[Direct answer]In the Beijing area, the determination of fraudulent payment in a guarantee letter applies the fraud exception rules for independent guarantees. According to the "Provisions of the Supreme People's Court on Several Issues Concerning the Trial of Disputes over Independent Guarantees", if the beneficiary knows that there is no real transaction background, a fictitious underlying transaction relationship, or an abuse of the right to request payment, it constitutes guarantee fraud, and the issuer may claim to stop payment. The key to the determination is whether the beneficiary is malicious and whether the request for payment lacks a reasonable basis. It must be subject to judicial review, and usually, the provision of a guarantee is required to adjudicate the suspension of payment. Foreign-related independent guarantees may also involve the application of the United Nations Convention on Independent Guarantees and Standby Letters of Credit. It is recommended that the issuer apply for a stop payment in a timely manner and provide evidence of the beneficiary's fraud. For more details, please refer to the following link:Financial capital and cross-border legal services involving foreign affairs.

1. Problem background and typical scenarios

Guarantee fraudulent payments often occur in international trade, engineering contracting, and cross-border financing scenarios. Typical cases include: the beneficiary forging documents or fabricating underlying transactions to claim against the issuing bank with an independent guarantee; the buyer and seller having performed their obligations normally, but the beneficiary still maliciously exercising the right to payment; disputes over the underlying contract, where the beneficiary uses the guarantee to "bypass the substantive dispute" and quickly obtain funds; and in the case of transferable guarantees, the instructing party and the beneficiary collude to fabricate claims. Independent guarantees follow the independence principle of "payment upon conformity of documents", which is originally a credit enhancement tool, but is often abused. Identifying fraudulent exceptions is key to protecting the rights and interests of issuers and applicants. Related cross-border disputes can be resolved through legal means.Business and contract dispute resolution services for enterprisesCoordinate and plan everything in an organized and efficient manner to ensure that all tasks are completed on schedule and within budget.

II. Key points of contention

There are three key points of contention. Firstly, the constitutive elements of fraud: whether the degree of "the beneficiary's malice and the lack of a reasonable basis for the payment request" has been reached. Minor breaches of contract or disputes over the basis of the payment request generally do not constitute fraud. Secondly, the boundaries of the principle of independence: the court must balance the negotiability of the guarantee with the exception of fraud, and only intervene in the payment when there is clear evidence of fraud. Thirdly, procedures and guarantees: the applicant needs to provide evidence and submit guarantees for the stop-payment order, and the review standards are strict with time limits being pressing. For cases involving multiple transfers and foreign-related factors, follow-up procedures can be initiated.Creditor-debtor relations and enforcement case servicesPromote cross-border recovery of debts.

III. Professional analysis by Hengluo Law Firm

Based on practical observations of handling independent guarantees and cross-border guarantee disputes, the greatest challenge in identifying guarantee fraud is "how to break through the independence principle". According to the "Interpretation of the Supreme People's Court on Several Issues Concerning the Trial of Disputes over Independent Guarantees" (implemented on December 1, 2016 and amended on December 23, 2020), although independent guarantees are independent of the underlying transactions, if the beneficiary engages in fraud or abuses its rights, the court may order the suspension of payment based on the applicant's application for suspension of payment. In practice, Hengluo Lawyers usually advise applicants to first collect evidence of the performance of the underlying contract, communication records of the beneficiary's malicious claims, and defects in the documents, and then apply to the court for suspension of payment and provide sufficient guarantees within the statutory time limit. At the same time, they evaluate the applicable laws and arbitration clauses of foreign guarantees to avoid procedural deadlocks. For claims arising solely from commercial disputes over the underlying contract, the parties should resolve the underlying transaction rather than easily allege fraud, otherwise they may face rejection due to insufficient evidence and bear legal responsibility. For cases involving the application of conventions, reference can be made to relevant provisions.Intellectual property protection and corporate legal servicesAnalyze the cross-border legal framework.

IV. Practical suggestions and legal basis

The core basis is the provisions of the "Interpretation of the Supreme People's Court on Several Issues Concerning the Trial of Disputes over Independent Guarantees" (implemented on December 1, 2016 and amended on December 23, 2020) regarding the independence of independent guarantees, fraud exceptions, and stop-payment procedures; the provisions of the "Law of the People's Republic of China on the Application of Law to Foreign-Related Civil Relations" regarding the applicable law for foreign-related guarantees; and the application rules of the "United Nations Convention on Independent Guarantees and Standby Letters of Credit" in contracting parties. Practical suggestions: Carefully evaluate the beneficiary's creditworthiness and the authenticity of the underlying transaction when signing the contract; fully retain delivery, acceptance, and communication records during performance; immediately apply for stop-payment and provide guarantees when detecting malicious claims; distinguish between "commercial disputes" and "fraud" and respond accordingly; and pre-agree on the applicable law and dispute resolution for foreign-related guarantees to reduce the cost of cross-border litigation.

