rules to stop payment, the issuing bank may still face the risk of being ordered to make payment in overseas disputes.

For example, in Spliethoff v Bank of China, although Qingdao Maritime Court made a stop-payment order, the Bank of China was still required by a UK court to make payment under the independent guarantee, as the applicant lost its case in UK arbitration. Likewise, a stop-payment order by a foreign court does not necessarily take legal effect within a PRC jurisdiction.

For example, in China Gezhouba Group v UniCredit Bank of Italy Shanghai Branch (2018), Shanghai Financial Court held that when determining whether the guarantee issuer should perform payment obligations under the guarantee – and whether there were legitimate reasons for delaying payment – it was not subject to the preliminary stop-payment order made by a foreign court.

It was also determined that the force majeure exemption claimed by the guarantee issuer could not be established, and the issuer should still bear compensation liability for delayed payment.

Zhang Guanglei is a partner and Cai Xiaoxia is an associate at Jingtian & Gongcheng. Zhang is also an arbitrator of the Hong Kong International Arbitration Centre, Shanghai International Arbitration Centre and Shenzhen Court of International Arbitration


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