What Is an Independent Guarantee?

Independent guarantee refers to the guarantee made by the guarantor to the beneficiary. When the beneficiary submits a request for a bill or a claim with other documents attached, the beneficiary will pay an independent commitment to the beneficiary. In international practice, independent guarantees include independent guarantees (also called independent guarantees or on demand guarantees) and standby letters of credit. The independent guarantee absorbs and draws on the operation mechanism of the letter of credit, and is an independent guarantee for payment performance, which is different from the traditional subordinate guarantee. The emergence of independent guarantees is considered to be "the most severe challenge and the most important innovation to traditional guarantees" and "the complete" subversion "of traditional guarantee systems.

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Independent guarantee means

Regarding independent guarantees, in different legal documents and works, there are called pay-as-you-go guarantees, pay-as-you-go guarantees, unconditional, irrevocable guarantees, standby letter of credit guarantees, etc., and they are also expressed as banks Guarantees, abstract guarantees. The ICC Guidelines on Uniform Guarantees for On-Demand Payments define it as: "a party that pays to the other party a certain amount or not more than a certain amount of money when they request it by written request or prescribed documents Commitment. "However, there is no uniform definition of the meaning of an independent guarantee at home and abroad, but in general, an independent guarantee is a request made by the guarantor to the beneficiary or the creditor of the main contract at the request of the applicant? , Expressing a written commitment to bear the payment obligation immediately and unconditionally when the beneficiary files a claim against him and presents certain documents.

The independent guarantee is still a guarantee, which is manifested in that its purpose is still to ensure the realization of the main creditor's rights, and still has the basic characteristics of human guarantees, which are based on the credit and property of the civil subject, and independent guarantees are a kind of traditional guarantee. "alienation". The ruling of the court of Milan, Italy on November 28, 1985 clearly stated: "The independent guarantee contract cannot be applied to the norm of guarantee, because it does not have the characteristic that the guarantee relationship is subordinate to the main debt." This is mainly reflected in: First, the independent guarantee and the The main contracts are independent of each other. On the one hand, the independent guarantee and creditor's rights have not been subordinated to each other, that is, the invalidity or revocation of the main creditor's right does not affect the guarantor's commitment to the creditor. On the other hand, in general, the modification of the main contract and the transfer of the main creditor's right are not the legal reasons for the guarantor to release the guarantee responsibility. Second, the guarantor's right of defense shall not be enjoyed and exercised. The traditional guarantor enjoys the right of first-hand defense, while the independent guarantor does not have such a defense. Although this can be seen as the most prominent difference between independent guarantees and subordinate guarantees, in fact, in traditional guarantees, the joint and several liability guarantor renounces the right of first-plea defense and assumes joint and several liabilities with the main debtor.

Insufficient guarantee of traditional goods

There are two main types of guarantees: physical guarantees and human guarantees. The guarantee of property includes mortgage, pledge and lien; the guarantee of person is the guarantee. As far as the objective effect is concerned, the material guarantee may be more reliable and more conducive to the realization of creditors' claims. However, in international economic and trade activities, human security is better than material security and is more widely used. The main reason for this phenomenon that seems to be contrary to common sense is that in the case of foreign guarantees, the security of property faces (1) the inconvenience of cross-border litigation; (2) the inconvenience of cross-border registration of collateral; (3) the collateral The value may be depreciated; (4) if the mortgagor behaves improperly during the mortgage period, the creditor is also difficult to observe; (5) the traditional security real right has a subordinate nature, and its effectiveness is determined by the creditor's right it guarantees. The main creditor's right is invalid, and the secured creditor's right cannot be effective; when the security right is realized, the guaranteed creditor's right must also exist. Therefore, the risk of the creditor (mortgage) is great.

Insufficient guarantee of traditional people

In view of things

Independent guarantees have largely overcome the deficiencies and deficiencies of traditional guarantee methods, and there are also greater risks. In general, independent guarantees are indeed very beneficial to creditors, but relatively harsh and unfavorable to debtors. For this reason, countries with more developed western market economies and more complete legal systems have disputed them for a long time, both in favor and in opposition.

Say for sure

Affirmers believe that the advantages of independent guarantees are many.

First, right

In China, there are both independent guarantee businesses in international trade, such as standby letters of credit and on demand guarantees; there are also independent guarantee businesses in domestic economic and trade businesses. The author has been in contact with more in practice. Guarantee. So what is the legal effect of independent guarantees in China?