5. Henglu Law Firm's Advice

The threshold for identifying fraud in letters of guarantee is high and the time limit is tight. It is crucial not to mistake ordinary commercial disputes for fraud. The issuer and the applicant should pay attention to two points: first, evidence. They should quickly fix the materials showing the beneficiary's malice, fictitious transactions, or document defects; second, procedures. They should apply for a stop-payment order within the statutory time limit and provide sufficient guarantees, otherwise, under the principle of independence, the bank will make normal payments. For cases involving only disputes over the performance of the underlying contract, they should resort to contractual resolution to avoid having their fraud claims rejected due to insufficient evidence and having to bear the related costs. For cross-border letters of guarantee, particular attention should be paid to the applicable laws and conventions. If necessary, they can seek professional assistance for evaluation.Special services and other case servicesDevelop a stop-payment and defense plan.

VI. Frequently Asked Questions

Q1: If the other party files a claim based on the guarantee letter, can I refuse to pay on the grounds of fraud, and what are the chances of success?

Whether a payment can be refused on grounds of fraud does not depend on subjective judgment, but on whether the evidence meets the standards for fraud exceptions. According to the provisions of independent guarantees, only when the beneficiary knows there is no real transaction, fictitious underlying transaction, or abuse of the right to request payment, can it constitute fraud and lead to a decision to stop payment. If it is just a commercial dispute or quality dispute over the underlying contract, it generally does not constitute fraud, and the bank is still required to make payment in accordance with the conformity of documents. Therefore, the chances of success depend on whether you can submit solid evidence of the beneficiary's malice and apply for a stop-payment order and guarantee within the time limit. Never treat ordinary disputes as fraud, otherwise, insufficient evidence may lead to a rejection and you may have to bear the costs.

Q2: To initiate a stop-payment request for a letter of guarantee fraud, what evidence do I need to prepare?

The core evidence includes: the text of the independent guarantee and the underlying transaction contract (to prove the relationship between the guarantee and the transaction background), records of performance and delivery acceptance (to prove that the obligations have been properly fulfilled and there are no grounds for payment), communication records and documents of the beneficiary's malicious claims (to prove fabrication or abuse), clues to document defects or forgery, and the guarantee materials required for applying for a stop-payment order. The organization of the evidence focuses on three points: "the underlying transaction was properly performed—the beneficiary's request lacks reasonable basis—there is malicious intent". For foreign-related cases, it is also necessary to prepare applicable laws and arbitration clauses. The more evidence that can refute the "documentary compliance" theory, the higher the success rate of the stop-payment order will be; it is recommended to fix the evidence as soon as possible and consult a professional lawyer.

Q3: How much does it cost to apply for a stop-payment guarantee letter, including the guarantee fee?

The application for a stop-payment order involves two cost components: first, the case acceptance fee and possible preservation fees, which are paid according to the request amount or the amount of the preserved property under relevant regulations; second, the stop-payment guarantee, where the court typically requires the applicant to provide a full guarantee equivalent to the amount of the guarantee (cash, guarantee, or property mortgage) to compensate for the losses caused to the respondent by an erroneous stop-payment order. Legal fees are related to the complexity of the case and the degree of foreign involvement, and are usually charged on a per-case basis or as a percentage of the subject matter value. The specific fees are subject to the contract of engagement and there is no unified standard. The guarantee is a mandatory prerequisite for a stop-payment order, and the applicant must assess their guarantee capacity and the associated costs before submitting the application.

Q4: How long does the stop-payment procedure for guarantee fraud typically take, and can it successfully block the payment?

The payment suspension procedure is urgent: after the court accepts the application for payment suspension, it shall make a ruling within 48 hours, and in urgent cases, it shall review it immediately; if the ruling suspends the payment, the effect usually lasts until the judgment takes effect. However, payment suspension is only a temporary measure. Whether the fraud is ultimately determined will depend on the substantive trial, which lasts six months in the first-instance ordinary procedure and three months in the summary procedure. Whether the payment can really be stopped depends on whether the evidence of fraud is sufficient and whether the guarantee is sufficient. If the substantive trial determines that it does not constitute fraud, the payment suspension will be lifted and the applicant will bear the consequences. Therefore, both evidence and guarantee are indispensable, and it is recommended to prepare the substantive defense simultaneously.

Q5: If I discover that a letter of guarantee has been subject to a malicious claim, what should I do first?

It is recommended to proceed in four steps: First, immediately verify the performance of the basic contract to confirm that it has been fulfilled and there are no genuine payment reasons, and fix the delivery, acceptance, and communication records; Second, apply to the court for a stop-payment order within the statutory time limit and prepare sufficient guarantee materials to avoid the bank disbursing funds according to the principle of independence; Third, sort out evidence of the beneficiary's malice or document defects and draft a stop-payment application and substantive defense opinions; Fourth, simultaneously review the applicable laws, arbitration clauses, and conventions of the foreign guarantee, and initiate cross-border coordination if necessary. It is essential not to delay throughout the process, as the time limit for stop-payment is extremely short. It is recommended to engage a lawyer as soon as possible to assist in planning both procedural and substantive strategies.

The above answer is based on the judicial practice in Beijing. The judicial interpretation in other provinces and cities may vary. For specific cases, please refer to the local rules and evidence situation.

If you are currently facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the necessary evidence, to avoid missing the statutory time limits.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.