Settling disputes arising from guarantee system

Settling disputes arising from guarantee system

The guarantee system takes the realisation of creditors’ rights as the basic aim of legislation. In recent years, legislators have paid more and more attention to the effect guarantees have on improving the business environment. At the same time, based on the subordination and non-exchangeability of the guarantee contract as a unilateral contract, they have also paid more attention to the protection of guarantors’ interests, such as the invalid guarantee system that has been widely discussed in judicial practice.

Now, there are clearer standards for the evaluation of the validity of guarantees, however, the legal consequences of an invalid guarantee have not been fully discussed. This article introduces and analyses some common problems in adjudicating compensation liabilities of an invalid guarantee in dispute resolution.

The premise for a guarantor to undertake the guarantee liability is that the contract is valid, but the opposite is the case for the liability of compensation. However, in the practice of dispute settlement, many parties claim that the guarantor should bear the guarantee responsibility, with the guarantor able to raise a pertinent defence accordingly. If the judge rules that the guarantee contract is null and void, the judge may either directly dismiss the parties’ claims, or rule according to the degree of the guarantor’s fault.

Both of the above-mentioned situations are reflected in judicial practice. Some judges hold that as the creditor has not proved that it has examined the resolutions of the company of the guarantor, the court cannot uphold the claim of the creditor for the guarantor to bear joint and several liability on the grounds of performance of guarantee obligations. Some judges hold that the creditor has not fulfilled their obligation of reviewing the company’s resolution in good faith, and reasonably. They can also hold that the guarantor affixed the official seal of the company or the seal of the legal person without obtaining the resolution of the company, and the guarantor shall bear half of the compensation liabilities.

Similar issues are also reflected in arbitration cases. In some cases, a tribunal holds that it will be more helpful to resolve the dispute if the parties have fully expressed their opinions on the validity of the guarantee contract. The tribunal can determine the guarantor is liable for compensation based on its judgment of the causes of the invalidity of the guarantee contract and the degree of fault.

In this regard, the author believes that, firstly, the core of the trial lies in the determination of the validity of the contract for guarantee, no matter whether the liability for guarantee or the liability for compensation is determined. The law stipulates the liability for fault of the guarantor when the guarantee contract is invalid, and links the proportion of the liability for compensation to the degree of fault, which is linked to the cause for the invalidity of the security contract. If the guarantee contract is invalid, due to its own reason and the invalidity of the principal contract, a certain discretion is given to the judges regarding the specific relationship between the invalidity of the cause and the fault, and also in terms of the specific proportion of the responsibilities to be undertaken.

Secondly, after the guarantee contract is determined to be invalid, the same judge, in light of the specific causes for invalidity, judges the fault of the parties concerned and the proportion of compensation liabilities. If the judge only determines that the guarantee contract is invalid in a specific case, and no longer recognises the compensation liability, analysis of the specific causes should not be elaborated on so as to prevent having a binding effect on judgments of other cases.

The author is of the opinion that, from current dispute resolution practices, even if the party concerned claims that the basis of the guarantor’s liability is to guarantee liability, a corresponding reply can be made to some extent. When the opposing party raises a defence against the validity of the guarantee contract, so as to ensure that the parties have fully aired their opinions on the dispute, this leaves room for further judgment in respect of compensation liability when the judge determines the guarantee contract is invalid.

Thirdly, some academics have pointed out that in the practice of dispute resolution, the compensation liability borne by a company due to an invalid guarantee is very similar to the liability borne by a valid guarantee. Therefore, close attention should be paid to the difference between the two in terms of the nature and scope of liabilities. It is generally believed that the guarantor’s liability for compensation is a pre-contractual liability, and the scope of liability for compensation is based on the “portion that the debtor is unable to discharge”, and is not limited by the scope of guarantee as agreed in the contract. Based on judgments and rulings that the author has analysed, the courts usually refer to article 17 of the judicial interpretation to rule that the guarantor is responsible for a certain portion that the debtor is unable to discharge after the scope of the debtor’s liabilities have been clarified. As for the “portion that the debtor is unable to discharge”, this will be clarified only after the court has completed enforcement in respect of the movables and other convenient properties of the party involved.

Liang Xiaohui is a case manager at the BAC/BIAC