B&R CasesTM

一带一路案例 TM

Jiangsu Taihu Boiler Co., Ltd.

v. PT. Krakatau Engineering Corporation and the

Wuxi Branch of Bank of China Limited, A Dispute over Fraud with a Guarantee Letter

B&R Typical Case 7

Batch 1 Case 7 (Released by the Supreme People’s Court on July 7, 2015)

CHINA GUIDING CASES PROJECT

March 1, 2018 Edition∗

∗ The citation of this translation of the Typical Case is:《江苏太湖锅炉股份有限公司与卡拉卡托工程有限

公司、中国银行股份有限公司无锡分行保函欺诈纠纷案》(Jiangsu Taihu Boiler Co., Ltd. v. PT. Krakatau Engineering Corporation and the Wuxi Branch of Bank of China Limited, A Dispute over Fraud with a Guarantee Letter), STANFORD LAW SCHOOL CHINA GUIDING CASES PROJECT, B&R CasesTM, Typical Case 7 (TC7), Mar. 1, 2018 Edition, http://cgc.law.stanford.edu/belt-and-road/b-and-r-cases/typical-case-7. For the original version of this case, see 人民法院为“一带一路”建设提供司法服务和保障的典型案例 (Typical Cases Concerning Judicial Services and Safeguards Provided by the People’s Courts for the “Belt and Road” Construction),《最高人民法院网》

(WWW.COURT.GOV.CN), July 7, 2015, http://www.court.gov.cn/zixun-xiangqing-14897.html.

This document was primarily prepared by Sean Webb and Dr. Mei Gechlik; it was finalized by Dimitri Phillips and Dr. Mei Gechlik. We thank Wenjie Ou and YING Yun for their research assistance. Minor editing, such as splitting long paragraphs, adding a few words included in square brackets, and boldfacing the headings, was done to make the piece more comprehensible to readers; all footnotes, unless otherwise noted, have been added by the China Guiding Cases Project. The following text is otherwise a direct translation of the original text released by the Supreme People’s Court.

B&R CasesTM is a serial publication of the China Guiding Cases Project that provides full-text versions and high-quality English translations of court cases in China that are related to the country’s Belt and Road Initiative.

Strictly Grasping the Standards on Guarantee Letter Fraud

Maintaining the International Financial Order

I. Basic Facts of the Case

Taihu Company 1 and Krakatau Company 2 agreed to complete a construction project concerning generators. The two parties’ contract clearly stipulated that if the contract was to be revised, [the revision] had to be adopted in the form of amendments to the contract; meeting minutes, faxes, etc. could not produce the effect of altering the contract. If Taihu Company breached the contract, Krakatau Company could demand payment [in accordance with] a demand guarantee.

Thereafter, [on the grounds that] Taihu Company breached the contract, Krakatau Company demanded the Wuxi Branch of Bank of China Limited, 3 the issuing party of the guarantee letter, to make payment in accordance with the guarantee letter. Taihu Company initiated litigation, claiming that the two parties had, through meeting minutes, revised the contract and that Krakatau Company’s act of demanding payment [in accordance with] the guarantee letter did not conform to the stipulations in the contract and [thus] constituted fraud. [Taihu Company] requested that the payment [based on] the guarantee letter be stopped. The Intermediate People’s Court of Wuxi Municipality, Jiangsu Province, [rendered] the first-instance judgment, rejecting Taihu Company’s litigation requests.4 Taihui Company appealed.

II. Results of the Adjudication

The High People’s Court of Jiangsu Province handled the case and opined:5 A court’s review of an underlying contract is limited to [reviewing] whether the beneficiary, knowing the 1 The original text reads “太湖公司” and is translated here as “Taihu Company”. In the case name, this party is referred to as “江苏太湖锅炉股份有限公司”, which is translated here as “Jiangsu Taihu Boiler Co., Ltd.” in accordance with the name found on the company’s website, at http://www.taihuboiler.com. 2 The original text reads “卡拉卡托公司” and is translated here as “Krakatau Company”. In the case name, this party is referred to as “卡拉卡托工程有限公司”, which is translated here as “PT. Krakatau Engineering Corporation” in accordance with the name found on the company’s website, at http://www.krakataueng.co.id/v4/content/3/history. 3 The original text reads “中国银行股份有限公司无锡分行” and is translated here as “the Wuxi Branch of Bank of China Limited”, with “Bank of China Limited” in accordance with the name found on the company’s website, at http://www.boc.cn/en/index.html. 4 This judgment is（2011）锡商外初字第 0023 号民事判决 (“(2011) Xi Shang Wai Chu Zi No. 0023 Civil Judgment”), rendered on November 8, 2012, full text available on the China Guiding Cases Project’s website, at http://cgc.law.stanford.edu/judgments/jiangsu-2011-xi-shang-wai-chu-zi-0023-civil-judgment [hereinafter First-Instance Judgment]. 5 This judgment is（2013）苏商外终字第 0006 号民事判决 (“(2013) Su Shang Wai Zhong Zi No. 0006 Civil Judgment”), rendered on May 27, 2014, full text available on the China Guiding Cases Project’s website, at http://cgc.law.stanford.edu/judgments/jiangsu-2013-su-shang-wai-zhong-zi-0006-civil-judgment.

