Letter of Comfort or Guarantee Letter

Transcription

Llinks Banking Law Bulletin
May 2008
By Charles Qin and Jennifer Jiang
In Foshan Municipal People’s Government v. Bank of Communications
1
(Hong Kong Branch) Re: Guarantee Dispute
and Bank of
Communications (Hong Kong Branch) v. Gangyun Jiye Company
Limited, Yunfu Municipal People’s Government and Others Re: Dispute
over Loan Guarantee Contract (Appeal),2 there was legal debate about
whether letters of undertaking3 issued by local governments to overseas
creditors could be recognized as guarantee letters under the Security
Law of the People’s Republic of China (1995) (the Security Law).
This article compares and analyzes the two cases, and discusses the
nature of a letter of undertaking in similar cases.
Comparative Analysis of the Two Cases
Foshan Municipal People’s
Bank of Communications
Government
(Hong Kong Branch) v.
v.
Bank
Communications
Kong
of
(Hong
Branch)
Re:
Guarantee Dispute
Lily Han: (86 21) 6881 8100 - 6609
[email protected]
Company
Limited, Yunfu Municipal
Others Re: Dispute over
Loan Guarantee Contract
(Appeal)
韩东红: (86 21) 6881 8100 - 6609
[email protected]
Llinks
Jiye
People’s Government and
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Did the letter of undertaking
Did the letter of undertaking
Key
issued
issued
Issues
Municipal
by
the
Foshan
People’s
by
Municipal
the
Yunfu
People’s
Government fall within the
Government fall within the
legal
legal
guarantee?
definition
of
definition
of
guarantee?
Llinks Law Offices
www.llinkslaw.com
This publication is for general guidance only and is not intended to provide legal advice in any specific case. We expressly
disclaim any liability for the consequences of action or non-action based on this publication. All rights reserved.
1
Similar Facts
(1) The Hong Kong branch of Bank of
(1) The Hong Kong branch of Bank of
Communications (the Hong Kong
Communications (the Hong Kong branch)
branch)
offered
offered
credit
facilities
a
credit
facility
to
Yunfu
respectively to Zhong Ya Enterprises
Enterprises Limited, which was established
Limited
and Peak
in Hong Kong by the Yunfu Government.
Garden Limited (Peak Garden), both
For the aforesaid credit facility, the Yunfu
of which were established in Hong
Government issued a letter of undertaking
Kong by the Foshan Government.
to the Hong Kong branch, specifying that,
For the aforesaid credit facilities, the
“the
Foshan Government issued
two
Company to fulfil the obligations of
letters of undertaking to the Hong
repaying the loans, including the interest
Kong branch, specifying that, “the
and principal, to the Bank within the period
government
the
as agreed. Should the Company make late
Company to fulfil the obligations of
repayment or be in default repayment of the
repaying the loans, including the
interest and / or principal to the Bank, the
interest and principal, to the Bank
government shall resolve the problem to
within
prevent the Bank from suffering economic
(Zhong Ya)
shall
the
monitor
period
as
agreed.
Should the Company make late
government
shall
monitor
the
loss.”
default
(2) In the loan contract signed between the
repayment of the interest and / or
Hong Kong branch and Yunfu Enterprises
principal
repayment
or
be
in
Bank,
the
Limited, the letter of undertaking was
resolve
the
classified as “other document” in the list of
problem to prevent the Bank from
“the currently valid collateral and / or legal
suffering economic loss.”
documents provided for the Bank”.
to
government
the
shall
(2) The section, “Collateral and Legal
Documents” in the credit facility
letters issued by the Hong Kong
branch to Zhong Ya and Peak
Garden did not only include the
letters of undertaking issued by the
Foshan
Government,
included
mortgage
but
also
over
real
property, guarantee and pledge over
certificate of deposit.
In addition,
the aforesaid letters of undertaking
were also listed in the section,
“Others”, rather than “Guarantee”.
2
Different Facts
(3) After Zhong Ya and Peak Garden
(3) After Yunfu Enterprises Limited failed to
failed to repay the debts owed to the
repay the debt owed to the Hong Kong
Hong Kong branch, the Foshan
branch, the Hong Kong branch appointed a
Government and the Hong Kong
law firm to serve legal letters on Yunfu
branch held three meetings, which
Enterprises
were recorded in three minutes.
Government respectively, demanding the
According to the three minutes, the
performance of their obligations.
Hong
Kong
branch
had
Limited
and
the
Yunfu
never
required the Foshan Government to
fulfil the obligations as guarantor or
to repay the debts for Zhong Ya and
Peak Garden. Instead, the parties in
the meetings agreed to the Foshan
Government
restructuring
the
debtors’ assets so as to repay the
debts.
