Guarantees and Standby Letters of Credit are extremely versatile instruments, equally important to the conduct of domestic business as to facilitating international commerce. Join us for an exploration of the numerous ways in which Standby LCs and Guarantees are leveraged in traditional trade finance and in fast-growing Supply Chain Finance programs and structures. Moderator: Andrea Hauptmann, Excutive Director, Head of Guarantees Department, Raiffeisen Bank International

1. Guarantees and Standby’s: Usage in Traditional
Trade and in SCF Structures

2. • AGENDA: Current state of global practice in the use of standbys and guarantees
• 1) The use of standbys and guarantees in open account trade and SCF
• 2) Guarantees: rule-making in Russia and China
• 3) Legal issues across selected markets and regions
Guarantees and Standby’s: Usage in Traditional Trade and in SCF Structures

3. Guarantees and Standby’s: Usage in Traditional Trade and in SCF Structures
Panel:
• Alexander MALAKAT (Opus Advisory)
• Prof. Xiang GAO (China University of Political Science & Law)
• Stephen TRICKS (Clyde & Co LLP)
• Vin O‘BRIEN (Consultant ICC)
• Andrea HAUPTMANN (Raiffeisen Bank International AG)

4. • Standbys and Guarantees demonstrate the flexibility, robustness and continued
importance of traditional trade mechanisms and techniques
• Near-global shift to trade on Open Account terms, but pre-crisis, we seem to
have forgotten the importance of risk mitigation
• Post-crisis focus on Open Account, therefore Supply Chain Finance, has
continued, with a renewed focus on transaction-level risk mitigation
• Standbys and Guarantees integrated into SCF structures as one mode of risk
mitigation
Standbys and Guarantees in Open Account and SCF

5. Russian legislation
 Civil Code (Federal Law No. 42-FZ dated 4 March 2015 (On Amendments to Part I of the Civil Code of the
Russian Federation) (the "Law") was signed by the President of the Russian Federation on 8 March 2015 and is
aimed at amending certain provisions of the RCC in relation to the law of obligations and contract law. The Law will
take effect on 1 June 2015 )
 Supreme Court Decisions (Review of the Practice of Resolving Disputes connected with the
Application of Rules of the Civil Code of the Russian Federation on Bank Guarantees
 # 27 dated January 15, 1998
 # 14 dated March 23, 2012
 Russian Arbitration practice (Arbitration Court of the City of Moscow and regional arbitration courts)

6. COMING INTO FORCE (Art.373)
Before 01/06/15
From the date of issue,
unless otherwise
stipulated in the
guarantee
Starting from 01/06/15
From the moment of its delivery (handing over)
by the guarantor, unless otherwise stipulated
in the guarantee
- From the date of issue
- From any other calendar date
- The term may also be defined by reference
to the event which shall inevitably take
place. (Article 190)

7. AMENDMENTS (Art. 371)
Before 01/06/15
No amendment to the
guarantee are allowed
Starting from 01/06/15
- The independent guarantee shall not be
revoked or amended by the guarantor, unless
otherwise stipulated in it
- In case the guarantee provides that it can be
revoked or amended by the guarantor, such
revoke or amendment shall be done in the
same manner as the guarantor used to issue
the guarantee, unless otherwise stipulated in
the guarantee
- If the guarantee provides upon receipt of the
beneficiary’s consent, then the guarantor’s are
deemed amended or terminated only upon
receipt of the beneficiary’s consent

8. EXAMINATION (Art. 375)
Before 01/06/15
1. On receiving the beneficiary's
claim, the guarantor shall without
delay notify about it the principal and
shall pass to him the copies of the
claim with all the related documents.
2. The guarantor shall be obliged to
examine the beneficiary's claim and
the enclosed documents within a
reasonable term, displaying a
reasonable solicitude in order to
establish, whether or not the claim
and the enclosed documents
correspond to the terms of the
guarantee.
Starting from 01/06/15
1. the Guarantor shall examine the Beneficiary’s
claim and the enclosed documents within 5
days following the date the claim presentation
and effect payment provided the claim and the
enclosed documents are deemed compliant.
The guarantee may indicate other period for
claim examination, however not exceeding 30
days.
2. The Guarantor shall examine the enclosed
documents on their face.
3. The Beneficiary shall reimburse the
Guarantor or the Principal for the amount of
damage resulted from the presentation of the
inauthentic documents and the unreasonable
claim (Art.375.1)
-

