Recently, two cases represented by GEN lawyers related to independent guarantee fraud issued under two EPC contracts of power projects in Republic of Yemen, were upheld in the first trial of Chinese court in Jinan. These two cases may provide solutions for contractors who have to repeatedly extend validity of the letters of guarantee even in the situation of force majeure, such as wars, to avoid the letter of guarantee / reissuing letter of guarantee being demanded in international construction projects.
As China contractors started playing major role in major international construction projects, disputes around independent or demand guarantees rapidly increase. Owners of international projects often require contractors to provide independent guarantees to secure the completion of the projects. However, the mechanism of independent guarantees is characterized by "payment first, argue later", with only exception of "fraud". The test of "double fraud" applied by Chinese courts in counter-guarantee disputes makes it difficult to terminate payment under reissuing guarantees.
By 2022, at least 10 countries in the world are at war. Moreover, with the COVID-19 spreading across the world, many countries are impacted by economic recession, resulting in a sharp increase in the cost of local manpower, materials and machinery, the situation has largely changed comparing with those when executing the contracts. Even so, from the other side, the owners of the host country where the international projects are located still expect the contractors to complete the projects according to the original contracts, and often take the guarantees as the threat, either to request continuous extension, or make unreasonable claims. Contractors usually have to compromise due to the risk of the guarantees and agree to all unreasonable requirements of the owners.
In these cases, the court determined that the employer and the reissuing bank had no right of claim under the force majeure event of war, and then decided to terminate the payment under the Counter Guarantees. The judgment provides more confidence for Chinese contractors engaged in overseas projects.