When drafting contracts, it is common to create obligations on a joint and several basis. For example, if a guarantee is given by two or more guarantors on a joint and several basis, each guarantor is liable to the creditor for the full amount of the debt in the event that the debtor defaults. If one guarantor pays the debt in full, it can require the other guarantors to pay their share of the liability, and it can also claim compensation from the debtor.
In this article, I will look at the different ways in which liability can be shared by two or more parties under common law and PRC law. The concepts can be quite confusing and are complicated by the different terminology used. In common law jurisdictions, terminology includes “joint liability”, “several liability” and “joint and several liability”. In China, the terminology includes an fen zeren [按份责任], which is usually translated as “proportionate liability”, and liandai zeren [连带责任], usually translated into English as “joint and several liability”, although there is an important difference between the way in which this concept operates under the common law and PRC law, as I will explain later.
In China, the potential confusion is compounded by the different ways in which the term liandai zeren [连带责任] is used in the Security Law. It is used both to describe the nature of the liability between two or more guarantors, as outlined above (article 12 of the Security Law), and also to distinguish between two different types of guarantee: a “general guarantee” [一般保证] and a “joint and several” guarantee [连带责任保证]. In the case of a general guarantee, the guarantor is not liable to the creditor until the creditor has obtained a judgment or arbitration award against the debtor and has been unable to receive payment after taking enforcement action against the debtor’s assets (article 17 of the Security Law). In the case of a joint and several guarantee, the creditor can take action directly under the guarantee without the need to proceed against the debtor first (article 18 of the Security Law).
We will also consider the nature of the liability that exists between partners in a partnership.
Let’s look first at “several liability”. Under the common law, several liability describes the situation where two or more obligors undertake separate obligations to another party and each is liable only for its own obligations. If one of the obligors cannot meet its obligations, the other obligors are not liable. An example of a transaction in which several liability arises is a syndicated loan, where each lender is only responsible to lend the amount that it has agreed to lend and there is no liability on the part of the other lenders if it fails to do so.
This is relatively easy to understand. The issues become more complicated when one tries to distinguish between “joint liability” and “joint and several liability”. Joint liability describes the situation where two or more persons undertake the same obligation in favour of another party. Each obligor is liable in full for the performance of the relevant obligation. If one obligor pays the liability in full, it can usually require the other obligors to pay their share of the liability.
Traditionally, there have been two important features of joint liability that distinguish it from “joint and several” liability:
- All obligors should be sued (i.e. they should all be parties to the action) – what this means is that the creditor only has one opportunity to sue and if the creditor sues some but not all of the obligors, it cannot take subsequent action against the other obligors; and
- If the creditor releases one of the obligors from its obligations, the other obligors will also be released unless the creditor expressly reserves its rights against the other obligors.
On the other hand, joint and several liability is a combination of several liability and joint liability. In other words, each of the obligors undertakes jointly with the other obligors to satisfy the relevant obligation in favour of the creditor and, at the same time, undertakes to satisfy the relevant obligation as a separate obligation. What this means is that the creditor may take action against one or more of the obligors. If the creditor does not receive payment in full, it can then take action against the other obligors. Of course, it would always be possible for a guarantor that is sued to apply to add co-guarantors as parties to the proceedings and for a court to order that co-guarantors be added.
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A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre.