[Direct answer]In the Beijing area, the two have similar functions, both of which are used by banks to provide credit support for applicants' debts, but they differ in legal nature and applicable rules. Bank guarantees can be divided into subordinate guarantees and independent guarantees: subordinate guarantees are closely related to the underlying contract and apply the provisions of the Civil Code of the People's Republic of China on guarantee contracts, and the guarantor enjoys corresponding defenses; independent guarantees have the characteristics of on-demand payment and are independent of the underlying transaction. China has clarified its rules through the "Provisions of the Supreme People's Court on Several Issues Concerning the Trial of Disputes over Independent Guarantees" (announced on November 18, 2016 and implemented on December 1, 2016). Standby letters of credit are similar to independent guarantees in function and are commonly used in cross-border transactions, usually applying international practices such as the Uniform Rules for Demand Guarantees or the International Standby Practices. Therefore, the most fundamental difference between the two is that domestic guarantees are more subject to domestic law, while standby letters of credit and independent guarantees place greater emphasis on documentation and independence.

I. Problem Background and Typical Scenarios

In cross-border projects, trade, and financing, enterprises are often required to provide guarantees. Bank guarantees and standby letters of credit therefore appear frequently. Typical scenarios include: international project bidding and performance requiring the issuance of guarantees; buyers in cross-border trade requiring payment guarantees; overseas owners only accepting standby letters of credit; financing transactions requiring the issuance of on-demand guarantees; applicants worried about being maliciously sued for payment and hoping to set up defenses or restrictions; banks citing international rules and clauses in guarantees, and parties having doubts about their effectiveness. The key issues in practice are: whether the guarantee is independent of the underlying transaction; under what conditions the bank will make payments; and what remedies the applicant has after being sued for payment. All of these will directly affect the enterprise's capital safety and risk exposure.

II. Key points of contention

First, whether the guarantee is a subordinated guarantee or an independent guarantee, the legal consequences of the two are significantly different. Second, how to distinguish the functions and application rules of standby letters of credit from independent guarantees. Third, whether the bank's payment conditions are based on the conformity of documents or require review of the underlying transaction. Fourth, whether the party being claimed against can raise a defense of breach of the underlying transaction. Fifth, the identification standards and remedial paths for fraudulent claims. Sixth, how to stipulate the applicable law and dispute resolution methods, and how to determine jurisdiction in cross-border situations.

III. Professional analysis by Henglue Law Firm

When handling disputes over letters of guarantee and standby letters of credit, it is necessary to address them from three aspects: nature identification, payment conditions, and remedy pathways. First, nature identification. Subordinate letters of guarantee are related to the underlying contract and apply the provisions of the Civil Code of the People's Republic of China on guarantees, allowing the guarantor to assert corresponding defenses; independent letters of guarantee are independent of the underlying transaction and, according to the "Provisions of the Supreme People's Court on Several Issues Concerning the Trial of Disputes over Independent Letters of Guarantee" (issued on November 18, 2016 and implemented on December 1, 2016), the issuer shall independently assume the payment obligation upon receipt of documents meeting the requirements of the letter of guarantee, unaffected by disputes over the underlying transaction. Second, rule application. Standby letters of credit are more common in cross-border transactions and are typically subject to international rules such as the Uniform Rules for Demand Guarantees or the International Standby Practices, with a high degree of document standardization and a review standard based on the apparent conformity of the documents. If the parties intend to issue independent letters of guarantee, they should explicitly state the meaning of demand payment and independence from the underlying transaction in the text, otherwise they may be deemed to provide general guarantees and subject to corresponding rules. Third, remedy pathways. The independence of independent letters of guarantee and standby letters of credit does not mean there are no checks and balances. If there is fraudulent demand payment by the beneficiary, a stop-payment application can be filed in accordance with the law, but high evidentiary standards must be met. Applicants can also control risks through effective conditions, document requirements, and decreasing amount mechanisms during the design stage to prevent misuse of guarantees. In cross-border transactions, attention should also be paid to the applicable laws, the issuer's creditworthiness, and the arrangement of jurisdiction clauses to reduce enforcement difficulties. For financial and cross-border disputes, reference can be made to relevant provisions.Financial capital and cross-border transactions involving foreign entitiesService.

