Independent Guarantee The Legal System Research

Independent Guaranty which is called in legal circles is likely called Independent Guarantee, namely Demand Guarantee in business world. Because in most cases, this kind of guarantee is issued by bank, so we call it Demand Bank Guarantee as well. In this article, they are all used for the same purpose without any prejudice. Whereas, the origin of the independent guarantee came from international business practice, the related international rules would like to say demand guarantee. So this article follow it and use the word demand guarantee too.Demand Guarantees (also named as Independent Guarantees) and Letter of Credit are two international instruments of settlement which aim to solve the confilict interests of each party in international transactions. The rights under Irrevocable Letter of Credit and Demand Guarantees are deemed as Cash in Hand in international commercial practice. Traditional Civil and Commercial Law believe that the Guaranty is Suretyship which attach to Underlying Contract. The effect of suretyship depends on that of underlying contract. A sureyship(also called accessory guarantee or surety bond) which,as an undertaking to pay the principal's debt (as opposed to the guarantor's own primary obligation under a demand guarantee),entitles the surety(i.e. the issuer of the suretyship) to raise all defences available to the principal and to only pay the amount that the beneficiary establishes as being owed by the principal. That means only the debtor is not able to or refuse to pay the debt, does the guarantor have to perform his obligations. But the international transactions add more commercial risks to parties in distinct countries because of the huge amount and long time limit of the contract, because of the different legal systems, cultures, political and economic background. So a ready, prompt and assuredly realizable guaranty is required in order to avoid and relieve the non-performance risk, and ensure the security of the transaction and the successful performance of all contractual duties. A new type of guaranty , named as Independent Guarantees was born for this requirement. It is an irrevocable undertaking issued by the guarantor, upon the instructions of the principal to pay th beneficiary any sum that may be demanded by that beneficiary up to a maximum amount determined in the guarantee, upon presentation of a demand conforming with the terms of the guarantee. The essentail characteristic of a demand guarantee is First, its two-fold independence. A demand guarantee is independent of the underlying transaction between the principal and the beneficiary that prompted th issuance of the guarantee. And a demand guarnatee is also independent of the instruction relationship pursuant to which the principal requested the guarantor to issue the guarantee in favour of the beneficiary; second, its security for payment. As long as the creditor presents the documents conforming with the terms of the guarantee, does the guarantor have to pay the amount that the beneficiary required, except of fraud; third, its speediness. The guarantor has to pay the beneficiary in a reasonable short period of time sincepresentation of a demand. The independent guarantee now is the main trend of international guaranty in international bank and commercial practice after second world war. Because all parties gain benefits from this system. First, it helps the creditor realize his credit; Second, it makes the bank go beyond the disputes arising from the underlying contract; Third, it helps the debtor gain more finance.We began to use demand guarantee in international economic practice in the early 1980s. Our bank practice would like to call it as foreign guarantee or foreign currency guarantee. Actually, this kind of gurantee is not operated as widely as in European and USA because of our close confinement to our foreign currency system in international transactions in PRC. At present, we have no statutes for independ guarantee in our legislative system. The "Guaranty Act of PRC" and related judicial explanation...