First Instance
The court of first instance, i.e. the
The court of first instance, i.e. the Guangzhou
Guangdong Provincial High Court held
Intermediate People’s Court held that the
that the Foshan Government had offered
guarantee
the Hong Kong branch a guarantee of the
Government and the Hong Kong branch had
loans to Zhong Ya and Peak Garden, but
been established, but that the letter of
the guarantee was not legally effective.
undertaking issued by the Yunfu Government
The Foshan Government was held liable
was ineffective.
for only 50% of the debts owed by Zhong
guarantee was contributed to by both parties,
Ya and Peak Garden.
the Yunfu Government was only liable for 50%
contract
between
the
Yunfu
As the failure of the
of the debts owed by Yunfu Enterprises
Limited.
Final Appeal
The court of second instance, i.e. the
The court of second instance, i.e. the
Supreme Court of the PRC (“the Supreme
Guangdong High Court held that the guarantee
Court”) held in favour of the Foshan
contract between the Yunfu Government and
Government’s appeal that the letter of
the Hong Kong branch had been established,
undertaking did not constitute a guarantee
but the letter of undertaking issued by the
and therefore the Foshan Government did
Yunfu Government was not effective. As the
not owe any legal liability to the Hong
failure of the guarantee was contributed to by
Kong branch.
both parties, the Yunfu Government was only
liable for one third of the debts owed by Yunfu
Enterprises Limited.4
3
It should be noted that in Bank of Communications (Hong Kong Branch) v. Gangyun Jiye Company Limited,
Yunfu Municipal People’s Government and Others Re: Dispute over Loan Guarantee Contract (Appeal), the
Guangdong High Court on 10 May 2006 filed the “Request for the Direction Whether the ‘Letter of Undertaking’
in Bank of Communications (Hong Kong Branch) v. Gangyun Jiye Company Limited, Yunfu Municipal People’s
Government and Others Re: Dispute over Loan Guarantee Contract (Appeal) had Constituted a Guarantee”5
with the Supreme Court, which on 11 October 2006 replied that, “in respect of the question whether the ‘letter of
undertaking’ issued by the Yunfu Government has constituted a guarantee as defined in the Security Law, the
Guangdong High Court shall consider the background and content of the letter of undertaking as well as other
facts in reaching a conclusion.”6 On 4 January 2005, however, the Supreme Court held in the final appeal of
Foshan Municipal People’s Government v. Bank of Communications (Hong Kong Branch) Re: Guarantee
Dispute that the letter of undertaking in the case had not satisfied the definition of guarantee under the Security
Law. The above two cases reflect that, in current judicial practice, the PRC courts of law do not have a
consistent view on the question whether a letter of undertaking issued by the government constitutes a guarantee.
Determination of the Nature of Comfort Letters in Practice
In the above two cases, the Guangdong High Court and the Supreme Court held two different opinions regarding
the nature and validity of letters of undertaking:
¾
The letter of undertaking in question did not fall within the legal definition of guarantee.
In Foshan Municipal People’s Government v. Bank of Communications (Hong Kong Branch) Re:
Guarantee Dispute, the Supreme Court held that the letter in question, in the first place, was called, “letter
of undertaking”, rather than “guarantee letter” so that the content of the letter had to be considered in
deciding whether it constituted a guarantee. Secondly, in terms of its content, the wording such as “shall
resolve the problem” and “prevent the Bank from suffering economic loss” did not expressly show the
intention of being bound by a guarantee or repaying the debts on behalf of the companies in question.
Particularly, the term, “shall resolve the problem” was vague and unclear, which could be interpreted as
the moral responsibility urging the debtors to repay their debts. In addition, the Hong Kong branch had
never required the Foshan Government to undertake the liability for the guarantee,7 which reflected the
fact that the Hong Kong branch had never taken any actions to exercise the guarantee rights against the
Foshan Government. With reference to the principle that “a guarantee cannot be created by
presumption” as stipulated in the Civil Code of France, the letter of undertaking did not have the nature of
a guarantee.
¾
The letter of undertaking in question fell within the legal definition of guarantee.