IV. Practical suggestions and legal basis

Action list: Firstly, clarify whether the required guarantee is an independent guarantee or a subordinate guarantee, and clearly state it in the text; Secondly, verify the issuing bank's creditworthiness and the applicable rules of the guarantee, and pay attention to the provisions of international practice in cross-border situations; Thirdly, reasonably design the effective conditions, document requirements, and decreasing amount mechanism; Fourthly, assess the risks of the underlying transaction to avoid the guarantee being claimed due to commercial disputes; Fifthly, pay attention to the remedial path for fraudulent claims and the proof standards for stop-payment applications; Sixthly, agree on the applicable law and dispute resolution methods to reduce the difficulty of cross-border enforcement. For financial and cross-border disputes, you can refer to the relevant provisions.\nFinancial capital and cross-border transactions involving foreign entitiesFor disputes involving corporate contracts, you can refer to the following for reference.Business and contract disputes in enterprisesFor those interested in corporate law and compliance, you may wish to refer to the following resources:Intellectual property protection and corporate lawLegal basis: Articles 681, 682, and 686 of the Civil Code of the People's Republic of China (adopted on May 28, 2020 and implemented on January 1, 2021), and the relevant provisions of the "Interpretation of the Supreme People's Court on Several Issues Concerning the Trial of Independent Guarantee Letter Disputes" (promulgated on November 18, 2016 and implemented on December 1, 2016). The specific application shall be subject to the currently effective laws, regulations, and judicial rulings.

5. Henglu Law Firm's Reminder

Firstly, whether the guarantee is independent or not is a critical risk factor, and its nature must be clarified before issuance. Secondly, independent guarantees and standby letters of credit require payment based on the conformity of documents, and disputes over the underlying transactions generally do not constitute defenses. Thirdly, the text should specify the conditions for effectiveness and document requirements to control the risk of claims. Fourthly, cross-border transactions should pay attention to applicable rules, the issuing bank's creditworthiness, and jurisdictional arrangements. Fifthly, fraudulent claims can be legally remedied, but the standard of proof is relatively high. For financial and cross-border disputes, legal remedies can be sought through appropriate channels.\nFinancial capital and cross-border transactions involving foreign entitiesYou will receive a comprehensive solution for the service, and if there are any contract disputes, we can address them together.Business and contract disputes in enterprisesHandle it.

VI. Frequently Asked Questions

Q1: What is the main difference between a bank guarantee and a standby letter of credit?

The main difference lies in the legal nature and applicable rules. Bank guarantees can be divided into subordinate guarantees and independent guarantees. Subordinate guarantees apply the provisions on guarantees in domestic law; standby letters of credit are mostly used in cross-border transactions and usually apply international practices, emphasizing documentation and independence, and their function is closer to that of independent guarantees.

Q2: What is an independent guarantee, and how is it different from a general guarantee?

An independent guarantee has the characteristic of being payable upon demand, and it is independent of the underlying transaction. The issuer should make the payment after receiving the documents that meet the requirements of the guarantee, and the payment will not be affected by the disputes of the underlying transaction. A general guarantee, on the other hand, is subordinate to the main contract, and the guarantor enjoys corresponding rights of defense. There are obvious differences between the two in terms of payment conditions.

Q3: Does the bank review the underlying contract when making payments?

For independent guarantees and standby letters of credit, usually only the documents are reviewed to see if they meet the requirements of the guarantee, without substantively checking whether there is an actual breach of contract in the underlying transaction; for this reason, applicants should control the risk of being sued for payment by designing the requirements of the documents and the conditions for their effectiveness.

Q4: What should I do if someone maliciously demands a redemption?

If there is fraudulent claim, you can apply for a stop-payment order in accordance with the law, but you need to meet high standards of proof. At the same time, you can assert your rights and pursue corresponding responsibilities based on the underlying transaction. Therefore, it is recommended to preserve evidence and stipulate clear claim conditions and dispute resolution methods at the design stage.

Q5: Should I choose a letter of guarantee or a standby letter of credit for my domestic business?

For domestic business, letters of guarantee are typically used more frequently, and clients can choose between accessory letters of guarantee or independent letters of guarantee based on the needs of the transaction. In cross-border business, foreign counterparties may prefer to accept standby letters of credit. When making a choice, clients should consider the requirements of the counterparty, applicable regulations, the creditworthiness of the issuing bank, and their own risk tolerance, and make a comprehensive judgment based on these factors.

The above content is based on the compilation of judicial practices in the Beijing area. The facts of individual cases and the jurisdiction of the court may affect the conclusions. Welcome to consult Henglu Law Firm about specific situations.

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

Disclaimer: This article is compiled based on the current laws and regulations and public 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.