SHIAC INTERNATIONAL
CASE SERIES
Episode 2
Application of Law in
Cross-Border Bond Financing Guarantee Cases
01
In recent years, more and more Chinese companies choose to issue overseas bonds as a way of financing, among which the Convertible Bonds is one of the common mechanisms in such cross-border financing transactions to guarantee the interest of the investors. When applying the extraterritorial laws, there could be challenges in the explanation of the contracts and the determination of the rights and obligations of the parties. This episode of SHIAC International Case Series is going to introduce a recent case dealt by SHIAC which involves cross-border guarantee issues, and discuss on the typical questions in this case.
02
In June 2015, Hong Kong company A intended to finance its affiliated Company B by issuing Euro-Convertible Bonds. The investor, Hong Kong company C entered into a Euro-Convertible Bonds subscription agreement with A and B, under which A and B agreed to issue Euro-Convertible Bonds subscribed by C on a specified date for a total amount of $5 million. After the execution of the Subscription Agreement, C paid A the subscription amount of $5 million.
In September 2015, A and B issued a Letter of Commitment to the subscribers of the bonds, including C, making a commitment to the listing and the indemnity clauses.
In March 2017, A, B, C, D (another Chinese investment company) and E, a natural person as guarantor, signed the Supplemental Agreement III to make additional agreements on listing and going private, and that E will be jointly and severally liable for the redemption principal and interest of the Convertible Bonds.
In May 2018, A, B, C and E signed the Repayment Agreement jointly, agreeing that E would redeem the Convertible Bonds from C on behalf of A, at a redemption price of $10 million and a redemption period of January of the following year. However, the agreement has not been fulfilled.
In January 2019, A, B, C, D and E jointly concluded the Repayment Plan, agreeing that E would redeem the Convertible Bonds from C on behalf of A at a redemption price of $10 million, and that A, B and D assume joint and several guarantee responsibilities. The redemption period begins from the date of the contracting of the Repayment Plan. At the same time, E undertakes to return $3.33 million and $6.67 million by March and May 2019 respectively, and to pay the accrued interest. The arbitration clause provides for arbitration by SHIAC.
As the redemption demand was not fulfilled, Investor C submitted the dispute to SHIAC for arbitration, requesting that the First Respondent to pay the redemption funds and the accrued interest and that the Second and Third Respondents be held jointly and severally liable for the First Respondent's debts.
03
The Respondents submit that: first, the dispute in this case should be handled with reference to the application of the provisions of the Third Part on “Contracts” of the Civil Code or the most similar provisions relevant to contracts under other laws. Second, the redemption claim of $10 million agreed in the Repayment Plan is obviously too high and unfair. Third, the guaranty period has expired, so the Claimant's claims have exceeded the arbitration statute of limitations.
The Claimant argues in the rebuttal that: first, Hong Kong law should be applied. Second, the redemption price agreed in the Repayment Agreement and the Repayment Plan is not prohibited by Hong Kong law. Third, the Repayment Agreement and the Repayment Plan did not specify a fixed guarantee period, in accordance with the Hong Kong case law, the Second Respondent and the Third Respondent were not exempted from liability due to the expiration of the guarantee period.
04
A. On the application of law, the Arbitration Tribunal considers that the disputants are established in Hong Kong, so this case is a foreign-related case under the Law on the Application of Foreign-related Civil Legal Relations. The Repayment Agreement and the Repayment Plan state that these two agreements have the same legal effect as the previous agreements signed by the relevant parties, and in case of any inconsistency, these two agreements shall prevail. From the meaning of the above agreements and the true intent of the parties to the contract, the parties did not substitute the later signed Repayment Agreement and Repayment Plan for the earlier signed agreements listed in the "Whereas" section, therefore, in the case that both the earlier and later signed agreements are valid, the "inconsistency" stated in the later signed agreement only refers to the inconsistency of the same kind of content, and the content not agreed in the later signed agreement shall be subject to the earlier signed agreement. The previous agreements signed by the relevant parties all agreed that Hong Kong law would be applied and that the relevant disputes would be submitted to the Hong Kong International Arbitration Centre, while the Repayment Agreement and Repayment Plan at issue in this case only involved the change of the dispute resolution institution to SHIAC, and did not change the applicable law. Therefore, the Arbitration Tribunal held that the disputes arising from the Repayment Agreement and the Repayment Plan should be governed by the law of Hong Kong.
