Security System in China II

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I. Concept of suretyship

According to Article 681.1 of the Civil Code,1 suretyship refers to a promise made by the surety “for the purpose of ensuring the enforcement of an underlying claim” that he would “perform the obligation or bear the liability when the debtor fails to perform the obligation when it is due or a circumstance as agreed by the parties occurs”.

II. Forms of suretyship

There are two forms of suretyship under the PRC law. Article 686.1 of the Civil Code provides that “Suretyship consists of general suretyship and suretyship with joint and several liability.”

III. Presumption rules on form of suretyship

The suretyship form of is an arbitrary matter that can be agreed mutually by parties involved in the suretyship contract. If there is no agreement on suretyship form or the agreement is unclear, the presumption rules shall apply.

Article 19 of the Security Law provided: “where there is no agreement on the form of the suretyship or the relevant agreement is unclear, the surety shall bear the liability as in the form of a suretyship with joint and several liability.” This clause clarified the presumed suretyship form to be joint and several liability suretyship. The reason of such arrangement was to both facilitate the realization of the creditor’s right and motivate the surety to make a specific agreement on the form of suretyship in the contract, otherwise the surety would bear the adverse consequence thereof.2

However, Article 686.2 of the Civil Code makes subverted modification on the presumption rules as set in the Security Law by providing that “Where there is no agreement in the suretyship contract on the form of the suretyship or the relevant agreement is unclear, the surety shall bear the liability as in the form of a general suretyship”. According to which, the presumed form of suretyship is now general suretyship instead of suretyship with joint and several liability. The rationale behind this change is that suretyship is gratuitous and unilateral and the surety has bear the obligation with no right under a suretyship. It would be obviously unfair to further aggravate surety’s obligation by presuming the suretyship as joint and several liability when no agreement reached on the suretyship form or the relevant agreement is unclear, especially when the debtor himself is capable of performing the obligation or bearing the liability.

This clause also reflects that Civil Code has changed the legislative inclination and values more on the balance between the creditor and the surety comparing with the Security Law’s preference for protection on creditors. Therefore, in the case where there is no convincing interpretation on the suretyship contract, a presumption in the direction of less obligation on surety’s side shall be made.3

This inclination can also be seen on recognition rule between suretyship and joining of the obligation.

IV. TimefEffect of the new presumption rules set in the Civil Code

For those contracts executed after the effectiveness of the Civil Code, it is no doubt that the presumption rules to determine the suretyship form as set out in the Civil Code shall apply. The problem is which presumption rule shall apply for contracts signed and executed before the Civil Code.

The principle of non-retroactivity of law is a general principle, according to the Article 2 of Several Provisions of the Supreme People's Court on Time Effect for Application of the Civil Code of the People's Republic of China (the “Provisions on Time Effect”), “for civil dispute cases arising from legal facts before the effectiveness of the Civil Code, if there are relevant provisions in the laws and judicial interpretations at that time, such provisions shall apply”. Therefore, if the suretyship contract signed before the implementation of the Civil Code and has no specific agreement on the suretyship form or the agreement is unclear, the surety shall be presumed to bear a joint and several liability based on the Security Law. I.e., in the case of He Fujun v. Zhang Zhifeng,4 the court held that the contract was signed before the Civil Code and the effective security law and judicial interpretations then shall apply. Given that there is no agreed suretyship form, the form shall presume to be suretyship with joint and several liability.

