Independent Guarantees in China: What a Beneficiary Can Rely On

A demand guarantee is worth what a court will let you collect on it. In 2025 the Supreme People's Court published a case that answers the question a beneficiary actually cares about: once the underlying contract is settled between the parties, can the party who procured the guarantee go to a Chinese court and stop the bank from paying? The answer was no — the guarantee stayed independent, and the counter-guarantee stayed payable even though the claim under the primary instrument had been compromised. The same decision, for the first time, held that a standby letter of credit with a security function is an independent guarantee under Chinese law, which means the whole body of Chinese demand-guarantee rules now applies to it.

What follows is the structure of the transaction, the money trail, the three reasons the court gave, the statutory test for stopping payment, and what a beneficiary holding a Chinese guarantee should do differently.

What the case decided, in one paragraph

A Chinese contractor procured a performance standby letter of credit in favour of a beneficiary in the Philippines. A Chinese bank issued a counter-guarantee in favour of the beneficiary's bank, which in turn issued the credit the beneficiary could draw on. The beneficiary demanded the full amount; the contractor authorised payment of part; the beneficiary's bank paid the beneficiary and claimed the same amount under the counter-guarantee; the beneficiary then settled with the beneficiary's bank and withdrew its claim under the primary credit. The contractor sued to stop the Chinese bank from paying. The Supreme People's Court dismissed the claim. A counter-guarantee is independent of the credit it supports, and a settlement between the beneficiary and the beneficiary's bank does not extinguish the Chinese bank's obligation to pay under the counter-guarantee.

The structure: two instruments, two banks

Nothing in this case makes sense without the layering, so it is worth setting out before the dispute.

The applicant was performing a construction contract in the Philippines. It asked Bank of Jiangsu to issue a performance standby letter of credit in favour of D.M. Consunji, Inc. in connection with that contract. Bank of Jiangsu did not issue to the beneficiary directly: it issued an irrevocable counter-standby to ANZ's Manila branch, which then issued the credit the beneficiary could draw against.

That is the ordinary arrangement in cross-border construction: a local bank fronts the instrument in the beneficiary's jurisdiction, and the applicant's bank backs it from home. It also creates the trap in this case — two instruments, two obligors, and one beneficiary who deals with only one of them.

The money trail

The amounts matter because the dispute was about whether a later settlement reached the second layer.

Read the last three rows together, because they are the whole case. The beneficiary had already received US$7.3 million and given it back. It then settled directly with ANZ Manila for US$6 million and agreed to withdraw its claim under the primary standby. ANZ Manila, having paid US$6 million to the beneficiary, demanded that same US$6 million from Bank of Jiangsu under the counter-standby.

The applicant's argument was straightforward and, on a lay reading, attractive: the beneficiary has withdrawn its claim, so there is nothing left to pay, so the counter-guarantee should not be honoured. The Supreme People's Court rejected it.

Why the claim failed: three reasons

The court did not reach the fraud question by weighing the merits of the construction dispute. It disposed of the case on the instruments.

1. Both instruments are independent guarantees under Chinese law. The standby and the counter-standby both had a security function and both stated that payment was due on demand. That brings them within the definition of an independent guarantee, and therefore within the Provisions on Several Issues Concerning the Trial of Independent Guarantee Dispute Cases. Before this case there was no Chinese concept of a standby letter of credit and no rule saying which regime governed it. There is now: the demand-guarantee regime.
2. The counter-standby was payable on its own terms. Bank of Jiangsu, as issuer of the counter-standby, did not give notice of refusal in accordance with Article 5.01 of the International Standby Practices (ISP98). Having failed to refuse in the manner the rules require, it was liable to pay at maturity. The court treated the missed refusal as decisive on the obligation, not as a technicality.
3. The settlement did not reach the counter-standby. The 11 May 2017 settlement resolved the claim under the primary standby and one other instrument. It said nothing about the counter-standby. And the beneficiary's undertaking to withdraw its claim was given for consideration — it was the price of ANZ Manila's US$6 million — so it was not a waiver. Because the counter-standby is independent of the primary standby, Bank of Jiangsu's obligation under it was not extinguished by the way the primary standby was later funded.