B. As for the guarantee liability, the Tribunal noted that the agreements involved in this case all contained agreements relating to guarantees. From the content of each of the aforementioned agreements, it is clear that the agreement signed later is not conditional on the nullification or substitution of the previous agreement and the agreement signed later prevails only in terms of the content of the same nature. According to the rules established in Holme v. Brunskill, the Tribunal held that the Second Respondent and the Third Respondent should fulfill their joint and several guarantee responsibilities to the First Respondent in accordance with the agreement of the Repayment Plan. Meanwhile, according to the rules established in National House-Building Council v. Fraser, the Second and Third Respondents were not exempted from liability due to the expiration of the guarantee period.
C. On the dispute of the redemption price, the redemption price and liquidated damages agreed in the Repayment Agreement and the redemption price, interest and payment method and liquidated damages for late payment agreed in the Repayment Plan are the true intent of the parties to the contract. Therefore, the First Respondent shall pay the redemption price and interest accordingly.
Ultimately, the Tribunal awarded all of the Claimant's claims.
05
The legal issues of cross-border guarantee presented in this case involve the application of extraterritorial law (the Hong Kong law) and the interpretation of multiple contracts, etc. A particularly noteworthy issue is the guarantor's liability under the different legal systems in the absence of an agreement between the parties on the duration of the guarantee. According to the relevant case law of Hong Kong, if there is no agreement on a fixed guarantee period in the contract, the guarantee liability assumed by the guarantor is not exempted due to the expiration of the guarantee period. However, according to Article 692 of the Civil Code and Article 34.2 of the Judicial Interpretation on the application of the relevant guarantee system of the Civil Code of the People’s Republic of China, if the creditor and the guarantor have not agreed on a guarantee period, the guarantee period shall be six months from the date of expiration of the principal debt; if the creditor does not request the guarantor to assume the guarantee liability within the said period, the guarantee liability shall be extinguished (Article 26 of the former Guarantee Law of the People’s Republic of China also provides for a similar provision that the guarantee liability shall be extinguished if the guarantee is not claimed after the expiration date). Therefore, when drafting a cross-border guarantee contract, the parties should pay due attention to the agreement on the applicable law and the differences in the legal regime of guarantees under different legal systems.
In addition, the issue of the interpretation of the multiple contracts presented in this case also deserves attention. Generally speaking, one of the interpretative effects intended by the decision-makers after applying the tools for contract interpretation such as contextual interpretation, purposive interpretation, customary interpretation and good faith principle is that "the final agreement excludes the earlier signed agreement". In the Repayment Plan, the parties agreed that "if there is any inconsistency between this agreement and the previous agreement, this agreement shall prevail", which obviously gave the Repayment Plan a final and definite meaning by agreement. However, the interpretative effect of "exclusion" is not an absolute exclusion, otherwise it will make the parties' performance under the earlier signed contract baseless. Therefore, when the agreement specifies that "in case of inconsistency, this agreement shall prevail", the decision-makers should still pay attention to the content of the agreement of the earlier signed contract. If the relevant agreement of the former contract is not covered in the latter contract or does not conflict with the agreement of the latter contract, the decision-makers should continue to recognize the binding effect of the relevant content in the former contract on the parties if the former contract is still valid. In this case, the parties did not agree on the application of law in the Repayment Agreement and the Repayment Plan, but agreed on the application of Hong Kong law in the previously concluded agreements. In the absence of any objection by the parties to the validity of the agreements signed before the Repayment Agreement and the Repayment Plan, the Arbitral Tribunal accepted that the agreement on the application of law in the earlier signed agreements should continue to be applied to the disputes arising from the later signed agreements This train of thought in arbitration is a reflection of the afore-mentioned decision-making approach on the interpretation of multiple contracts.