The Supreme People's Court held in the case of "Hunan Machinery Import and Export Corporation, Hainan International Leasing Company and Ningbo Oriental Investment Co., Ltd.'s import contract disputes" that the Hainan Company's guarantee contract contained the following statement: "The import agreement is invalid and the guarantee liability is lost", but this independent guarantee method should not be adopted in domestic civil activities. Therefore, the agreement is invalid. For this reason, it shall be determined in accordance with Article 5 (1) of the Guarantee Law. The guarantee contract was invalid because the main contract was invalid. From this, it can be seen that the attitude of the Supreme People's Court is to distinguish between international and domestic, and considers international to be the area of party autonomy, so it recognizes the legal effect of independent guarantees in international trade; while it rejects independent guarantees between domestic enterprises and banks Attitude, does not recognize the legal effect agreed by the parties, the purpose is to prevent fraud and abuse of rights. However, it is not appropriate to take a different approach, both internally and externally, to independent guarantees. The main reasons are:

1. Whether it is an independent guarantee in international or domestic economy and trade, it belongs to the parties' autonomy. The requirements of improving economic efficiency and respecting the autonomy of the parties have made most countries and the international community recognize the effectiveness of independent guarantees in international and domestic economic and trade, and have formulated some relevant domestic laws, international conventions and international practices. Professor Roy Goode once pointed out, "Although on-demand guarantees are mainly issued in international trade, the scope of application of URDG is not limited to guarantees in international transactions. It can also be sometimes applied to guarantees issued for domestic transactions. As long as the guarantee shows compliance with the URDG. "This shows that independent guarantees exist in the practice of international and domestic trade. If the parties cannot accept the independent guarantee, they can choose the traditional subordinate guarantee method.

2. Whether it is an independent guarantee in the international or domestic economy and trade, there are certain risks such as fraud or abuse of rights. However, the independent guarantee is based on the operating mechanism of the letter of credit, that is, the principle of independence and the principle of fraud exception. Under the condition of good operating mechanism, the independent guarantee can achieve the "trilateral win-win" of creditors, guarantors and debtors.

3. In our country, there is currently no specific legislation on independent guarantees, but it is generally believed that independent guarantees are not restricted. The legal basis generally recognized in academic and practical terms is the provisions of Article 5 of the "Guarantee Law." The contract. The main contract is invalid and the guarantee contract is invalid. If there is another agreement in the guarantee contract, it shall be in accordance with the agreement. "The provisions of the latter part of the provision actually recognize that the parties to the contract can change the subordinate nature of the guarantee contract through the contract and make it an independent guarantee. . Moreover, our country also recognizes the effectiveness of international practice in the absence of express provisions. In addition, according to Article 2 of the "Administrative Measures for the Administration of External Guarantees of Domestic Institutions" and Article 7 of the "Implementation Rules of the Administrative Measures for the Administration of External Guarantees of Domestic Institutions", China's external guarantees include standby letters of credit and letters of guarantee.

Finally, it should be pointed out that there is still a problem of judicial inconsistency in the effectiveness of independent guarantees in domestic economic activities. China is not a country of case law, and the Supreme Court has not made judicial interpretations of the effectiveness of domestic independent guarantees.Its jurisprudence has no natural binding force on lower courts, and local courts have also judged their effectiveness in many cases involving independent guarantee contracts. It is not consistent, and some places actually recognize the validity of independent guarantees in the country.

Socioeconomic reality

The establishment of an independent guarantee system in China is a requirement of socio-economic reality, which is mainly manifested in the following three aspects. (1) Independent guarantees already exist in China, but they lack theoretical guidance and legal norms. According to the six cases described in Zhang Xiangdong's book "External Guarantees", pages 128-207, the establishment of independent guarantees in the cases occurred in the early 1980s, which shows that Chinese enterprises have begun to accept them in international trade very early. And use an independent warranty too. Readers may also learn more about the use of independent guarantees at the comrade's office in the foreign trade department. Unfortunately, there are no comprehensive regulatory documents to regulate these economic activities. (2) In the area of bank guarantees, Article 4 of the "Foreign Exchange Guarantee Measures of the People's Construction Bank of China" in 1989 and Article 6 of the "Interim Measures for the Administration of Foreign Exchange Guarantees" of the Agricultural Bank of China in 1990 have similar provisions. It has played an important role in conducting guarantee activities for Chinese banks. However, these regulations are too simple, so that many basic contents cannot be made complete, and bank guarantee contracts themselves often have many problems, such as the effective date of the contract, the effective conditions, and the unclearness of the payment obligations. And the law applicable to contract selection is inappropriate. (3) In international guarantees, credit guarantees are more widely used than property guarantees, and in credit guarantees, a new type of independence guarantee is more welcomed by parties than traditional dependent guarantees. In China, the relevant normative documents on independent guarantees are crude and outdated, and many of the loopholes and defects in the guarantee contracts themselves. Socio-economic reality calls for the establishment of a perfect independent guarantee system.