One further point from the court's published reasoning deserves attention, because it is where most applicants go wrong: a bank that has paid in good faith under a guarantee issued on instructions cannot have the counter-guarantee protecting its right of reimbursement stopped. The court framed this as an aspect of independence. It is also written into the statute in terms, as set out below.

How Chinese law recognises an independent guarantee

Chinese law does not treat every bank undertaking as independent. A suretyship is accessory: it follows the underlying debt, and defences on the debt are available to the surety. An independent guarantee is the opposite, and the Provisions set the test.

• Issuer. A bank or non-bank financial institution. A trading company's promise is not an independent guarantee.
• Form. A written undertaking to pay a specified sum, or a sum within a stated maximum, on presentation of documents that conform to the terms of the undertaking.
• Independence. The undertaking states that payment is on demand, or that it is governed by the ICC Uniform Rules for Demand Guarantees, ISP98, or a similar set of rules. Absence of that wording is what pushes an instrument back into accessory suretyship, with all the defences that entails.

The practical consequence of this case is that the wording of a standby letter of credit now decides which regime it falls under in China. If it says payment is due on demand, or incorporates ISP98, it will be treated as an independent guarantee — and the issuer will be held to the document, not to the construction contract behind it.

Stopping payment: the test, and why it is deliberately narrow

An applicant who wants to freeze a guarantee applies to the court for an order suspending payment. Article 12 of the Provisions lists the only five situations that count as fraud:

1. the beneficiary colluded with the applicant or another person to fabricate the underlying transaction;
2. a third-party document submitted by the beneficiary is forged, or false in content;
3. a judgment or arbitral award holds that the debtor under the underlying transaction bears no liability to pay or compensate;
4. the beneficiary has confirmed that the underlying obligation was fully performed, or that the payment event specified in the guarantee has not occurred;
5. any other case in which the beneficiary, knowing it has no right to payment, abuses that right.

Article 14 then requires three conditions to be satisfied at the same time before any order can be made, and adds two prohibitions that decide most applications before they start:

That second prohibition describes this case exactly. Bank of Jiangsu had paid ANZ Manila under the counter-standby on the applicant's instructions; the instrument the applicant wanted stopped was the one securing Bank of Jiangsu's reimbursement. Even without the reasoning on independence, the application ran into a statutory wall.

Two procedural points follow, and they run in opposite directions depending on which side you are on. Under Article 16, the court must rule on a suspension application within 48 hours and the order, if made, takes effect immediately. But under Article 15, if the application was wrongfully made, the applicant is liable for the loss it caused. Freezing a guarantee is cheap to attempt and expensive to get wrong.

What the case did not decide

Two limits are worth stating, because the case is sometimes read as broader than it is.

It is not a finding that the demand was honest. The court did not examine whether the beneficiary's original demand of roughly US$23 million was justified by the construction contract. It held that the counter-guarantee had to be paid on its terms, and that the settlement did not alter that. Questions about the underlying performance remain open, in whatever forum the contract provides.

It does not make guarantees unstoppable. Article 12 remains available, and the cases where suspension succeeds tend to involve forged documents, a court or tribunal having already held that no debt exists, or a beneficiary that has confirmed performance. What the case adds is a clear statement that ordinary commercial sequencing — a partial payment, a settlement, a withdrawal of a claim in exchange for money — does not amount to fraud.

If you hold a Chinese guarantee

The beneficiary's position is stronger after this decision, but only if the instrument was drafted to be drawn on. Six points, in the order they matter.

