ANZ Bank, Manila Branch v. China National Electric Engineering Co., Ltd. & Bank Of Jiangsu [2024] (2024) Zui Gao Fa Min Shen No. 2800 [PRC]

Retrial application dismissed in case involving a dispute over alleged fraud and application the PRC Independent Guarantee Provisions to a standby LC governed by ISP98.

Type of Lawsuit: Dispute over Independent Letter of Guarantee Fraud, Independent Letter of Guarantee Payment, and Improper Dishonor.

Topics: Classification of Standby LC; Legal Application of Standby LC; Counter Standby; Independent Guarantee; Complying Demand; Independent Guarantee Fraud; Wrongful Dishonor; Interest and Costs for Wrongful Dishonor; PRC Independent Guarantee Provisions; Chinese Law; ISP98; ISP98 Rule 5.03

Parties:

• Standby LC Issuer/Counter Standby LC Beneficiary – Australia and New Zealand Banking Group Ltd. Manila Branch (ANZ, Manila Branch)
• Instructing Party – Australia and New Zealand Banking Group Ltd. Shanghai Branch (ANZ, Shanghai Branch)
• Counter Standby LC Issuer – Bank of Jiangsu, Beijing Branch
• Standby LC Applicant/Counter Standby LC Applicant – China National Electric Engineering Co., Ltd. (China Electric)
• Standby LC Beneficiary – D.M. CONSUNJI.INC. (Consunji)

Underlying Transaction: Subcontract for Philippine Engineering Project.

Instruments:

Standby Letter of Credit for USD 22,979,687.50. Subject to ISP98 and the law of the Philippines.

Counter Standby Letter of Credit for USD 22,979,687.50. Subject to ISP98 and the Provisions of Supreme People's Court on Several Issues Relating to the Hearing of Disputes over Independent Guarantees (PRC Independent Guarantee Provisions).

Procedural History:

First Instance Judgment:¹ The Second International Commercial Court of the Supreme People's Court of the PRC ruled in favor of ANZ, Manila Branch, holding that the demands of ANZ, Manila Branch did not constitute fraud and Bank of Jiangsu owed payment under the Counter Standby LC.²

Retrial Application: China Electric sought retrial under Article 211(2) and (6) of the Civil Procedure Law, alleging factual and legal errors.³

Decision: Retrial application dismissed.

Rationale: The retrial application of China Electric does not meet the criteria of Article 211 of Civil Procedure Law of the People's Republic of China.⁴

Factual Summary:

Contractual Background

On 22 December 2011, China Electric as contractor entered into a Project Engineering Contract with Consunji as general contractor under which China Electric agreed to provide an unconditional on-demand bank guarantee equivalent to 10% of the total contract value to secure its performance obligations.

To fulfill this requirement, China Electric applied to Bank of Jiangsu, Beijing Branch for a standby LC. Bank of Jiangsu, through ANZ Shanghai Branch, instructed ANZ Manila Branch to issue a Standby LC in favor of Consunji. Concurrently, Bank of Jiangsu issued a Counter Standby LC in favor of ANZ Manila Branch. Both LCs were governed by ISP98 and functioned as independent guarantees, fulfilling the underlying contract's terms. All parties agreed to apply Chinese law⁵ and acknowledged that any fraud issues related to the LCs would be governed by the PRC Independent Guarantee Provisions.

Dispute

In 2015, ANZ Manila Branch submitted a payment demand under the Counter Standby LC to Bank of Jiangsu for USD 6 million.

China Electric alleged fraud, arguing: (1) The Counter Standby LC had expired and no complying demand was received; thus, there was no payment obligation; (2) A 2019 settlement agreement⁶ between ANZ Manila Branch and Consunji reducing the demand to USD 6 million constituted fraud; and (3) The USD 6 million sum demanded combined liabilities under two separate guarantees and should not be borne solely by China Electric.

Issues

(1) Whether Bank of Jiangsu retained payment obligations under the Counter Standby LC after allegedly failing to timely reject the demand.

(2) Whether the settlement agreement between ANZ Manila Branch and Consunji constituted fraud under PRC Independent Guarantee Provisions Article 12.⁷

(3) Whether the USD 6 million demanded exceeded the amount available under the Counter Standby LC.

