This paper discusses on grid folding in the Laplace system of equations of grid generation. Although it is widely believed that a grid-generation method using the Laplace system does not result grid folding due to maximum principle, we have often encountered the grid folding especially at a trailing edged of an airfoil of O-grid topology. This paper gives an explanation of the phenomenon by considering that the elliptic grid-generation equations include partly a characteristic of a steady advection-diffusion equation. A method for avoiding grid folding in the Laplace system is presented using upwind-type finite difference discretization.