[Direct answer]In the Beijing area, in principle, it is not allowed to refuse to pay at will, but it is permissible under certain circumstances. A demand guarantee, also known as an independent guarantee, is independent in nature. The issuer's payment obligation is independent of the underlying transaction relationship. According to the "Interpretation of the Supreme People's Court on Several Issues Concerning the Trial of Disputes over Independent Guarantees", as long as the documents submitted by the beneficiary conform to the terms of the guarantee on the surface, the issuer shall make payment; the issuer cannot refuse to pay on the grounds that there are disputes over the underlying transaction or that the applicant alleges that the beneficiary has breached the contract. Typical situations in which payment may be refused include: first, the documents submitted by the beneficiary do not conform to the terms of the guarantee, which constitutes a non-conforming document; second, the guarantee has expired, become invalid, or the guarantee amount has been exhausted; third, the beneficiary constitutes fraudulent claim, that is, abusing rights to claim payment when knowing that there is no right to request payment, which is a fraud exception of the independent guarantee; fourth, if the People's Court rules to suspend payment according to law, the issuer shall not make payment. Therefore, the bank's refusal to pay must have clear grounds, otherwise it may bear breach of contract liability.

1. Problem background and typical scenarios

In project contracting, international trade, and financing, demand-pay guarantees are widely used for their convenience in making payments. After the beneficiary submits a demand for payment, the applicant often requests the bank to refuse payment, but the bank may be concerned about assuming liability for improper refusal of payment. Whether the bank can refuse payment and under what circumstances it can do so directly affect the interests of all parties and the fulfillment of the guarantee's function.

II. Key points of contention

First, the independence of the independent guarantee and its limitations on refusal to pay. Second, the review standards for the apparent conformity of documents. Third, the determination of the invalidation of the guarantee and the exhaustion of the amount. Fourth, the application of the fraud exception. Fifth, the effectiveness of the court's order to stop payment.

III. Professional analysis by Henglue Lawyers

Henglue Lawyers explained this from both the rule and practical perspectives. Firstly, the restriction of independence: Once an independent guarantee is issued, the issuer's payment obligation is independent of the underlying transaction. As long as the beneficiary's claim meets the requirements of the guarantee, the bank shall make the payment and cannot refuse to pay on the grounds that the underlying contract has not been performed or that the applicant claims that the other party has breached the contract. Secondly, document review: The bank's review is limited to whether the documents comply with the surface requirements of the guarantee, that is, whether the types, contents, deadlines, and amounts of the submitted documents meet the requirements of the guarantee; the review is based on the surface, not on the actual performance of the underlying transaction. Thirdly, invalidation and exhaustion: The guarantee usually stipulates the validity period and the maximum amount. If the claim is made beyond the validity period or the cumulative claim exceeds the guarantee amount, the bank may refuse to pay that part. Fourthly, fraud exception: If the beneficiary knows that there is no right to request payment but still makes a claim, it constitutes a fraudulent claim, and the bank may refuse to pay on this basis; however, the standard for identifying fraud is strict, and sufficient evidence is required. A simple dispute over the underlying transaction is not enough to determine fraud. Fifthly, stop-payment ruling: If the court determines that there is fraud and issues a stop-payment ruling, the issuer shall not make the payment; the stop-payment ruling is binding on the bank, but if the applicant suffers losses due to an erroneous stop-payment, the applicant shall bear the liability for compensation. When the Beijing District Court adjudicates disputes over independent guarantees, it respects the independence of the guarantee and also applies the fraud exception with caution.

