Curbing risks with independent guarantees in construction sector

In recent years, with the continuous stream of international projects contracting business and the vigorous growth in the investment in, and construction of, domestic infrastructure, independent guarantees have repeatedly made an appearance in the course of the performance of project contracts. With a view to facilitating the development of the business of construction enterprises and reducing the risks associated with independent guarantees, the author would like to briefly discuss and analyze the judicial practice applicable to independent guarantees in China.

Concept and nature

The concept of “independent guarantee” has its origin in the Uniform Rules for Demand Guarantees, published by the International Chamber of Commerce in 1992. The rules define an independent guarantee as follows: a demand guarantee means any guarantee, bond or other payment undertaking, however named or described, by a bank, insurance company or other body or person, given in writing for the payment of money on presentation in conformity with the terms of the undertaking of a written demand for payment and such other document(s) as may be specified in the guarantee.

The specific feature of an independent guarantee lies in the fact that although it arises from an underlying contract, it is, in principle, independent from it and from the underlying transaction, and is not affected by the validity of the underlying contract. Any claims lodged under the guarantee do not rely on the underlying contract and are not conditional on whether a breach of the underlying contract has occurred.