Analysis:

Payment Obligation under the Counter Standby LC

On 27 November 2015, ANZ Manila Branch submitted documents to Bank of Jiangsu via ANZ Shanghai Branch (as the Instructing Party), requesting payment under the Counter Standby LC. The demand complied with ISP98 and the terms of the Counter Standby LC.

Additionally, China Electric received a written notice from Bank of Jiangsu on 2 December 2015, stating that it had received a demand under the Counter Standby LC. China Electric disputed this, arguing that Bank of Jiangsu did not receive a complying demand because ANZ Shanghai Branch initiated the demand and directed payment to its account, but this contention lacked factual basis.

Under ISP98 Rule 5.03, Bank of Jiangsu was obligated to pay on ANZ Manila Branch's submission of a complying demand and its failure to issue a timely notice of dishonor.

Fraud Allegations against ANZ, Manila Branch

The Court stated the Standby LC and Counter Standby LC involved in this case are independent of each other. The settlement agreement between ANZ Manila Branch and Consunji only addressed obligations under the Standby LC and did not involve the Counter Standby LC. Since China Electric was not a party to the Standby LC, the settlement could not contend "the beneficiary has conspired with the applicant for the letter of guarantee or any other person to carry out a fictitious underlying transaction".

Further, ANZ Manila Branch's demand under the Counter Standby LC did not constitute fraud under the claim "the beneficiary has confirmed that the debt of the underlying transaction has been fully performed". Under the settlement terms, Consunji irrevocably waived all demands under the Standby LC only after receiving USD 6 million from ANZ Manila Branch. Thus, the USD 6 million was not part of any demand under the Standby LC. ANZ Manila Branch's 2019 demand for USD 6 million plus interest under the Counter Standby LC was a follow-up to its 2015 compliant demand (which remained partially unpaid) and not a new demand.

Reducing the demand amount to USD 6 million was a lawful exercise of ANZ Manila Branch's rights and did not reflect "the beneficiary is aware that it has no right to demand payment and yet still abuses such right."

The Demand under the Counter Standby LC

ANZ Manila Branch's demand for China Electric to pay USD 6 million plus interest was based on its demand under the Counter Standby LC and was unrelated to the settlement agreement under the Standby LC. The demand did not exceed the amount covered by the Counter Standby LC.

Since the settlement agreement was not a matter subject to review under the terms of the Counter Standby LC and given the documentary and independent nature of standby letter of credit transactions, the Court rejected China Electric's argument that the settlement agreement justified payment refusal and held that China Electric's refusal lacked factual and legal basis.

Saibo Jin's Comment:

The First Instance Judgment was Incorrect

Firstly, the legal relationship on which ANZ, Manila Branch based its lawsuit was flawed. Bank of Jiangsu was not a party to the underlying contract and did not participate in the settlement process among applicant China Electric, the beneficiary Consunji, and ANZ, Manila Branch regarding the Standby LC, nor did it sign the settlement agreement related to the Standby LC. Therefore, the settlement agreement among China Electric, Consunji, and ANZ, Manila Branch has no legal binding force on Bank of Jiangsu.

Secondly, beneficiary Consunji, by signing the settlement agreements related to the underlying contract and the Standby LC, waived all claims under the Standby LC (note that these are all claims under the Standby LC issued by ANZ, Manila Branch). If the beneficiary waives all claims against ANZ, Manila Branch under the Standby LC, then ANZ, Manila Branch, as beneficiary of the Counter Standby LC, naturally loses its right to claim under the Counter Standby LC. Bank of Jiangsu, as Counter Standby LC Issuer, naturally has the right to reject any claim made by ANZ, Manila Branch under the Counter Standby LC.

Finally, a named defendant in this case, Bank of Jiangsu, should not have been sued. The settlement agreement is only effective among the three parties and does not extend to Bank of Jiangsu, which is not a party to the agreement. ANZ, Manila Branch should only have sued obligor, China Electric, under the three-party settlement agreement. The legal relationship and basis for ANZ, Manila Branch's claim is the three-party settlement agreement, not Bank of Jiangsu's Counter Standby LC. Since the Standby LC has been waived by the beneficiary, ANZ, Manila Branch has no obligation to make payment under the Standby LC, which in turn leads to Bank of Jiangsu's release from its payment obligation under the Counter Standby LC. The legal basis for ANZ, Manila Branch's lawsuit can only be the rights and obligations stipulated in the three-party settlement agreement among the applicant, the beneficiary, and ANZ, Manila Branch.