IV. Practical suggestions and legal basis

Action suggestions: First, banks should establish a standardized document review process and strictly check according to the terms of the guarantee letter; Second, if the applicant discovers that the beneficiary is fraudulently demanding payment, they should promptly apply for a stop payment and notify the bank; Third, the beneficiary should ensure that the submitted documents are consistent with the terms of the guarantee letter to avoid being rejected due to non-compliance; Fourth, all parties should pay attention to the validity period and amount of the guarantee letter, and renew or adjust it in time. For matters involving finance and cross-border transactions, you can refer to the relevant provisions.\nFinancial capital and cross-border transactions involving foreign entities.For contract disputes, you can refer to the following document for guidance.Business and contract disputes in enterprisesLegal basis: Articles 3, 6, 7, 12, and 14 of the "Regulations of the Supreme People's Court on Several Issues Concerning the Trial of Disputes over Independent Guarantee Letters" (amended and implemented on January 1, 2021). The specific application shall be subject to the currently effective laws, regulations, and judicial rulings.

5. Henglu Law Firm's Reminder

Firstly, the payment of a demand guarantee is independent of the underlying transaction. Secondly, the bank cannot refuse to pay on the grounds of a dispute over the underlying transaction. Thirdly, the bank can refuse to pay if the documents are non-conforming, overdue, or the amount has been exhausted. Fourthly, the fraud exception requires sufficient evidence, and the stop-payment ruling is binding on the bank. For cases involving independent guarantees and cross-border transactions, the parties may seek resolution through legal means.\nFinancial capital and cross-border transactions involving foreign entities.The service provides a comprehensive solution, which can be combined with disputes over basic contracts.Business and contract disputes in enterprisesFor plateaus, those involving the recovery of funds can be referred to for reference.Creditor's rights and debts, and enforcementFor any questions regarding difficult situations, you can seek advice from the columnSpecial servicesTeam.

VI. Frequently Asked Questions

Q1: For a demand guarantee, does the bank have to make the payment?

If the documents are in conformity, the payment shall be made. If the documents submitted by the beneficiary are in apparent conformity with the terms of the guarantee letter, the bank shall make the payment. The obligation to pay is independent of the underlying transaction, and the bank cannot refuse to pay on the grounds of disputes over the underlying contract or the other party's breach of contract.

Q2: Under what circumstances can a bank refuse to make a payment?

The main reasons include: documents not conforming to the terms of the letter of guarantee, the letter of guarantee expiring or the amount being exhausted, the beneficiary making fraudulent claims, and the court ordering a suspension of payment. In addition, arbitrary refusal to pay may constitute a breach of contract, for which the bank will bear responsibility.

Q3: If the basic contract has not been fulfilled, can I refuse to make the payment?

No. The core of an independent guarantee is that the payment is independent of the underlying transaction. The bank only checks whether the documents comply with the requirements on the surface, and does not check whether the underlying transaction has actually been performed. Disputes over the underlying transaction should be resolved separately between the applicant and the beneficiary.

Q4: What circumstances constitute a fraud exception?

The beneficiary, knowing that he/she does not have the right to request payment, still abuses his/her rights to demand payment, such as demanding payment even though he/she knows that the underlying debt has been performed, or colluding with a third party. The standards for determining this are strict, and sufficient evidence is required. Merely having a dispute over the underlying transaction usually does not constitute fraud.

Q5: Can the bank still make payments after the court orders a stop payment?

No. If the court finds that it constitutes fraud and orders a suspension of payment, the issuer shall not make the payment. The suspension order is binding on the bank; if the suspension order causes losses to the beneficiary due to an error, the applicant shall bear the corresponding compensation liability.

The above Q&A is mainly based on the judicial practice in Beijing. There may be differences in the adjudication opinions in different regions. It is recommended to consult a professional lawyer based on the specific circumstances of the case.

If you are currently facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the relevant evidence, to avoid missing the statutory time limit. →Financial capital legal services·Beijing Henglue Law Firm

Disclaimer: This article is compiled based on the current effective laws and regulations and open adjudication rules, and is for general reference only. It does not constitute a formal legal opinion on specific cases. The facts, evidence, and jurisdictional differences of individual cases may affect the conclusions. If you encounter disputes, please consult a practicing lawyer in time.