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CASE SERIES
Episode 2
Application of Law in
Cross-Border Bond Financing Guarantee Cases
01
Case Synopsis
In recent years, more and more Chinese companies choose to issue overseas bonds as a way of financing, among which the Convertible Bonds is one of the common mechanisms in such cross-border financing transactions to guarantee the interest of the investors. When applying the extraterritorial laws, there could be challenges in the explanation of the contracts and the determination of the rights and obligations of the parties. This episode of SHIAC International Case Series is going to introduce a recent case dealt by SHIAC which involves cross-border guarantee issues, and discuss on the typical questions in this case.
02
Basic Facts
In June 2015, Hong Kong company A intended to finance its affiliated Company B by issuing Euro-Convertible Bonds. The investor, Hong Kong company C entered into a Euro-Convertible Bonds subscription agreement with A and B, under which A and B agreed to issue Euro-Convertible Bonds subscribed by C on a specified date for a total amount of $5 million. After the execution of the Subscription Agreement, C paid A the subscription amount of $5 million.
In September 2015, A and B issued a Letter of Commitment to the subscribers of the bonds, including C, making a commitment to the listing and the indemnity clauses.
In March 2017, A, B, C, D (another Chinese investment company) and E, a natural person as guarantor, signed the Supplemental Agreement III to make additional agreements on listing and going private, and that E will be jointly and severally liable for the redemption principal and interest of the Convertible Bonds.
In May 2018, A, B, C and E signed the Repayment Agreement jointly, agreeing that E would redeem the Convertible Bonds from C on behalf of A, at a redemption price of $10 million and a redemption period of January of the following year. However, the agreement has not been fulfilled.
In January 2019, A, B, C, D and E jointly concluded the Repayment Plan, agreeing that E would redeem the Convertible Bonds from C on behalf of A at a redemption price of $10 million, and that A, B and D assume joint and several guarantee responsibilities. The redemption period begins from the date of the contracting of the Repayment Plan. At the same time, E undertakes to return $3.33 million and $6.67 million by March and May 2019 respectively, and to pay the accrued interest. The arbitration clause provides for arbitration by SHIAC.
As the redemption demand was not fulfilled, Investor C submitted the dispute to SHIAC for arbitration, requesting that the First Respondent to pay the redemption funds and the accrued interest and that the Second and Third Respondents be held jointly and severally liable for the First Respondent's debts.
03
Opinion of the Parties
The Respondents submit that: first, the dispute in this case should be handled with reference to the application of the provisions of the Third Part on “Contracts” of the Civil Code or the most similar provisions relevant to contracts under other laws. Second, the redemption claim of $10 million agreed in the Repayment Plan is obviously too high and unfair. Third, the guaranty period has expired, so the Claimant's claims have exceeded the arbitration statute of limitations.
The Claimant argues in the rebuttal that: first, Hong Kong law should be applied. Second, the redemption price agreed in the Repayment Agreement and the Repayment Plan is not prohibited by Hong Kong law. Third, the Repayment Agreement and the Repayment Plan did not specify a fixed guarantee period, in accordance with the Hong Kong case law, the Second Respondent and the Third Respondent were not exempted from liability due to the expiration of the guarantee period.
04
Opinion of the Tribunal
A. On the application of law, the Arbitration Tribunal considers that the disputants are established in Hong Kong, so this case is a foreign-related case under the Law on the Application of Foreign-related Civil Legal Relations. The Repayment Agreement and the Repayment Plan state that these two agreements have the same legal effect as the previous agreements signed by the relevant parties, and in case of any inconsistency, these two agreements shall prevail. From the meaning of the above agreements and the true intent of the parties to the contract, the parties did not substitute the later signed Repayment Agreement and Repayment Plan for the earlier signed agreements listed in the "Whereas" section, therefore, in the case that both the earlier and later signed agreements are valid, the "inconsistency" stated in the later signed agreement only refers to the inconsistency of the same kind of content, and the content not agreed in the later signed agreement shall be subject to the earlier signed agreement. The previous agreements signed by the relevant parties all agreed that Hong Kong law would be applied and that the relevant disputes would be submitted to the Hong Kong International Arbitration Centre, while the Repayment Agreement and Repayment Plan at issue in this case only involved the change of the dispute resolution institution to SHIAC, and did not change the applicable law. Therefore, the Arbitration Tribunal held that the disputes arising from the Repayment Agreement and the Repayment Plan should be governed by the law of Hong Kong.