9. Provisions of the Supreme People’s Court on Several Issues
Concerning Adjudication of Cases of Independent Guarantees
Professor Xiang Gao
Dean, College of Comparative Law
China University of Political Science & Law
Email: gao_x@hotmail.com; Tel: +86 13911866878
Annual Meeting, ICC Banking Commission
Jakarta, 05 April 2017
9

10. 10
1. Overview
2. The nature of the Provisions
3. Highlights for key points
4. Reflections and observations
Outline

11. 11
1. Altogether 26 articles
2. Drafted in 5 years (2012-2016)
3. Covering many issues, including
• Identification of independent guarantees
• Position of international rules such as the URDG
• How are the principles of strict compliance and independence are treated
• When payment obligations terminate
• How to identify fraud
• Conditions for stopping payment when fraud is involved
• Jurisdiction and governing law
4. Complementary to international rules and practices
Overview

12. 12
The Nature of the Provisions
1. Article 32 of the Organic Law of the People’s Courts of
the People’s Republic of China provides: “The Supreme
People's Court gives interpretation on questions
concerning specific application of laws and decrees in
judicial proceeding.”
2. Article 4 of the Several Provisions of the Supreme
People’s Court on Matters concerning Judicial
Interpretations provides: “Judicial interpretations
made and promulgated by the Supreme People’s
Court are legally binding.”

13. 13
1. Fundamental features (Art. 1)
“An independent guarantee herein refers to an undertaking in writing issued by a bank or a non-bank
financial institution as the issuer to the beneficiary, agreeing to pay the beneficiary a certain amount
or any sum up to the maximum amount specified in the guarantee upon the beneficiary’s demand and
presentation of documents complying with the terms and conditions of the guarantee. ….. (Art. 1)
2. Supplementary factors considered (Art. 3)
Unless there is no indication as to the document required for the presentation for payment and the
maximum amount in the guarantee, a claim by a party that the guarantee is an independent one shall
be supported by a people’s court under any of the following circumstances:
• The guarantee states that it is payable on demand;
• The guarantee specifies that it is subject to the model rules on independent guarantees such as
the ‘Uniform Rules for Demand Guarantees’ of the International Chamber of Commerce; or
• According to the content of the guarantee, the payment obligation of the issuer is independent
from the underlying transaction and the application agreement of the guarantee, the issuer
undertakes to pay merely upon presentation of complying documents.
Identifying an Independent Guarantee

14. 14
Art. 5 If an independent guarantee specifies that it is subject to model
rules for independent guarantees such as the Uniform Rules for
Demand Guarantees, or the issuer and the beneficiary unanimously
refer to such model rules prior to the end of the court debate session of
the first instance, the court shall affirm that the content of the model
rules has been incorporated into the terms and conditions of the
guarantee.
In the absence of the aforesaid circumstances, the claim by a party
that the relevant model rules shall apply to the independent guarantee
shall not be supported by a people’s court.
The Position of URDG and Similar
International Rules

15. 15
Art 6, para. 1: Where the documents presented by the beneficiary appears on their face are
complying with the terms and conditions of the guarantee and consistent with one another,
the demand by the beneficiary requiring the issuer to fulfill its payment obligation shall be
supported by a people’s court.
Art. 7: A people’s court shall follow the standard for the examination of documents specified
in the guarantee to determine whether the documents are complying on their face. Where
there is no such specification in the independent guarantee, the relevant standard for the
examination of documents by the International Chamber of Commerce may be referred to.
A people’s court shall affirm a document to be complying on its face where it does not appear
on its face to be identical to the terms and conditions of the independent guarantee or
between one and another but does not appear to be in conflict with each other.
Art. 9: The claim by the issuer for reimbursement from the applicant after it has paid in
accordance with the independent guarantee shall be supported by a people’s court unless
there is a discrepancy in the documents presented by the beneficiary.
The Principle of Strict Compliance

