Study On Guarantee Involving Foreign Elements In Private International Law

This article has three parts:introduction, main body, and conclusion.The introduction discusses the legal definition of guarantees involving foreign elements, the emergence and development of international commercial guarantees, and related cases of international guarantees. It also explains the theoretical and practical significance of this topic, drawing upon past and present Chinese and foreign scholarship on the private international law of guarantees.The main body of the article consists of five chapters.Chapter One explains some problems with the basic theory of guarantees involving foreign elements, laying the foundation for further inquiry. This chapter first introduces the character of guarantees and the special tripartite relation established by such guarantees. On this basis, the subject matter of private international law is defined as "relations of guarantees involving foreign elements." The contours of the terms "relations of guarantees involving foreign elements" and the definition of "involving foreign elements" are explained in detail. In order to emphasize the special problems under international private law raised by guarantees involving foreign elements, this chapter, from the perspective of substantive law, compares guarantee involving foreign elements with independent guarantee that are frequently used in international trade, including Letters of Credit, Standing Letters of Credit, and Bank Guarantees on Simple Demand, and then concludes that the special characters of guarantee involving foreign elements to establish special principles of International Private Law. This chapter investigates the characterics of guarantees involving foeign elements and proposes practical solutions for the problem of whether PRC courts should define letter of comfort as guarantees.Chapters Two through Five discuss three core private international law problems related to guarantees involving foreign elements:jurisdiction over international guarantees; the applicable law for guarantees involving foreign elements and restrictions upon it; and the recognition of foreign judgments and arbitral awards of the principal debts, and the consequences for evidence. Chapter Two concerns the problem of jurisdiction over guarantees involving foreign elements. How to understand conflicts of jurisdiction over guarantees involving foreign elements, and how to resolve them, are novel legal questions. Disputes over guarantees involving foreign elements include disputes over the principal contract as well as the guarantee contract, thus increasing the connecting factors of guarantees involving foreign elements. General guarantors enjoy a counterplea right, which means that the creditor must "claim first" from the principal debtor to get an affirmative judgment for the amount of the principal debt from the court or arbitral tribunal. After proving that the assets of the principal debtor cannot satisfy the debt, the creditor can "claim afterwards" from the general guarantor. When these two elements are present, the liability of the general guarantor is triggered. The creditor, principal debtor and guarantor in a guarantee involving foreign elements constitute a joint lawsuit, and the court must join them together, in order to avoid any inconvenience for the parties. The guarantee is relatively independent of the underlying contract, in the sense that the principal contract and guarantee contract may be resolved differently or subject to different jurisdicions, which can cause conflicts of jurisdiction between courts, as well as conflicts between courts and arbitral tribunals. Especially when there is an arbitration clause or a clause stipulating which court has jurisdiction, the situation can be even more complicated. This is a difficult problem in PRC courts’ practice. In this regard, this chapter explicates in detail the different types of jurisdictional conflict between the principal contract and the guarantee contract, and presents accompanying tables and charts; analyzes the third party in arbitration and consolidated of arbitration, compulsory consolidated of arbitration, and combined jurisdiction; and proposes strategies for resolving jurisdictional conflicts that are suitable to the PRC legal environment. When the parties to a contract agree to an arbitration clause but the third party guarantor does not, the arbitral tribunal cannot compel all three parties to consolidate the arbitration case; likewise, if the principle contract and guarantee contract have separate arbitration clauses, then the arbitral tribunal has no right to conduct combined arbitration,unless the creditor, main debtor and guarantor have agreed to a new combined arbitration clause. Some countries even require compulsory combined arbitration of related disputes in order to promote the efficiency and convenience of the proceedings, but this chapter-agreeing with the majority of countries-objects to such activity as impairing the consent of arbitration. On the other hand, in litigation, the court’s jurisdiction over cases is granted by the country adjudicating the case, so the court’s jurisdiction need not respect the parties’ autonomy to the same extent. Therefore, courts may, under some circumstances, exercise jurisdiction over the guarantee contract and then extend their jurisdiction to the principal contract, compelling a consolidation of the cases. However, if the principal contract contains a clause stipulating that a foreign jurisdiction has exclusive jurisdiction, Chinese courts cannot extend their jurisdiction in this manner to compel consolidation. For general guarantee contracts, Chinese courts may terminate the proceedings by dismissing the case, ordering the creditor to file a claim against the principal creditors in another country within a fixed time period; or the court may first determine the amount of principal debt and resume the proceedings after the creditor presents an effective award or verdict from the courts of another jurisdiction. If the creditor fails to bring a lawsuit or arbitration claim against the principal debtor or the amount of the principal debt can not be determined, and the court fails to mediate an agreement between the parties, it must dismiss the entire lawsuit. For cases arising from joint guarantee contracts, Chinese courts must reject claims brought by the creditor against the principal debtor and continue the trial for the guarantee contract. However, Chinese courts will still exercise jurisdiction to consolidate the cases if the principal contract has a clause stipulating that a foreign court has exclusive jurisdiction.Chapter two also examines the special circumstances under which Chinese courts should refuse to exercise jurisdiction over the principal contract. The author calls for the application of the doctrine of forum non convenience, and the establishment of detailed standards for the invocation of the doctrine, in order to minimize international conflicts over jurisdiction-unless submitting to a foreign jurisdiction would impose an undue hardship on the Chinese guarantor. Also, the author notes, the legal effect of the invocation of forum non convenience to deny