B. As for the guarantee liability, the Tribunal noted that the agreements involved in this case all contained agreements relating to guarantees. From the content of each of the aforementioned agreements, it is clear that the agreement signed later is not conditional on the nullification or substitution of the previous agreement and the agreement signed later prevails only in terms of the content of the same nature. According to the rules established in Holme v. Brunskill, the Tribunal held that the Second Respondent and the Third Respondent should fulfill their joint and several guarantee responsibilities to the First Respondent in accordance with the agreement of the Repayment Plan. Meanwhile, according to the rules established in National House-Building Council v. Fraser, the Second and Third Respondents were not exempted from liability due to the expiration of the guarantee period.
C. On the dispute of the redemption price, the redemption price and liquidated damages agreed in the Repayment Agreement and the redemption price, interest and payment method and liquidated damages for late payment agreed in the Repayment Plan are the true intent of the parties to the contract. Therefore, the First Respondent shall pay the redemption price and interest accordingly.
Ultimately, the Tribunal awarded all of the Claimant's claims.
05
Brief Comments
The legal issues of cross-border guarantee presented in this case involve the application of extraterritorial law (the Hong Kong law) and the interpretation of multiple contracts, etc. A particularly noteworthy issue is the guarantor's liability under the different legal systems in the absence of an agreement between the parties on the duration of the guarantee. According to the relevant case law of Hong Kong, if there is no agreement on a fixed guarantee period in the contract, the guarantee liability assumed by the guarantor is not exempted due to the expiration of the guarantee period. However, according to Article 692 of the Civil Code and Article 34.2 of the Judicial Interpretation on the application of the relevant guarantee system of the Civil Code of the People’s Republic of China, if the creditor and the guarantor have not agreed on a guarantee period, the guarantee period shall be six months from the date of expiration of the principal debt; if the creditor does not request the guarantor to assume the guarantee liability within the said period, the guarantee liability shall be extinguished (Article 26 of the former Guarantee Law of the People’s Republic of China also provides for a similar provision that the guarantee liability shall be extinguished if the guarantee is not claimed after the expiration date). Therefore, when drafting a cross-border guarantee contract, the parties should pay due attention to the agreement on the applicable law and the differences in the legal regime of guarantees under different legal systems.
In addition, the issue of the interpretation of the multiple contracts presented in this case also deserves attention. Generally speaking, one of the interpretative effects intended by the decision-makers after applying the tools for contract interpretation such as contextual interpretation, purposive interpretation, customary interpretation and good faith principle is that "the final agreement excludes the earlier signed agreement". In the Repayment Plan, the parties agreed that "if there is any inconsistency between this agreement and the previous agreement, this agreement shall prevail", which obviously gave the Repayment Plan a final and definite meaning by agreement. However, the interpretative effect of "exclusion" is not an absolute exclusion, otherwise it will make the parties' performance under the earlier signed contract baseless. Therefore, when the agreement specifies that "in case of inconsistency, this agreement shall prevail", the decision-makers should still pay attention to the content of the agreement of the earlier signed contract. If the relevant agreement of the former contract is not covered in the latter contract or does not conflict with the agreement of the latter contract, the decision-makers should continue to recognize the binding effect of the relevant content in the former contract on the parties if the former contract is still valid. In this case, the parties did not agree on the application of law in the Repayment Agreement and the Repayment Plan, but agreed on the application of Hong Kong law in the previously concluded agreements. In the absence of any objection by the parties to the validity of the agreements signed before the Repayment Agreement and the Repayment Plan, the Arbitral Tribunal accepted that the agreement on the application of law in the earlier signed agreements should continue to be applied to the disputes arising from the later signed agreements This train of thought in arbitration is a reflection of the afore-mentioned decision-making approach on the interpretation of multiple contracts.
（Editor: Research Department of SHIAC）
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示范仲裁条款
Model Arbitration Clause
凡因本合同引起的或与本合同有关的任何争议，均应提交上海国际经济贸易仲裁委员会/上海国际仲裁中心进行仲裁。
Any dispute arising from or in connection with this Contract shall be submitted to Shanghai International Economic and Trade Arbitration Commission / Shanghai International Arbitration Center for arbitration.