The Reasoning for Applying the Independent Guarantee Provisions to a Standby LC Governed by ISP98 was Unpersuasive

Firstly, in the official commentary of the Supreme People's Court on the Independent Guarantee Provisions,⁸ it was explicitly stated that an independent guarantee is inherently a type of Letter of Credit; not merely a "guaranty function" – a term generally used for an accessory suretyship. The determination in this case is inconsistent with the original intent of the drafters of the Provisions.

Secondly, the first instance judgment held that a Standby LC, because it is subject to ISP98, should be characterized as an independent guarantee. The issue is that in numerous independent guarantees and standby LCs for foreign loan transactions in China, many Standby LCs are issued subject to UCP600. When disputes arising from such transactions are brought before Chinese courts, then that the nature of a Standby LC governed by UCP600 be characterized as an independent guarantee instead of a letter of credit. Consequently, the reasoning in the first instance judgment is unpersuasive.

I have found that in several past Chinese court cases in which the Standby LC is subject to UCP600 it has already be characterized as a LC and the Letter of Credit Provisions should be applied.⁹

(1) In an earlier case, the Ruling on Enforcement in Woori Bank (China) Company Limited Shenzhen Branch v. Seoul Sungbo Real Estate (Yantai) Co. by the Yantai Intermediate People's Court (21 January 2015), the Standby LC involved was issued subject to UCP600. In its first instance judgment, the Yantai Intermediate Court held:

"[A]ccording to Article 2 of the Supreme People's Court's Provisions on Several Issues Concerning the Trial of Letter of Credit Dispute Cases, when a people's court hears a case of an LC-related dispute, if any stipulation is made by the parties concerned that the relevant international practices or other provisions should be applicable to a case of an LC-related dispute, such stipulation shall prevail; if no stipulation is made by the parties concerned, the UCP promulgated by the International Chamber of Commerce and other relevant international practices shall be applicable to the case.

According to the scope of application stipulated in UCP600, UCP600 applies to all documentary credits (including standby letters of credit to the extent to which the UCP may be applicable) where they are incorporated into the text of the credit."

(2) In another related case on the same date, the same the Yantai Intermediate People's Court held in The Korea Development Bank Guangzhou Branch Enforcement Objection Case:

"[A]ccording to Article 2 of the Supreme People's Court's Provisions on Several Issues Concerning the Trial of Letter of Credit Dispute Cases, when a people's court hears a case of an LC-related dispute, if any stipulation is made by the parties concerned that the relevant international practices or other provisions should be applicable to a case of an LC-related dispute, such stipulation shall prevail; if no stipulation is made by the parties concerned, the UCP promulgated by the International Chamber of Commerce and other relevant international practices shall be applicable to the case.

According to the articles of UCP600, a credit is irrevocable and independent, meaning the performance of the issuing bank's duties under the LC does not depend on: 1) the issuing bank's right and ability to obtain reimbursement from the applicant; 2) the beneficiary's right to obtain payment from the applicant; 3) any reference in the credit to a reimbursement agreement or the underlying transaction; or 4) the issuing bank's knowledge or lack of knowledge regarding the performance or breach of any reimbursement agreement or the underlying transaction.

Article 5 of the Supreme People's Court's Provisions on Several Issues Concerning the Trial of Letter of Credit Dispute Cases stipulates that after the issuing bank makes a commitment on the payment or acceptance of a LC or performance of other obligations under a LC, the issuing bank shall perform the payment obligation within the time limit as specified in the LC as long as the documents conform to the clauses of the LC and the documents conform to each other on the surface. If a party concerned initiates a protest for the reason of the basic transaction between the applicant and the beneficiary, the people's court shall not support it, except under the circumstances as prescribed in Article 8 of these Provisions."

(3) In another related case from the same year, the Ruling on Application for Recognition and Enforcement of Court Judgments and Arbitral Awards in China Great Wall Asset Management Co., Ltd. Jinan Office, The Korea Development Bank Guangzhou Branch v. Seoul Sungbo Real Estate (Yantai) Co., Ltd. by the Shandong High People's Court (8 April 2015), the court found that the Standby LC in the case was issued subject to UCP600. The court found that the UCP, revised by the ICC in 2007, is an international uniform practice applicable to documentary credits, including standby letters of credit. Similar to the Yantai Court, this court held that in the absence of parties stipulating any international practices or other provisions being applied, Article 2 of the Supreme People's Court's Provisions on LC Dispute Cases directs that the UCP promulgated by the International Chamber of Commerce and other relevant international practices shall apply. The Shandong High People's Court added:

"According to the scope of application stipulated in UCP600, UCP600 applies to all documentary credits (including standby letters of credit to the extent to which the UCP may be applicable) where they are incorporated into the text of the credit. According to the articles of UCP600, a credit is irrevocable and independent ... [The ruling then reiterated the independence principle and cites Article 5 of the Letter of Credit Provisions, similar to the excerpt in point (2) above, concluding that KDB should perform its payment obligation and Great Wall Company's defense was unsupported due to lack of evidence of fraud under the Letter of Credit Provisions]."

Obviously, the Shandong High Court held that the standby letter of credit issued subject to UCP600 in this case should ultimately be governed by the Letter of Credit Provisions.

(4) In a later case, the First Instance Civil Ruling in China Minsheng Banking Corp., Ltd. Guangzhou Branch v. Guangzhou Yatong Metal Co., Ltd. et al. by the Guangzhou Intermediate People's Court (20 May 2016), China Minsheng Bank (CMBC) issued a standby LC subject to UCP600, but the applicant had applied for the issuance of an independent guarantee in the Application Form. A dispute therefore arose between the parties on this matter. However, the First Instance Court held:

"[R]egardless of whether the document issued by [CMBC] upon the application of [Applicant] is named an Irrevocable Guarantee or a Standby Letter of Credit, it is substantively a document of a guaranty nature. The surety liability of [surety] cannot be avoided merely due to differences in its name or translation."

(5) In another case, the First Instance Civil Judgment in The Export-Import Bank of China v. Qiu Huizu, Wang Qiaoer, et al. regarding a letter of credit financing dispute by the Beijing Fourth Intermediate People's Court (6 June 2018), the standby LC issued by the Export-Import Bank was subject to UCP600. However, the first instance judgment in that case did not explicitly determine whether the judicial interpretations for letters of credit or those for independent guarantees should ultimately apply.

Among the cases cited above, only one First Instance ruling characterized the nature of a standby LC as an independent guarantee. In all other cases involving standby LCs issued under UCP600, Chinese courts characterized their nature as LCs and applied the Letter of Credit Provisions.

The Retrial Application in this Case was Predestined

The Fourth Civil Division within the Supreme People's Court handled the retrial application of this case. The five judges who presided over the first instance of this case, although nominally judges of the International Commercial Court, were all in fact from the Fourth Civil Division. It is inappropriate and practically meaningless to have a panel of three relatively junior judges from the Fourth Civil Division review, challenge, or even overturn a prior judgment rendered by a panel of more senior judges from the same division. This procedural setup was fundamentally unfair to the petitioning party.

Footnotes

1. ANZ, Manila Branch filed a lawsuit against Bank of Jiangsu and third party China Electric in Nanjing Intermediate People's Court of Jiangsu Province. As this case is an international commercial case with significant influence, the Second International Commercial Court of the Supreme People's Court, in accordance with Article 20 and Article 38 of the Civil Procedure Law of the People's Republic of China (amended on June 27, 2017) and Article 2 of the Provisions of the Supreme People's Court on Several Issues Concerning the Establishment of International Commercial Courts, ruled that the case should be heard by the Second International Commercial Court of the Supreme People's Court. Article 155 of the Civil Procedure Law of the People's Republic of China (amended on June 27, 2017) Judgments and rulings of the Supreme People's Court, and judgments and rulings for which appeal is not allowed pursuant to the law or judgments and rulings for which an appeal is not filed within the appeal period shall be judgments and rulings which have come into legal effect.

2. Case Number: (2020) Zui Gao Fa Shang Chu No. 2 [PRC]. See full text and case summary.

3. Case Number: (2024) Zui Gao Fa Min Shen No. 2800 [PRC].

4. Civil Procedure Law of the People's Republic of China Article 211

Where the application of the litigants satisfies any of the following circumstances, the People's Court shall conduct a re-trial:

(1) There is adequate new evidence to overturn the original judgment or ruling;

(2) There is lack of evidence for the basic facts ascertained in the original judgment or ruling;

(3) The main evidence for the facts ascertained in the original judgment or ruling is forged;

(4) The main evidence for the facts ascertained in the original judgment or ruling has not been cross-examined;