1. Check the governing rules clause. A standby or guarantee that incorporates ISP98 or states that payment is on demand is an independent guarantee in China. One that does not may be recharacterised as accessory suretyship, and the issuer will then be entitled to raise the applicant's defences.
2. Present conforming documents, and keep proof of presentation. The obligation is to pay against documents. Keep the courier record, the SWIFT traffic and the receipt stamp — the same evidence that proves a conforming presentation also defeats an allegation that no valid demand was made.
3. Do not assume a settlement protects the guarantee. If you settle with the issuing or fronting bank, say expressly what happens to the instrument and to the counter-guarantee behind it. Silence is what produced this litigation.
4. Expect the 48-hour application, and be ready for it. The applicant can apply before or during proceedings, and the order takes effect immediately if granted. Have your demand documents and the contract clause ready to file in response, because the window is measured in hours.
5. Watch the expiry date, not the dispute. A guarantee expires on its stated date or expiry event. A demand presented after expiry is worth nothing, whatever the merits. Diarise the date and present before it, even if the amount is still being negotiated.
6. Enforce where the money is. A guarantee is one of the few cross-border remedies that does not require you first to win a judgment against the Chinese party and then enforce it. If the guarantee route is unavailable, the enforcement analysis is set out in how a foreign judgment reaches a Chinese company's assets.

Frequently asked questions

Is a standby letter of credit the same as a guarantee in China?

Not by name, but by function. Before this case Chinese law had no concept of a standby letter of credit. The Supreme People's Court held that a standby with a security function which states payment on demand is an independent guarantee, so the demand-guarantee rules apply to it. The label on the document matters less than whether it is payable against documents on demand.

Can a Chinese court stop a bank from paying?

Yes, but only on the five grounds in Article 12, and only where all three conditions in Article 14 are met. Loss caused by a wrongful suspension is recoverable from the applicant. In practice, applications founded on the applicant's complaints about the underlying contract are refused as a matter of course, because Article 14 says so in terms.

What happens if the issuing bank never formally refuses?

It pays. In this case the counter-guarantee issuer failed to give notice of refusal in accordance with ISP98 Article 5.01, and the court held it liable to pay at maturity. A bank that sits on a presentation without refusing it in the required form loses the objection.

Does the beneficiary have to give anything back after being paid?

Not under the guarantee, and not to the applicant directly. In this case the beneficiary did return roughly US$7.3 million to the applicant, but that was a separate arrangement, not part of the guarantee mechanism. Recovery of an overpayment is a claim on the underlying contract, pursued separately.

What if the contract is governed by foreign law?

The law governing the guarantee is not necessarily the law governing the contract. An independent guarantee dispute in a Chinese court is decided under Chinese law and the Provisions; questions about performance of the sale or construction contract go to whichever law and forum that contract selects. The two tracks run in parallel and do not wait for each other.

Before you call the guarantee, read the instrument

Send me the guarantee text, the counter-guarantee if you have it, and the documents you intend to present, and I will tell you whether the instrument is independent on its face, whether your presentation is likely to conform, and what an applicant's suspension application would be able to rely on. The arbitration alternative is set out in what foreign buyers should know about CIETAC arbitration, and the litigation route in how to sue a Chinese company from abroad. Where the honest answer is that the guarantee is not the remedy you need, that is what you will be told.

About the author

Li Xinlei (Aaron Li) is a partner at Beijing Huicheng (Jinan) Law Firm in Jinan, Shandong, where he acts for foreign companies and individuals in international trade disputes, cross-border enforcement and construction claims. He has five years of international engineering and market development experience in the Middle East and South Asia, and writes on China trade lawyer practice from the buyer's side — what to check, what it costs, and what can actually be recovered.

Source note: this article summarises case 1 of the fifth batch of typical cases relating to the Belt and Road Initiative, released by the Supreme People's Court of the People's Republic of China on 25 September 2025 and decided by its Second International Commercial Court under docket (2020) Zui Gao Fa Shang Chu No. 2. The facts, amounts, holdings and quoted reasoning are taken from the case text published by the Supreme People's Court. Company names appear because they are recorded in the published case; English renderings of Chinese company names are direct translations. References to the Provisions on Several Issues Concerning the Trial of Independent Guarantee Dispute Cases (as amended in 2020) are to the text of that instrument, and the observations on Article 14(3) are the author's reading of its application to these facts rather than a quotation from the judgment.

Disclaimer: This article provides general legal information and does not constitute legal advice for any specific case. Procedural rules and judicial practice change, and the appropriate route depends on the facts of the individual matter. Please consult and appoint a qualified lawyer for your own case.