jurisdiction over the principal contract is not to dismiss the creditor’s suit but rather to suspend it, during which time the creditor may bring a lawsuit or arbitration in another country. In such instances, the Chinese court retains the right to resume court proceedings to adjudicate the guarantee contract. Chapter Three discusses the applicable law for guarantees involving foreign elements. This chapter first examines complications in the relationship between the parties and the different bodies of law that might apply to the guarantee contract, and then explains how conflicts arise between different bodies of applicable law. Furthermore, the author notes that Chinese courts have misunderstood and incorrectly applied clause 129 of the Interpretation of Chinese Guarantee Law, which states:"When there is a discrepancy between the applicable law of a guarantee contract and its principal contract, the applicable law of the guarantee contract shall be determined by the applicable law of the principal contract.’In this context, the author examines the how the applicable law of the principal contract constrains the choice of law for the guarantee contract. This chapter then explains and distinguishes the rules for choice of law, and the definition of the place of performance, for both the principal contract and the guarantee contract. After demonstrating how the applicable law is determined, this chapter also analyzes the consequent differences in substantive law that may arise for the principal contract and the guarantee contract.Chapter Four discusses limitations on the judicial application of the law of guarantees involving foreign elements. This chapter mainly discusses the theoretical basis for the application of economic rules and regulations directly to the contract which impinges on the autonomy of the parties. The author argues that when Chinese courts refuse to apply extraterritorial law to contracts, they should have recourse to such rules and regulations. By contrast, in practice, Chinese courts often rely on other doctrines-the preservation of public order and the evasion of (national) law-in order to justify their refusal to apply extraterritorial law. The author argues that such justifications are theoretically "directly applicable laws". In addition, this chapter discusses limitations on choice of laws imposed by the directly applicable laws of different countries.Chapter Five analyzes the recognition of foreign judgments and monetary awards, as well as related problems in the law of evidence. Disputes arising from the principal contract and the guarantee contract can be resolved differently by different jurisdictions. For a general guarantee contract, a creditor would first sue the principal debtor in a foreign court, and then bring a suit against the guarantor in a Chinese court. In such a case, when the verdict or overseas award is not recognized by Chinese courts, a great deal of problems can arise in subsequent litigation in Chinese courts, such as whether the verdict or award has probative value, or whether the guarantor involved in the foreign legal proceedings is entitled to the same defenses as the principal debtor. After inquiring into the jurisprudence governing the recognition of foreign verdicts and awards, this chapter analyzes and compares the effectiveness of different types of domestic and foreign verdicts, and the effectiveness of foreign judgments and awards in China.This chapter then discusses the particular situation where a PRC court hears a dispute over a guarantee involving foreign elements, and during such a case the court is asked to stipulate the judgment of a foreign court or an arbitral tribunal as a fact of evidence. In general, in order for such stipulation to take place, the parties must commence separate judicial proceedings. Once these proceedings have been successfully concluded, the PRC court can directly adopt the judgment as a fact, without the need for evidentiary proof. On the other hand, in the absence of a successful conclusion of such proceedings, PRC courts may NOT stipulate the judgment as a fact of evidence. In particular, where the foreign courts or arbitral tribunals issue judgments or awards when the defendant or respondent is absent after proper summons, the creditor’s burden of proof regarding his claims in a PRC court is not excused, and PRC courts must examine any evidence submitted by the creditor.The Conclusion summarizes the key points of this article. Disputes over guarantees involving foreign elements are unique as they involve multiple parties, a tripartite legal and commercial relationship and multiple dispute resolution regimes, which together can lead to much confusion in both international law scholarship and legal proceedings. The principal contract is governed by one legal jurisdiction, but the guarantee contract may be governed by another. In such a case, which jurisdiction determines the starting point, the validity and the scope the guarantor’s obligations, and which jurisdiction determines when the principal debt is assumed, whether it is valid, and when it is excused by reason of impossibility or impracticability? The jurisdiction governing the principal contract might allow the creditor to require the guarantor to perform its obligations, but the jurisdiction governing the guarantee contract might indicate that the guarantor’s responsibilities have not yet been triggered. This situation would cause a conflict of laws of the two jurisdictions, possibly resulting in the application of different legal rules and different resolutions of the substantive legal issues. Therefore, there is a need to establish a system of international legal rules and regulations to address the rather unique legal problems posed by guarantees involving foreign elements. To avoid such jurisdictional conflicts of laws, arbitration proceedings over the principal contract and the guarantee contract should be consolidated and judicial proceedings over the principal contract and the guarantee contract should be combined within a single jurisdiction. In adjudicating of substantive legal issues, in accordance with international legal trends, courts should comply with and apply country’s public law, and respect the parties’ choice to reject particular jurisdictions. Even though some theoretical controversy still surrounds the concept of directly applicable law, it should still be applied in practice. As for evidentiary issues, it does not violate the principle of sovereignty for domestic courts to accept foreign courts’ or arbitral tribunals’ determinations of fact regarding the principal debt. However, domestic courts should apply proper procedures before recognizing the foreign judgments or awards. Directly incorporating this recognition procedure into the adjudication of the substantive legal issues, as this article proposes, would make the litigation process more convenient for the parties and more efficient. It is therefore a key issue for legislators to balance the parties’convenience and the judicial sovereignty of foreign jurisdictions, and at the same to realize, to the fullest extent possible, the equitable and efficient adjudication of disputes over guarantees involving foreign elements.