The need to improve China's guarantee legislation

First, since reform and opening up, China's foreign-related legislation has always adopted an enlightened and pragmatic position. They have complied with the international practices formed by international economic and trade. As early as in the 1985 Law on Foreign Economic Contracts: International laws can be applied if the laws of the People's Republic of China do not provide for them. However, there are many international practices related to the independent guarantee system, such as the Uniform Rules for Contract Guarantees, the Uniform Rules for On-demand Payment, and the Uniform Rules for Contract Guarantees. These practices are optional for the parties to apply. On the one hand, it is convenient for the parties involved in international trade to choose a custom; on the other hand, it also causes trouble to the parties for no reason, and they often argue over how to determine the applicable custom.

Secondly, China's professional banks were basically restructured into commercial banks in 1995. The past departmental regulations need to be supplemented and improved, and their position prices should be further increased. One can apply WTO requirements on transparency, and the other can provide more detailed operating procedures for China's bank guarantees, especially bank independent guarantees.

Improve Article 5 of the Guarantee Law

First, we should further strengthen the comparative research on independent guarantees and the translation and evaluation of related monographs. Second, we should gradually introduce some cases, which are best announced by the Supreme People's Court, so that national courts and relevant parties can become familiar with its basic content. It is not difficult to complete the independent guarantee legislation on this basis. It can be written into the legislative interpretation of the "Guarantee Law", or it can be written into the civil code to be promulgated, and then the operation mode can be fully expressed by legislative interpretation or administrative regulations. In this way, we can solve many problems concerning guarantees for China's foreign-related economic and trade activities, and provide legal support for independent guarantees. Not only that, the independent guarantee system can also be used to support domestic economic exchanges, guaranteeing that special funds for supervision are of this nature. It is suggested that the third paragraph of Article 5 of China's "Guarantee Law" should be added: the independent guarantee contract shall be handled in accordance with the relevant provisions of the People's Bank of China. If there are no provisions, international customary provisions may apply.

Re-enactment of administrative regulations

China's laws should clearly stipulate new types of independent guarantees. China's existing regulations on independent guarantees are not clear. "Independent guarantees" have not yet appeared in the conditions of China's laws and regulations, and relevant regulations are scattered in the management documents of professional banks and the People's Bank of China. As the regulations of professional banks are only internal regulations of the system, they are generally not binding. Except for the People's Bank of China, other professional banks have been restructured into commercial banks, and their provisions no longer have the nature of departmental regulations. In this way, once the guarantee terms issued by the bank are incomplete or ambiguous, there is no corresponding law to supplement them, and the occurrence of such disputes will make it impossible to rely on or can only apply the relevant provisions of the civil law by analogy. This situation is not conducive to the promotion of independent guarantee business in China's banks, because banks have become a multi-functional institution and it has become a worldwide trend; it is also not conducive to maintaining the international reputation of our banks. Therefore, the author suggests that the People's Bank of China should first draw on the provisions of the Uniform Rules for On-demand Guarantees and the United Nations Convention on Independent Guarantees and Standby Letters of Credit to formulate relevant regulatory documents to adjust independent guarantee-related matters. In addition to referring to the contents of the aforementioned international conventions and conventions, the regulatory documents of the People's Bank of China must pay special attention to the problems existing in China's current independent guarantees, especially the independent guarantees of banks, such as the effective date of the guarantee, the ineffective conditions, and payment. The responsibilities are not clear, the clauses of reduction and deduction are ambiguous, etc., and the format and model of the letter of guarantee or guarantee are introduced to the parties to ensure the reasonable financing of funds and the safety of operations.

Participation in the Convention on Independent Guarantees and Standby Letters of Credit

Since our country has participated in the drafting and discussion of the United Nations Convention on Independent Guarantees and Standby Letters of Credit, and we also have the basic practice of independent guarantees, and the Convention has entered into force on January 1, 2000, China can consider acceding to it at an appropriate time. This convention, and use it as a legal framework to establish and improve China's independent guarantee system.

The advantages of participating in the Convention are that it can save the time that the parties have spent choosing international practices in guarantees, and can effectively establish an independent guarantee system in China. First of all, the independent guarantee system not only fully protects the interests of creditors, but also reduces the debtor's expenses compared with physical cash guarantees, reduces the debtor's performance costs, and improves the economic benefits of both parties. Second, independent guarantees can reduce the risk of beneficiary fraud facing the debtor through the supervision of the beneficiary's claims by the guarantor, thereby balancing the rights and obligations of all parties. Third, to participate in the Convention so that guarantees do not involve disputes between parties to the underlying contract transaction, and guarantee institutions such as banks are willing to provide such guarantee services. Finally, the Convention itself provides us with valuable legislative experience in the form and content of underwriting, the rights and obligations of parties, interim judicial measures and the choice of applicable law.