Shanghai: Chinese Supreme Court strengthens interpretation on respecting the independence of refund guarantees

By Jason Lemann

The Chinese Supreme Court in November 2013 circulated a draft judicial interpretation dealing with cases in relation to independent guarantees.

This appears to be the court’s official response to an increasingly used tactic among shipyards in China whereby a local party (e.g. a Chinese shipyard) seeks to secure claims that they have brought in China (typically based on fraud or other tortious grounds to circumvent the arbitration clauses usually found in shipbuilding contracts) by freezing funds payable under a refund guarantee and/or seeking to prohibit Chinese banks as guarantor from making payment under guarantees the banks have issued.

The court seems to have recognised the danger of frivolous allegations of fraud as well as the importance of maintaining the market’s confidence in bank guarantees issued by Chinese banks. Prior to publication, the court circulated this draft interpretation and invited discussions and debate among representatives from various industries, including banks, shipyards and other stakeholders…

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