16. 16
Art. 6, Para. 2: The defense of the issuer against its payment obligation based on the
underlying transaction or the application of the independent guarantee shall not be supported
by a people’s court, unless circumstances provided in Article 12 of these Provisions arise.
Art. 8 The issuer has rights and obligations to examine the documents on its own and is
entitled to determine in its sole discretion whether or not the documents appear to be on their
face complying with the terms and conditions of the independent guarantee or consistent with
one another, and can decide whether to accept or reject a document if it is discrepant in its
sole discretion.
Where the issuer has expressly indicated to the beneficiary that it has accepted the
documents although they are discrepant, a people’s court shall support a claim by the
beneficiary that the issuer shall fulfill its payment obligation.
Where the issuer has refused to accept a discrepancy, a people’s court shall not support a
claim by the beneficiary that the issuer shall fulfill its payment obligation on the ground that
the applicant has accepted the discrepancy.
The Principle of Independence

17. 17
Art. 12 Independent guarantee fraud shall be affirmed by a people’s court where any of the
following is present:
• The beneficiary, in conspiracy with the guarantee applicant or a third party, has
fabricated the underlying transaction;
• A third-party document presented by the beneficiary is forged or contains fraudulent
information;
• A court judgment or arbitral award has found that the debtor in the underlying
transaction is not liable for payment or indemnification;
• The beneficiary acknowledges that the obligation under the underlying transaction
has been fully fulfilled or the event representing that payment is due specified in the
independent guarantee has not occurred; or
• Other circumstances where the beneficiary is aware that it has no right to demand
payment and yet still abuses such a right.
Fraud Identification

18. 18
1. Suspension of Payment (Art. 14)
A people’s court shall render a ruling to suspend the payment under an independent guarantee provided that
all of the following conditions are met:
• The evidence provided by the applying party has shown that there is a high probability that
circumstances provided in Article 12 of these Provisions are present;
• It is in such an emergency that the legitimate rights and interests of the applying party will suffer
irreparable damage if no immediate measures are taken to suspend the payment;
• The applying party has furnished sufficient security to cover the possible loss which may be suffered by
the party against whom the application is made due to the suspension of the payment.
When the issuer has paid in good faith under an independent guarantee issued upon instructions of another
financial institution, a people’s court shall not rule to suspend the payment under the independent guarantee
issued to secure the right of reimbursement of the aforesaid issuer.
2. Termination of Payment (Art. 20)
A people’s court shall make a decision to terminate the payment obligation of the issuer under an
independent guarantee if it has found beyond reasonable doubt that independent guarantee fraud is present
and that the circumstance provided in the third paragraph of Article 14 of these Provisions does not exist
after hearing a case of independent guarantee fraud on its merits.
Standards of Proof for Stopping Payment Where Fraud Is
Involved

19. 19
Art. 23 Where parties agree that an independent guarantee is to be
used in a domestic transaction, the claim by a party that the agreement
on the independent nature of the guarantee is invalid on the ground
that the independent guarantee contains no foreign elements shall not
be supported by a people’s court.
Domestic Guarantees Recognised

20. 20
Final Observations
1. Domestic independent guarantees recognized
Indicating the Court’s change of attitude towards commercial law and practice,
balancing fairness and efficiency. Its traditional approach emphasize more on
fairness as China is a civil law country
2. Different Standards of Proof of Fraud for Stopping Payment
• Suspension of payment: high probability (Art. 14)
• Termination of payment: beyond reasonable doubt (Art. 20)
3. How to identify an independent guarantee
• Three fundamental features (Art. 1)
• Supplementary objective factors (Art. 3)
4. Standby letters of credit left out

21. • Injunctions : Use and Abuse
– The independence principle
• Which Court has the power to issue an injunction? Is it:
– The Court with jurisdiction according to the guarantee;
– The Court with jurisdiction over the facility/application;
– The Court with jurisdiction over the underlying contract?
• Conflict of law / jurisdiction
Guarantees and Standby’s: Usage in Traditional Trade and in SCF Structures

22. • English Law: Independence Principle
– Applicant must prove that the beneficiary has no honest belief that it is
entitled to make the demand.
• English court with jurisdiction over the guarantee may order the
issuer to pay even if another court has previously issued an
injunction prohibiting the issuer from paying.
– Spliethoff v Bank of China (2015)
– NIDC v Santander – Court of Appeal (January 2017)
Guarantees and Standby’s: Usage in Traditional Trade and in SCF Structures

23. Guarantees and Standby’s:
Usage in Traditional Trade
and in SCF Structures
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