Marc Jackson reviews the problematic issues of enforcing guarantees provided by Chinese guarantors in China:
Pursuant to Chinese law, it is illegal for a Chinese legal entity to provide a guarantee to a foreign legal entity unless permission has been obtained from the State Administration for Foreign Exchange (SAFE). Accordingly, unless such a guarantee is SAFE registered, it cannot be enforced in China.
Whilst refund guarantees relating to shipbuilding contract avoid the need to obtain SAFE approval (on the basis that the issuing bank simply needs to report such guarantees to SAFE for risk management reasons), the same is not true of charter party guarantees which for all practical purposes have fallen outside the scope of SAFE approval.
There have been numerous instances, particularly following the financial crash of 2008, in which Owners have been unable to enforce arbitration awards against Chinese entities on the basis that the guarantees they provided were not SAFE approved, and thus illegal under Chinese law.
Relaxation of Position
However, new regulations pertaining to the provision of cross-border security came into force on the 1st 2014 which significantly relaxed the position. These new regulations are wide ranging, and cover
a myriad of security situations.
From the shipping perspective, the most relevant situations arise when:
What does this mean in practical terms?
Security arrangements, such as a guarantee or standby letter of credit, are no longer subject to SAFE approval or administrative requirements.
For “Outbound” or “offshore” security, the previous system of quota management and pre-approval has been replaced. Prior approval is no longer required and registration takes place following execution.
This article was first published in the September 2014 edition of Hellas Highlights. Hellas Highlights is a periodical newsletter from the Thomas Miller Hellas team.