In legal matters, issues concerning time are common. Paradoxically, their very ubiquity may cause the legal risks they present to be overlooked. The author of this column once encountered a loan contract dispute caused by a leap year. The dispute concerned whether a guarantee term had expired, and whether the guarantor was therefore released from its liability.
The dispute in question
On 24 August 2004, Bank A entered into a loan contract with Company B, providing that Company B would borrow RMB10 million from Bank A with a term running from 24 August 2005 to 12 August 2006. On the same date, Bank A separately entered into a guarantee contract with Company C, providing that Company C would guarantee Company B’s loan and assume joint and several liability for its repayment. The term of the guarantee was to terminate two years after the expiry of the term of the loan contract.
Bank A advanced the loan to Company B in accordance with the contract. However, at the end of the term, Company B failed to repay the loan. Bank A sent Company B loan default notices on 1 September 2006 and 1 July 2008, and one to Company C on 12 August 2008, demanding that Company C, as guarantor, repay the loan. As both Companies B and C failed to repay the loan, Bank A commenced legal action in February 2009, requesting that Company B repay all of the loan and interest and that as guarantor, Company C bear joint and several liability for repayment.
Partner
Dacheng Law Offices
Beijing
The time issue arose in the calculation of the guarantee term. The guarantee contract provided that the guarantee would “terminate two years after the expiry of the term of the loan contract”. According to the loan contract, its expiry date was 12 August 2006. The question is then, “what is the actual date of expiry of the guarantee term?” Bank A claimed that the guarantee would expire on 12 August 2008.
Conversely, Company C claimed that it was 11 August 2008 based on Article 198 of the Supreme People’s Court Opinions on Several Issues Concerning the Thorough Implementation of the General Provisions of the PRC Civil Code (Trial Implementation) (the Opinions). The Opinions provides that “if the term agreed on by parties does not commence from the first day of a month or year, a month shall be taken as 30 days and a year shall be taken as 365 days”.
If calculated based on a year of 365 days (right for a non-leap year), two years is therefore 730 days. As February 2008 had 29 days, one day longer than a non-leap year, the date two years after 12 August 2006 should be 11 August 2008. If this was the case, and Bank A asserted the guarantee liability against Company C on 12 August 2008, the guarantee term would by then have expired. Company C therefore claimed that it was not required to assume liability under the guarantee.
Ultimately, the court did not accept Company C’s argument. In its judgment, the court held that, in accordance with Article 198 of the Opinions, a year is a fixed period to be counted as 365 days, regardless of whether it is a normal year or leap year.
Moreover, it also held that “when using ‘year’ to determine a period of time, if the commencement date is not the first day of the year, the day immediately preceding the date corresponding to the commencement date in the last year of the period of time is the termination date”.
Problems with the judgment
This is clearly problematic. Firstly, the second part of the reasoning in the judgment does not accord with the original text as provided in Article 198 of the Opinions.
Secondly, in law, there are two methods of calculating a period of time.
The first is the calendar calculation method, i.e. without consideration of the effect of longer and shorter months and leap months.
The second is the natural calculation method, namely, a week is 7 days, a month is 30 days and a year is 365 days. In determining a time period, discrepancies may exist between the results calculated by these two methods.
In this case, both Bank A and the court used the calendar calculation method. Using this method, the extra day in a leap year can be ignored, as all that is required is finding the corresponding date on the calendar. However, according to Company C’s argument, when using the natural calculation method, the extra day in a leap year also needs to be considered.
Accordingly, the expiry date of the guarantee term as calculated by the natural calculation method is one day earlier than that calculated using the calendar calculation method.
However, what Article 198 of the Opinions provides for is the natural calculation method. In practice, a year should be translated into days and the expiry date calculated on that basis. If this provision was not adopting the natural calculation method, there would have been no need to translate “one month” and “one year” into days, but merely specify that “if the commencement date is not the first day of a month, the day immediately preceding the date corresponding to the commencement date in the last month of the period of time is the termination date” would have been
sufficient.
Precautionary measures
Legal risks arising due to periods of time do not occur solely in conjunction with leap years. When parties specify months as the unit of time, more serious disputes may arise due to the fact that in the calendar method, a month can have 28 days, 29 days, 30 days or 31 days and the month specified by the Supreme People’s Court has 30 days.
To guard against such risks, commencement and end dates should be expressly specified. Also, when performing a contract, it is advisable to reserve some time to assert a right, for example, in the foregoing case, if Bank A had simply asserted its right a few days earlier, it could have completely avoided the dispute.
Zhang Dong is a partner at Dacheng Law Offices
12/F-15/F, Guohua Plaza
3 Dongzhimennan Avenue, Beijing
Postal code: 100007
Tel: +86 10 58137799
Fax: +86 10 58137788
E-mail: dong.zhang@dachengnet.com