In Bank of Communications (Hong Kong Branch) v. Gangyun Jiye Company Limited, Yunfu Municipal
People’s Government and Others Re: Dispute over Loan Guarantee Contract (Appeal), the Guangdong
High Court held that firstly, “shall resolve the problem” and “prevent the Bank from suffering economic
loss” should be interpreted at two levels such that “the government should be responsible for resolving the
problem” and “if the problem cannot be resolved, the government shall undertake the liability”. If all
other solutions failed, repaying the debts on behalf of the debtor should be the most straightforward and
4
final resort. Such a promise carried the meaning of offering a guarantee for the loans borrowed by the
debtor that was consistent with the intention of Article 6 of the Security Law and, therefore, fell within the
legal definition of guarantee. Secondly, the letter of undertaking in question was on the list of the legal
documents for the guarantee and consistently treated as a guarantee letter. In addition, the Hong Kong
branch took action to exercise its rights against the Yunfu Government.8 The above Hong Kong branch’s
actions showed that the Hong Kong branch had expected the letter of undertaking to have an equal
guarantee effect as a guarantee contract. Therefore, the letter of undertaking showed the intention of
offering a guarantee and satisfied the legal definition of a guarantee.
Basic Factors in Deciding the Nature of a Comfort Letter
A comfort letter or letter of comfort is a written statement issued to a creditor, stating the moral obligations of the
issuer to repay the debtor’s debts or to monitor the debtor in repayment of the debts.9 A guarantee refers to an
agreement between a third party and a creditor that the third party is bound to repay the debt or undertake the
liability when the debtor is in default. The essence of a guarantee is that it reflects the guarantor’s intention to
repay the debt.
According to the analysis of the nature and effectiveness of comfort letters in judicial practice, we believe that
there are four key elements in deciding the nature of a comfort letter:
¾
Background
Firstly, the background of producing a comfort letter has to be considered. Under Article 8 of the
Security Law, the government shall not provide any guarantee against corporate loans. However, to
assist local enterprises in financing, the government always issues comfort letters, offering moral support
to borrowers in performing their obligations. It is generally believed that a comfort letter does not
constitute a guarantee and is, in fact, issued to avoid legal liability arising from a guarantee. In practice,
the wording of some comfort letters is very much similar to that of a guarantee. Therefore, it cannot be
excluded that a comfort letter may constitute a guarantee under certain special circumstances. Because
of the imprecise wording of a comfort letter, the background of issuing a comfort letter should be
considered in the determination of its nature.
¾
Document Title
Secondly, a guarantee given in writing should be entitled “guarantee letter” or “letter of guarantee”, which
expressly shows the issuer’s intention of offering a guarantee to the creditor in question. If the creditor
unconditionally accepts the document, then the guarantee contract is formed. However, documents
which are issued in forms of “letter of undertaking”, “comfort letter” or “confirmation letter” cannot be
easily decided by whether the issuers had an intention of offering a guarantee by merely examining the
document titles. In these circumstances, the content of the documents has to be considered, as was
required in the above two cases.
5
¾
Content of Documents
Further, examining the content of a comfort letter is the fundamental approach to determining the nature
of the comfort letter. A comfort letter is generally entitled “letter of undertaking” or “confirmation
letter”, which does not reflect the nature of the document in that both the wording of the letter and trade
custom, which may show the interested parties’ expectation of the comfort letter, have to be considered in
deciding whether the content of the comfort letter should have moral effect or legal effect. If the content
of the comfort letter includes provisions that “the issuer shall repay the debts on behalf of the debtor”,
“undertake the liability arising from a guarantee” or “guarantee the repayment by the debtor”, then the
comfort letter should be seen as having the nature of a guarantee and the issuer should be bound by the
guarantee. If the comfort letter expresses the fact that the issuer only bears the moral obligations of
monitor or support for the debtor, then the comfort letter should not be seen as a legally valid guarantee
and will be unenforceable in court. If the content of a comfort letter is imprecise so that it is difficult to
determine whether the letter constitutes a legally binding guarantee or moral obligations, other approaches
have to be applied.
¾
Conduct of the Parties
Finally, the conduct of the interested parties has to be taken into account. Article 125 of the Contract
Law of the PRC (1999) only lays out some general principles of the interpretation of contracts. With
reference to Article 4.3 of the Principles for International Commercial Contracts (2004) by the
International Institute for the Unification of the Private Law (UNIDROIT), a concluded contract may be
interpreted by the conduct of the parties. In the above two cases, the content of the letters of undertaking
issued by the Foshan Government and Yunfu government was basically the same and the letters of
undertaking were listed in the section, “Other Documents” in the letters of credit facility. The key
difference was the conduct of the Hong Kong branch (as the creditor) after the two local governments had
issued the letters of undertaking in that whether the Hong Kong branch had taken any actions to enforce
the guarantee rights against the governments was one of the key factors considered by the Supreme Court
and Guangdong High Court in deciding the nature of the letter of undertaking in the two cases.
