A contract for International Engineering Projects between applicant A and beneficiary B had been entered into. According to the contract, the applicant A applied for a demand guarantee from the issuing bank C which issued a demand guarantee which was delivered to the beneficiary B.
When the contract for international Engineering Projects is ascertained as valid, does the beneficiary B has the right of claim according to the demand guarantee?
Writer’s point of view:
A demand guarantee is independent of the underlying contract. It is still valid even the contract for international engineering projects on which the demand guarantee is based is void. The beneficiary B may claim against the issuing bank according to the demand guarantee.
Analysis:
1. Article 5(a) of URDG 758 states:
“A guarantee is by its nature independent of the underlying relationship and the application, and the guarantor is in no way concerned with or bound by such relationship. A reference in the guarantee to the underlying relationship for the purpose of identifying it does not change the independent nature of the guarantee. The undertaking of a guarantor to pay under the guarantee is not subject to claims or defences arising from any relationship other than a relationship between the guarantor and the beneficiary. ”
2. Article 6(2) of The Provisions of the Supreme People’s Court on Some Issues in the Adjudication of Independent Guarantee-related Cases states: “The issuer’s defence on the ground of the underlying relationship or demand guarantee applying relationship shall not be supported by people’s court apart from article 12 of the Provision. ”
In the light of this article, a demand guarantee is independent of the underlying contract, i.e., it is not certain that an invalid underlying contract will impact the demand guarantee. In majority of these circumstances, the validity of a demand guarantee will not be impacted by the underlying relationship after the demand guarantee is issued. But there is an exception of fraud.
Is the demand guarantee still valid when the applicant A and the beneficiary B colluded together to fake this contract for international engineering projects?
Writer’s point of view:
Under this circumstance, the demand guarantee is not absolutely invalid, but could be revoked.
Analysis：
1. Just as above-mentioned, the independence of a demand guarantee will be impacted where there is a fraud, therefore, the validity of the demand guarantee will be affected also.
2. According to the mainstream viewpoints worldwide, a demand guarantee is a contract between the issuer and the beneficiary( For example, both of the Great Britain and Singapore are for this viewpoint, so is the mainstream in China.).
3. Article 148 of Civil Code states: ”Where a juridical act is performed by a a party against his or her true will as a result of fraud by the other party, the defrauded party shall have the right to request a people’s court or an arbitral institution to revoke the act according to the regulation of the demand guarantee.”
Because the beneficiary B took part in the fabrication of the contract for international engineering projects which is the base for the demand guarantee, the issuing bank has the right to apply for revocation of the demand guarantee by filing a claim to a court or an arbitral institution based on the stipulation of the demand guarantee.
The legal effect of revocation of a demand guarantee is as same as invalidity, both of them shall be regarded as void ab initio.
Of course, there is a big difference between revocation and invalidity which need not be determined by a court or an arbitral institution in theory.
Is the issuer has the right to demand repayment against the beneficiary when a demand guarantee is valid, but the beneficiary presented a fake document to the issuer which had not found the fake document and paid the money?
Writer’s point of view:
Yes.
Analysis:
1. Likewise, according to the article 148 of Civil Code, the juridical act that a beneficiary presents a fake document may be revoked by the issuer who applies to a court or an arbitral institution.
2. Article 157 of Civil Code states: “After a juridical act is void, revoked, or determined as having no binding force, the property obtained by the actor as a result of the act shall be restituted”
Based on this, the beneficiary should repay the money to the issuer when the juridical act of obtaining the payment is revoked.
Please pay attention: The statute of limitation for right of revocation is one year, the longest period is five year from the juridical act occurs. The main purpose is to keep a juridical act in steady state, and to urge the obligee to exercise this kind of right.
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