Post by Malay on Sept 23, 2012 5:47:58 GMT 4
Letters of credit and bank guarantees in China
China has few laws regarding letters of credit and bank guarantees; the exception is the criminal fraud statute Article 195 which prescribes sentences reaching 10 years minimum imprisonment plus fines, depending on the size of the fraud. ( think twice before committing fraud in China).
The legal basis for accepting independent payment obligations is Paragraph 2 of Article 5 of the Security Law which provides that "unless otherwise agreed by the parties, such agreement shall be followed”. This rather cryptic statement is the basis for Chinese courts to accept letters of credit or other independent payment obligations.
Another Chinese legal text used to further the understanding of letter of credit cases is unique to Chinese law. The Chinese Supreme Court has a standing committee that issues guidelines for lower courts to interpret cases in certain areas. These guidelines are issued without a case or controversy being at bar.
Chinese courts reject the independence principle of bank guarantees for domestic transactions. Much to the surprise and dismay of the Chinese banking community, domestic transactions cannot be independent of an underlying transaction. This means that for domestic transactions in China you do not have instruments that are payable on first demand; instead you are only allowed to employ surety-ships, whose payment obligation is dependent on the underlying transaction.
The banking community is equally disturbed that the term domestic transaction is not clear. China usually regards the transactions between mainland China and Hong Kong, Macau as well as Taiwan as overseas transactions.
Are you confused yet ? Then what about the fact, that China only in 2010 has established that certain cases will be considered precedence. These cases are limited to Supreme Court cases, which meet the following criteria:
(1) cases with wide public concern;
(2) where the law requires comparison of principles;
(3) of a typical nature;
(4) complicated or of new type; and
(5) other cases with guiding functions.
Chinese courts recognize international banking practices like the UCP, URDG, ISBP, and ISP. The degree of recognition is however not consistent, i.e. some courts recognize the URDG as international practice, others do not. Absent further decisions,some people guess that the UCP will be more readily recognized than ISBP and ISP.
Due to a scarcity of Chinese legal bases and the fact that the above mentioned practices do not address injunctions, it is difficult to enjoin Chinese banks from paying.
User Beware, Chinese Government, Banks and Companies always look for their own interest and will tell you what you want to know. Do not believe them.
China has few laws regarding letters of credit and bank guarantees; the exception is the criminal fraud statute Article 195 which prescribes sentences reaching 10 years minimum imprisonment plus fines, depending on the size of the fraud. ( think twice before committing fraud in China).
The legal basis for accepting independent payment obligations is Paragraph 2 of Article 5 of the Security Law which provides that "unless otherwise agreed by the parties, such agreement shall be followed”. This rather cryptic statement is the basis for Chinese courts to accept letters of credit or other independent payment obligations.
Another Chinese legal text used to further the understanding of letter of credit cases is unique to Chinese law. The Chinese Supreme Court has a standing committee that issues guidelines for lower courts to interpret cases in certain areas. These guidelines are issued without a case or controversy being at bar.
Chinese courts reject the independence principle of bank guarantees for domestic transactions. Much to the surprise and dismay of the Chinese banking community, domestic transactions cannot be independent of an underlying transaction. This means that for domestic transactions in China you do not have instruments that are payable on first demand; instead you are only allowed to employ surety-ships, whose payment obligation is dependent on the underlying transaction.
The banking community is equally disturbed that the term domestic transaction is not clear. China usually regards the transactions between mainland China and Hong Kong, Macau as well as Taiwan as overseas transactions.
Are you confused yet ? Then what about the fact, that China only in 2010 has established that certain cases will be considered precedence. These cases are limited to Supreme Court cases, which meet the following criteria:
(1) cases with wide public concern;
(2) where the law requires comparison of principles;
(3) of a typical nature;
(4) complicated or of new type; and
(5) other cases with guiding functions.
Chinese courts recognize international banking practices like the UCP, URDG, ISBP, and ISP. The degree of recognition is however not consistent, i.e. some courts recognize the URDG as international practice, others do not. Absent further decisions,some people guess that the UCP will be more readily recognized than ISBP and ISP.
Due to a scarcity of Chinese legal bases and the fact that the above mentioned practices do not address injunctions, it is difficult to enjoin Chinese banks from paying.
User Beware, Chinese Government, Banks and Companies always look for their own interest and will tell you what you want to know. Do not believe them.