Some may refer to rule of beneficial retroactive application as an exception for the principle of non-retroactivity of law, the rule can also be found in Article 2 of the Provisions on Time Effect as follows: “... unless the application of the provisions of the Civil Code is more beneficial to the protection of the legitimate rights and interests of civil subjects, to the maintenance of social and economic order and to the promotion of socialist core values”(the “Three More-beneficial Standard”). However, the writer is of the negative opinion because the situation does not fit in the Three More-beneficial Standard and cannot trigger the exception. Firstly, the expression “more beneficial to the protection of the legitimate rights and interests of civil subjects” does not specify which party’s interest is of more favorable. Beneficial retroactive application rule shall be utilized to the extent that it would benefit both parties, or benefit at least one party on the condition that the other party’s interest would not be detracted.5 If the new presumption rules of surety form in Civil Code apply, it would be harmful to the creditor’s interest. Moreover, the reasonable expectations of the parties are based on the law at the time of the legal behavior and shall be protected. As the presumption rules stipulated in the Security Law, it shall deemed to be known to the parties once it is publicized. Therefore, the reasonable expectation of parties when signing a suretyship contract before the implementation of the Civil Code shall be “if there is no agreement on the form of the suretyship or the relevant agreement is unclear, the surety shall bear the liability as in the form of a suretyship with joint and several liability.” If the beneficial retroactive application rule applies, it would be contrary to parties’ reasonable expectations and not beneficial to the maintenance of social and economic order.

V. Conditions for application of the rule

Presumption rules on form of suretyship shall only be applied where no agreement was made in the suretyship contract on suretyship form or the relevant agreement is unclear. For example, some of the suretyship contracts may convey expressions on both suretyship forms which is a typical situation of unclear agreement. Further, in Wang Jiahui v. Long Xueyi and Li Weilong,6 the court found that the surety only signed at the corresponding signature block without any agreed suretyship form. Therefore, the court held it to be general suretyship. However, if the intention of the parties could be inferred following the interpretation rules on expression of intent, the presumption rules shall not be directly applied.

Article 142.1 of the Civil Code provides: “where an expression of intent is made to a specific person, the meaning of the expression shall be interpreted according to the words and sentences used, with reference to the relevant terms, the nature and purpose of the civil juristic act, the custom, and the principle of good faith.” This establishes the method and sequence of interpretation of meaning of the expression, which are, in order of application, semantic interpretation, overall interpretation, teleological interpretation, customary interpretation and interpretation based on principle of good faith. If a method of higher order is sufficient to clearly ascertain the intention of parties, the process of interpretation shall be terminated. Only when the precedent method fails to ascertain the intention can we move to the subsequent method(s). For example, in the case of BOC Zibo v. Zibo Wanjie Hospital, Zibo Boyi Fibre Ltd. And Wanjie Group Ltd,7 the court held that from the perspective of contract interpretation, when parties have disputes on contract terms, parties’ real expression of intention must be ascertained. The primary method for judging the textual meaning of their wordings is known as semantic interpretation. Only when the semantic interpretation method fails to infer the intention, other methods shall be applied to find the meaning of the clauses and fill the gaps. For further attention, only when the wordings of the contract is unclear, ambiguous and/or has more than two meanings does it need to be explained by the interpretation methods aforesaid.

Related articles

Please kindly see below for quick access to our past series articles on “Security System in China”:

 

  1. Unless otherwise specified, the terms in this article have the meanings defined in “Security System in China I Rules for company’s external security”, which could be found at https://www.dentons.com/en/insights/articles/2021/july/23/security-system-in-china-i
  2. See the Civil Law Office of the Legal Work Committee of the Standing Committee of the National People's Congress, Interpretation on the Security Law of PRC (1995), p25.
  3. See Liu Guixiang, Several Important Issues Relating to Security in the Civil Code, Application of the Law, 2021, No.01.
  4. Case no. (2020) Su 0830 Minchu 4398), the Primary People’s Court of Xvyu County of Jiangsu Province
  5. See Supreme Court’s Working Group on Implementing the Civil Code, Understanding and Application on Several Provisions of the Supreme People's Court on Time Effect for Application of the Civil Code of the People's Republic of China, People’s Justice, 2021, No.10.
  6. Case no. (2021) Yue 1803 Minchu 18, the Primary People’s Court of Qingxin District of Qingyuan City, Guangdong Province
  7. Case no. (2007) Min’er Zhongzi 99, the Supreme People’s court of PRC.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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