(5) Where the litigants are unable to gather the main evidence required for trial of the case due to objective reasons, the litigants have submitted a written application to the People's Court for investigation and gathering of evidence, and the People's Court does not carry out investigation and gathering of evidence;

(6) The application of laws by the original judgment or ruling is wrong;

(7) The composition of the trial organisation is illegal or a judge who should abstain from the lawsuit pursuant to the law does not abstain;

(8) A person with no capacity for litigation action is unable to participate in proceedings as he/she is not represented by a legal representative or a litigant who should participate in proceedings is unable to participate in proceedings due to any reason not attributable to himself/herself or his/her agent ad litem;

(9) A litigant's right to debate is deprived in violation of the provisions of the laws;

(10) Judgment in default is made in the absence of a litigant who has not been served a summons;

(11) The original judgment or ruling has omitted or exceeded a claim;

(12) The legal document on which the original judgment or ruling is based is revoked or modified; or

(13) The judge(s) has/have committed corruption, favouritism or perverted the law in making a judgment during the trial of the case.

5. During the trial of this case in the Second International Commercial Court, all parties agreed to uniformly apply Chinese law to the disputes involved in this case.

6. See section 1.5 of case summary.

7. PRC Independent Guarantees ProvisionsArticle 12 states:

Under any of the following circumstances, the People's Court shall deem that the case constitutes an independent letter of guarantee fraud:

(1) the beneficiary has conspired with the applicant for the letter of guarantee or any other person to carry out a fictitious underlying transaction;

...

(4) the beneficiary has confirmed that the debt of the underlying transaction has been fully performed, or that the triggering event for payment as provided in the independent letter of guarantee has not occurred; or

(5) any other circumstances where the beneficiary is aware that it has no right to demand payment and yet still abuses such right.

8. See Yongjian LIU and Hongyu SHEN, Understanding and Applicability of Regulations on the Trial of Lawsuits Concerning Independent Guarantees, PEOPLE'S JUDICATURE APPLICATION, Page 23, No. 1, 2017. Both LIU and SHEN were judges in the Supreme People's Court of China at the time and were the responsible judges of the drafting of the Justice Interpretation.

9. Attorney Saibo JIN is an expert in handling Independent Letter of Guarantee disputes, and was invited to participate in drafting and revising the judicial interpretation "Provisions of Supreme People's Court on Several Issues Relating to the Hearing of Disputes over Independent Letter of Guarantee". Since August 2023, designated as a member of the Technical Advisory (TA) of the Banking Commission (BC) of the International Chamber of Commerce (ICC). Former member of the Task Force of Demand Guarantee and an expert in DOCDEX Letter of Credit and Independent Letter of Guarantee dispute resolution at the ICC. Vice Director of the East Asia Committee of the Institute of International Banking Law & Practice (IIBLP), member of the Modification Committee of the International Standby Practices (ISP98) of the IIBLP, and member of the Editorial Committee of the electronic publication "Documentary Credit World" (DCW) of the IIBLP. Member of both the Letter of Credit and Independent Letter of Guarantee expert groups of ICC China. Attorney Jin Saibo has handled numerous litigation and arbitration cases related to Letters of Credit and Independent Letter of Guarantee, bulk commodity trading including disputes involving steel, copper oxide, aluminum oxide, palm oil, and ship sales. Twice elected as Vice Director of the Financial and Securities Special Committee of the All China Lawyers Association, arbitrator of the China International Economic and Trade Arbitration Commission, arbitrator of the Beijing International Arbitration Center, and arbitrator of many other arbitration institutions. Previously appointed as an expert of the Expert Committee on Civil and Administrative Supervision Cases of the Supreme People's Procuratorate. Invited to provide opinions and suggestions on the drafting and revision of judicial interpretations of the Guarantee Law part of the Civil Code. Member of the sixth and fifth working groups of the United Nations Commission on International Trade Law (UNCITRAL) for the Model Law on Secured Transactions and the Model Law on Insolvency. Observer of the drafting working group of the Model Law on Factoring (MLF) of the International Institute for the Unification of Private Law (UNIDROIT). Member of the Legal Committee (LC) of the Factors Chain International (FCI). Member of the Academic Committee of the Commercial Factoring Committee of the Service Trade Research Institute of the Ministry of Commerce. Haosheng LIN assisted with preparing the English version of this case summary. Lin is an associate attorney at Beijing Jincheng Tongda & Neal Law Firm.

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