Should a creditor not exercise its rights under the guarantee against the issuer of the letter of undertaking,
the court would presume that the creditor does not expect the letter of undertaking to have guarantee
effect as a guarantee contract does and that the parties did not have the intention to enter into a guarantee
contract, and would conclude that the letter of undertaking does not constitute a guarantee. On the other
hand, should a creditor take positive actions to exercise the its rights under the guarantee against the issuer
of the letter of undertaking, the court would be convinced that the creditor expects the letter of
undertaking to have the same guarantee effect as a guarantee contract and that the parties had the intention
to enter into a guarantee contract, and would, therefore, conclude that the letter of undertaking constitutes
a guarantee. In accordance with the judicial practice as discussed above, the authors recommend
creditors in similar cases to take positive action to exercise their rights under the guarantee after the letters
rights are issued.
6
The above are the authors’ opinions on the determination of the nature and validity of a comfort letter. In
addition, there are currently no statutory provisions on the limitation of actions for a creditor commencing legal
proceedings against a guarantor of an invalid guarantee for damages after such guarantee has been held invalid.
The question of the limitation of actions for an invalid guarantee arose in Foshan Municipal People’s
Government v. Bank of Communications (Hong Kong Branch) Re: Guarantee Dispute, but the Supreme Court
held that as the Foshan Government was not liable in the first place, the examination of the question of the
limitation of actions had become unnecessary and did not deal with this question in its judgment. Regarding
the limitation of actions for an invalid guarantee, there are two major points of view in the current judicial
practice that it should start from: (1) the due date of the debt agreed in the underlying contract; and (2) the date
on which the guarantee contract in question is held void. It is generally believed that the guarantor of an invalid
guarantee case should be liable for the establishment of the invalid guarantee. Therefore, the limitation of
actions against guarantors of invalid guarantees should not depend upon the guarantee period or the related
litigation.10 At present, the most common judicial practice in such cases is that the limitation starts from the
due date of the underlying contract.
Contact Details
If you would like to know more information about the subjects covered in this publication, please feel free to
contact the following people or your usual Llinks contact.
Charles Qin
Tel: (86 21) 6881 8100 - 6612
[email protected]
(86 10) 6655 5020
Michael Mei
Tel: (86 21) 6881 8100 - 6639
[email protected]
© Llinks Law Offices 2008
7
1
2
3
4
5
6
7
8
9
10
General Office of the Supreme Court: Page 17, 11th Issue, 2005 “Bulletin of the Supreme Court of the PRC”, The
People’s Court Press, Published in February 2006.
Chief Editor Wan E’xiang: Page 132, 2nd Issue, 2006 “Guideline on Foreign Commercial and Marine Trial”, The
People’s Court Press, 1st edition published in January 2007.
The Letter of Undertaking mentioned in this article is also called a comfort letter.
The trial result originated from the telephone communication between our law firm and the judge hearing this case on
18 January 2008.
Wan, E. op. cit.
Wan, E. op. cit.
“Never required” in the case refers to the fact that the Hong Kong branch had never required the Foshan Government
to fulfil the obligation as a guarantor during the period between the issuance of the letter of undertaking by the Foshan
Government and the legal proceedings commenced at the court of first instance. When the court determined whether
the letter of undertaking had constituted a guarantee under the Security Law, the court held that the creditor had only
exercised the creditor’s rights against the debtor rather than the Foshan Government. Therefore, the creditor was
deemed not to have shown an intention to enter into a guarantee contract with the Foshan Government. Under the
Security Law, guarantees are classified as joint liability guarantees and general guarantees. In case of a general
guarantee, the guarantor should be liable for the guarantee under the conditions that the debtor failed to repay the
debts. In the case, the creditor generally claimed the creditor’s rights against the debtor first. If the debtor failed to
repay the debts, then the creditor may require the guarantor to perform the guarantor’s obligations. Therefore, we
believe that the determination by the court requires further discussion.
“To exercise its rights” in the case refers to the fact that the Hong Kong branch used to require the Yunfu Government
to perform the guarantor’s obligations during the period between the issuance of the letter of undertaking by the Yunfu
Government and the proceedings commenced at the court of first instance.
Cao Shibing: General Discussion on The Legal System of Guarantee (3), chiefly edited by Li Guoguang: Page 21,
Part 4, Guideline and Reference on Economic Trial, Law Press, 1st edition, November 2001.
Same as 1.
8

Letter of Comfort or Guarantee Letter

Transcription

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