debtor of the underlying transaction neither breached the contract nor had overdue payments, still abuses his 6 right to demand compensation [by making] malicious claims. Meeting minutes [attempting to] revise a contract without following the forms and procedures stipulated in the contract do not produce the effect of altering the contract.

Given that the nature of the guarantee letter clauses in the underlying contract, [related] payment conditions, etc. were in dispute, the beneficiary’s demand for payment in accordance with the conditions [set out] by the bank when it issued the guarantee letter did not constitute fraud. Payment in accordance with the guarantee letter should be made in compliance with the rule “pay compensation first, dispute later”. [Therefore,] on May 27, 2014, the High People’s Court of Jiangsu Province rendered the final judgment [of this case], upholding the first-instance judgment.

III. Typical Significance

In the judgment of this case, the [High] People’s Court [of Jiangsu Province] fully respected the international transaction practices that the parties had agreed to apply, adjudicated [the case] in accordance with the handling rule “pay compensation first, dispute later” [embedded in] the International Chamber of Commerce’s rules on demand guarantees,7 strictly grasped the standards on guarantee letter fraud, safeguarded the beneficiary’s legal right to promptly receive compensation in accordance with the guarantee letter, and maintained the international financial order. This case was featured in the September 2014 issue of Documentary Credit Magazine

6 The term “his” as used herein is a gender-neutral term that may refer to “her” or “its”. 7 In the first-instance judgment of the Typical Case, the court ascertained this fact: “本保函受国际商会第 458号出版物即《保函 458 规则》的约束。” (“This guarantee letter is bound by the International Chamber of Commerce’s publication numbered 458, i.e., Guarantee Letters 458 Rules.”). See First-Instance Judgment, supra note 4.

Given the context, the court likely meant the 1992 Edition of the Uniform Rules for Demand Guarantees of the International Chamber of Commerce (“国际商会见索即付保函统一规则”, as so translated by the International Chamber of Commerce China (国际商会中国国家委员会)). See Uniform Rules for Demand Guarantees of the International Chamber of Commerce (ICC Product No. 458E, 1992 Edition), http://store.iccwbo.org/icc-uniform-rules-for-demand-guarantees-2. The so-called “pay compensation first, dispute later” principle is not explicitly stated in the rules, but is implicitly reflected in Article 2b), which reads:

Guarantees by their nature are separate transactions from the contract(s) or tender conditions on which they may be based, and Guarantors are in no way concerned with or bound by such contract(s), or tender conditions, despite the inclusion of a reference to them in the Guarantee. The duty of a Guarantor under a Guarantee is to pay the sum or sums therein stated on the presentation of a written demand for payment and other documents specified in the Guarantee which appear on their face to be in accordance with the terms of the Guarantee.

The above rules were revised in 2010. See Uniform Rules for Demand Guarantees of the International Chamber of Commerce (ICC Product No. 758E, 2010 Edition), http://store.iccwbo.org/icc-uniform-rules-for-demand-guarantees-urdg-including-model-forms. Article 5(A) of the new rules essentially captures the principles embedded in Article 2b) of the older rules.

[published] in the United States.8 At the same time, this case also reflects that in the course of “going global”, Chinese enterprises need to fully understand the characteristics of international financial settlement and guarantee instruments and that performance not strictly in accordance with a contract will produce huge legal risks.

8 The original text reads “《跟单信用证杂志》” (Documentary Credit Magazine) and the reference is likely to: Jun Xu, Litigation Digest: Jiangsu Taihu Boiler Co., Ltd. v. Pt. Kraktau Engineering, DOCUMENTARY CREDIT WORLD, Sept. 2014, at 18.