Recourse right of sureties under contracts in Civil Code

By Cheng Xiao, Beijing Arbitration Commission/Beijing International Arbitration Center
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A new article regarding the sureties’ right of recourse in suretyship contracts has been established in the Civil Code.

First of all, it is recognised that the nature of the legal subrogation of the surety in the suretyship contracts is the legal assignment of creditor’s rights, which means the surety not only obtains the recourse right against the debtor, but also obtains other subordinate rights of the creditor against the debtor, after assuming the suretyship liability. This enables the surety to fully exercise the recourse right.

Article 700 of the Civil Code provided that: “Unless otherwise agreed by the parties, a surety who has assumed the suretyship liability shall have the right to reimbursement from the debtor to the extent of the suretyship liability it has assumed, and be subrogated to the right of the creditor against the debtor, without prejudice to the interests of the creditor.”

In this article, “be subrogated to the right of the creditor against the debtor” is to recognise the legal subrogation of the surety. This article limits the conditions for the exercise of the right of recourse. First, the surety shall have fully performed his suretyship liability. Second, as for the scope of recourse right against the debtor, the surety can only claim the right of recourse within the limit of his/her suretyship liability that he/she has assumed.

Third, the article sets up the legal right of subrogation to ensure the full realisation of the surety’s right of recourse. By providing, “be subrogated to the right of the creditor against the debtor”, the surety replaces the creditor’s status after undertaking the suretyship liability. That is to say, it acquires all the relevant rights of the creditor against the debtor, including the security interests, the creditor’s rights, the principal rights and the accessory rights, so that the surety can make full use of his/her rights when claiming recourse right against the debtor.

Reimbursement simplified

In the case of joint and several suretyships, and where no liability distributions of the sureties have been agreed, the path by which the sureties seek reimbursement is simplified.

Article 12 of the Guarantee Law provides that: “If one debt has more than two guarantors, the guarantors shall share their responsibility of guarantee in accordance with the arrangements laid down in the guarantee contract. If there are no arrangements on the share of guarantee responsibility, the guarantors shall assume joint responsibility, and the creditor can demand any one of the guarantors to pay the whole debt; and any of the guarantors has the obligation to pay the total of the debt. The guarantor who has paid the debt has the right to seek compensation from the debtor, or demand other guarantors who have joint responsibility to pay their share.”

The legislative intent of this article is to set up dual paths to realise the right of recourse for the surety, in case of joint and several suretyships.

In terms of joint suretyships, if several sureties fail to agree on the liability distributions in the contract, the sureties shall assume the joint liability among themselves. Every surety shall bear the suretyship liability for the realisation of the whole creditor’s rights, and the creditor may require any of the sureties to bear the whole suretyship liability.

Therefore, after the surety has fulfilled his/her suretyship liability, he/she may either have recourse right against the debtor, or require another surety who has joint responsibility to bear a share of the debt and demand that they pay their share.

However, the Civil Code abolished the right of recourse between the sureties of the joint and several suretyships. Article 699 of the Civil Code provides that: “Where there are not less than two sureties for the same obligation, the sureties shall assume suretyship liability in accordance with the share of suretyship agreed in the contract of suretyship; absent agreement on the share of suretyship, the creditor may request any surety to assume suretyship liability to the extent of its suretyship.”

This article does not include any statement, as with article 12 of the Security Law, which “demand other guarantors who have joint responsibility to pay their share”. The legislative body made this adjustment out of systemic interpretation considerations. Since the right of recourse between guarantors is not recognised in mixed guarantees, the absence of explicit recognition of the right of recourse between guarantors in joint suretyship can avoid a logical contradiction with the former.

However, the authors think that there is contradiction between the provision that abrogates the right of recourse right between guarantors in joint suretyship, and the provision that recognises the right of recourse and subrogation in joint and several obligations. According to the theory of joint and several obligations, joint and several sureties shall assume joint and several obligations at the same level to the creditor, and the debtor is the second-ranking party assuming the obligation, so when a surety has fulfilled its obligations under a suretyship, it may have recourse right either against other sureties with the same ranking, or against the party ultimately assuming the obligation (the debtor) in full.

Therefore, article 699 of the Civil Code limits the dual paths by which the surety would have been able to realise the right of recourse to a single path, by which the surety can only claim to debtor, unless the sureties have agreed otherwise on the right of recourse.

Cheng Xiao is an arbitrator with Beijing Arbitration Commission/Beijing International Arbitration Center (BAC/BIAC), and the vice chairperson at Tsinghua University Law School Council. BAC/BIAC case manager Gao Zhuang, and Zhao Ning, from China Foreign Affairs University, also contributed to the article.