The guarantee contract serves as a subordinate contract to the main contract, and when the main contract is invalid, the guarantee contract is also invalid. At this point, the scope of responsibility that the guarantor should bear varies depending on whether they are at fault.

On December 31, 2020, the Supreme People's Court issued the "Interpretation of the Guarantee System of the Civil Code", which continued the relevant provisions of the original "Interpretation of the Guarantee Law" on the scope of liability that the guarantor should bear if the main contract is invalid and leads to the invalidity of the guarantee contract. However, there is no provision on how to determine the fault of the guarantor. This article will discuss how to determine the fault of the guarantor based on a construction contract dispute case represented by the author, combined with judicial precedents.

Basic facts of the case

Company A, as the contracting party, and Company B, as the general contractor, sign the "General Contracting Contract" for the construction of a certain project. Company C issues a "Payment Guarantee" to Company B, promising to provide joint and several liability guarantee for Company A to fulfill its payment obligations under the General Contract. Before the lawsuit, Company A did not obtain administrative approval procedures such as the state-owned construction land use certificate, construction land planning permit, and construction project planning permit. During the litigation process, Company A stated that Company D obtained the state-owned construction land use right certificate of the land where the project is located. The court found that the "General Contract" was invalid due to the lack of a construction project planning permit, and the "Payment Guarantee" as a subordinate contract to the "General Contract" was also invalid. The two trial courts made different determinations on whether Company C should bear responsibility.

Different determinations by the courts of second instance

The first instance court: The invalidity of the "General Contract" was caused by Company A's failure to handle planning approval procedures such as the construction project planning permit. Company C was not at fault for the invalidity of the "General Contract", and therefore did not need to bear any compensation liability to Company B.

Court of Second Instance: The project in question was approved for construction by the Development and Reform Commission of Z City. Company C is a state-owned investment platform company with 100% equity held by the People's Government of Z City. Company C is a major shareholder of Company D, which holds 100% equity of Company A. The public website page of Company C states that Company A is a branch of Company C. Therefore, Company C should be aware that Company A has not obtained a construction land planning permit The construction project planning permit will result in the invalidity of the "General Contract" and still provide guarantees for the project involved in the case. The payment guarantee of Company C, as Annex 4 of the "General Contract", provides guarantees for the payment and performance of the project funds in the "General Contract", which has a positive effect on promoting the signing of the contract. There are obvious faults, and the second instance court has taken into account the faults of Company C in this case, Determine that its liability for compensation is one-third of the debt owed by Company A that cannot be repaid after execution.

Legal provisions on the liability of the guarantor when the main contract is invalid or the guarantee contract is invalid

Before the implementation of the Civil Code, the issue of the guarantor's liability in the event of the invalidity of the main contract or the guarantee contract was mainly stipulated in the Guarantee Law and the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Guarantee Law of the People's Republic of China (hereinafter referred to as the "Interpretation of the Guarantee Law"). Article 5 of the Guarantee Law stipulates: "A guarantee contract is a subordinate contract of the main contract, and if the main contract is invalid, the guarantee contract is invalid. If there are other provisions in the guarantee contract, the provisions shall prevail. After the guarantee contract is confirmed to be invalid, if the debtor, guarantor, or creditor is at fault, they shall each bear corresponding civil liability based on their fault." Article 8 of the Interpretation of the Guarantee Law stipulates: If the main contract is invalid and leads to the invalidity of the guarantee contract, and the guarantor is not at fault, the guarantor shall not be liable; if the guarantor is at fault, the portion of the guarantor's civil liability shall not exceed one-third of the debtor's inability to repay the debt

After the promulgation of the Civil Code, both the Guarantee Law and the Interpretation of the Guarantee Law have become invalid. The provisions on the above issues are mainly reflected in Article 388 of the Civil Code and Article 17, Paragraph 2 of the Interpretation of the Supreme People's Court on the Application of the Guarantee System of the Civil Code of the People's Republic of China (hereinafter referred to as the Interpretation of the Guarantee System of the Civil Code).

How to understand the fault of the guarantor and the allocation of burden of proof?

1. The fault of the guarantor refers to the fault of invalidity of the guarantee contract, rather than the fault of invalidity of the main contract

If the main contract is invalid and the guarantee contract is invalid, the fault of the guarantor refers to the fault of the guarantor for the invalidity of the guarantee contract, rather than the fault of the guarantor for the invalidity of the main contract. Because the guarantee contract is not a party to the main contract, it is obviously unreasonable to attribute the fault of the main contract to the guarantor who is not a party to the contract.

The Supreme People's Court interprets the "fault of the guarantor" in Article 8 of the Interpretation of the Guarantee Law in the Complete Collection of judicial interpretation · Real Rights 3 as follows: The so-called "guarantor without fault" refers to the guarantor not knowing or should have known the invalid state of the main contract, or the guarantor not having played an intermediary or promoting role in the formation of the invalid main contract. It should be distinguished that the fault of the guarantor does not refer to the fault of the guarantor in the invalidity of the main contract, which is different from the general liability for contractual negligence. Because the parties to the main contract are creditors and debtors, the guarantor is not a party to the contract, and the main contract The same invalidity should not require the guarantor who is not a party to the contract to bear the invalidity result, and the invalidity result should be borne by the creditor and debtor. Specifically, the fault of the guarantor includes: the guarantor knowingly providing guarantee for the invalidity of the main contract, the guarantor knowingly promoting the formation of the main contract or acting as an intermediary for the signing of the main contract

2. How to determine the fault of the guarantor

(1) The guarantor, who is a shareholder of the debtor, should be aware that the main contract signed by the debtor is invalid, and providing guarantee for the debtor's main contract is at fault.

If the guarantor is a shareholder of the debtor, it should be aware of the main contract signed by the debtor. Creditors can provide evidence from the perspectives of the equity relationship and control relationship between the guarantor and the debtor to prove that the guarantor knowingly provided guarantee for the main contract even though it was invalid.

In the "Gao Liangtao and Zhungeer Banner Yangshi Tasongshuyan Shenzhou Coal Co., Ltd. Mining Rights Dispute Case", Confirmed by the Supreme People's Court Whether Lei Yong, Zhang Jinmei, and Xu Shimeng, as guarantors, should bear civil liability and whether they are at fault should be examined... In this case, the reason for the invalidity of the contract is that the mining license within the mining area involved in the case has not been changed according to law, resulting in the region not obtaining a mining license so far. Lei Yong, Zhang Jinmei, and Xu Shimeng, as shareholders of Shenzhou Coal Company, should be aware of the above situation and still represent Shenzhou Coal Company The company signed the contract involved in the case and provided guarantees, clearly at fault. [3]

In the retrial case of construction contract disputes between Hubei Tiandi Spring Modern Agricultural Development Co., Ltd. and Hubei Tiandi Spring Holdings Co., Ltd, Recognized by the Supreme Court Tiantianchun Holding Company is a controlling shareholder of 96.8% of Tiantianchun Agriculture Company. Bai Yishan was the legal representative of Tiantianchun Company when signing the project general contracting contract and guarantee contract, and signed the contract on behalf of Tiantianchun Agriculture Company. Therefore, Tiantianchun Holding Company and Bai Yishan have fulfilled the agreed approval obligations assumed by the employer in the special terms of the contract regarding the contracting information of the contract, especially the completion of the contract in question Information such as status should be known. The second instance court hereby determined that Tiandi Spring Holding Company and Bai Yishan should jointly bear joint and several liability for one-third of the debts that Tiandi Spring Agricultural Company cannot repay, and there is no lack of basis [4]

(2) The guarantor did not carefully review the main contract and was at fault for the invalidity of the guarantee contract.

In the absence of evidence to prove that the guarantor directly participated in the transactions under the main contract, it is crucial for the guarantor to exercise due diligence and carefully review the effectiveness of the main contract to determine whether the guarantor is at fault for the invalidity of the guarantee contract. When there are legal invalidity reasons such as violating mandatory provisions of laws and administrative regulations in the main contract, the guarantor's professional knowledge and experience should be combined to determine whether they have fulfilled their obligation to carefully review the effectiveness of the main contract.

In the case of enterprise loan dispute between Inner Mongolia North Heavy Industry Group Co., Ltd. and Inner Mongolia North Fengchi Logistics Co., Ltd., the first instance court, Tianjin Second Intermediate People's Court, held that although North Heavy Industry Company signed the "Memorandum on Entrusted Transportation Contract" with Tianjin Huajie Company and North Fengchi Company, It is agreed that Northern Heavy Industry Company shall provide joint and several guarantee liability for the payment and breach of contract obligations of Northern Wind Chi Company under the "Entrusted Transportation Contract", but the "Entrusted Transportation Contract" between Tianjin Huajie Company and Northern Wind Chi Company has not been actually fulfilled, and there is no evidence to prove that Northern Heavy Industry Company is aware of and participated in the circular transaction in this case, Therefore, there is no basis for Tianjin Huajie Company to require Northern Heavy Industry Company to bear joint and several guarantee liability in this case. [5] The second instance court, Tianjin High Court, held that due to the invalidity of the loan contract in this case, the memorandum signed by Tianjin Huajie Company with Northern Heavy Industry Company and Northern Fengchi Company regarding the "Entrusted Transportation Contract" should also be deemed invalid. Northern Heavy Industry Company, as the guarantor, did not carefully review the "Entrusted Transportation Contract" signed between Tianjin Huajie Company and Northern Fengchi Company, and has its own fault. Should bear one-third of the compensation liability for the inability of Northern Fengchi Company to repay the debt. [6]

The Supreme People's Court of the retrial court found that the original judgment found that Northern Heavy Industry Company, as the guarantor, had not carefully reviewed the "Entrusted Transportation Contract" signed between Tianjin Huajie Company and Northern Wind Chi Company, and was at fault. Therefore, it was ordered to bear one-third of the compensation liability for the unpaid part of Northern Wind Chi Company, and there was no impropriety. Northern Heavy Industry Company claims that it has fulfilled its duty of careful review, but has not provided sufficient evidence to prove it. Therefore, its claim that it is not at fault and should not bear civil liability cannot be established. [7]

(3) When the main contract is signed before, and the guarantee contract is signed after, and the nature and effectiveness of the main contract can only be determined through judicial review, it cannot be inferred that the guarantor knowingly provides guarantees knowing that the main contract is invalid.

The main contract is signed before, and the guarantee contract is signed after. The act of the guarantor providing guarantee cannot constitute the trust of the creditor due to the existence of the established mortgage guarantee relationship, thereby promoting the establishment of the main contract. Moreover, the effectiveness of the main contract cannot be determined to be invalid without judicial confirmation. The guarantor cannot judge whether the main contract is invalid. At this time, the guarantee contract is invalid, and the guarantor is not at fault and does not assume responsibility.

In the retrial of the loan contract dispute between Hengye Real Estate Development Company and Zhongguancun Securities Co., Ltd. in Doumen District, Zhuhai City, The Supreme People's Court has determined that before the signing of the Investment Cooperation Contract, Hengye Company issued the Commitment Letter in the absence of evidence to the contrary Providing guarantee for the debt involved in the case with all of its land and property cannot constitute a situation where the existence of the existing mortgage guarantee relationship creates trust in Zhongguancun Bonds, thereby promoting the establishment of the main contract. At the same time, Zhongguancun Securities has not provided evidence to prove that Hengye Company engaged in intermediary activities for the establishment of the Investment (Cooperation) Contract. Therefore, Hengye Company, as the guarantor, does not promote the establishment of the main contract or act as an intermediary for the signing of the main contract... From the contents stated in the Investment (Cooperation) Contract and the Letter of Commitment, the declaration of will about sharing risks is inconsistent with the contents of the agreement on 'Party B's unconditional return in full'... In this case, from the perspective of the interpretation of the text of the contract, Whether it is an investment cooperation legal relationship or a loan legal relationship between the two parties is not an exact and undisputed one. In the case where the nature and effectiveness of the "Investment (Cooperation) Contract" need to be determined through judicial review, Hengye Company cannot be held to have accurately foreseen that the "Investment (Cooperation) Contract" was actually an invalid loan contract when the "Commitment Letter" was issued, That is to say, it cannot be inferred from this that Hengye Company still provides guarantees for the main contract even though it is aware of its invalidity. [8]

3. The burden of proof for the guarantor's fault

Article 67, Paragraph 1 of the Civil Procedure Law stipulates: "The parties shall have the responsibility to provide evidence for their claims." Article 90, Paragraph 1 of the Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China stipulates: The parties shall provide evidence to prove the facts on which their own litigation claims are based or the facts on which they refute the other party's litigation claims, except as otherwise provided by law. Article 91 stipulates: "The people's court shall determine the burden of proof in accordance with the following principles, except as otherwise provided by law: (1) The parties claiming the existence of a legal relationship should bear the burden of proof for the basic facts that gave rise to the legal relationship... "Therefore, the creditor should provide evidence to prove the fault of the guarantor.

The Supreme People's Court also stated in the Minutes of the First Circuit Court of the Supreme People's Court's Meeting of Civil and Commercial Presiding Judges (Volume 1) that the fault of the guarantor shall be determined in accordance with Article 64 of the Civil Procedure Law of the People's Republic of China and Articles 90 and 91 of the Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China, It is not appropriate for the guarantor to bear the burden of proof without fault.

As a subjective state, it is not easy for the creditor to prove that the guarantor is at fault for the invalidity of the guarantee contract. In litigation, how should the creditor effectively provide evidence to prove that the guarantor is at fault for the invalidity of the guarantee contract, and then demand that the guarantor bear the corresponding compensation responsibility? The importance of safeguarding the legitimate rights and interests of the creditor is obvious.

Summary of practical experience

When creditors claim that the main contract is invalid or that the guarantor should bear corresponding compensation liability due to fault when the guarantee contract is invalid, they can focus on the following directions of proof: (1) the order of signing the guarantee contract and the main contract, the guarantee contract appears in the form of an attachment to the main contract, and the guarantor plays an intermediary, intermediary, or promoting role in the signing of the main contract. (2) The guarantor is the controlling shareholder or actual controller of the debtor; (3) When the main contract is invalid due to legal reasons such as violating mandatory provisions of specific laws and administrative regulations, the guarantor is a subject with professional knowledge or equivalent experience and ability, and should know that the main contract is invalid and still provide guarantee.

If the guarantor is to exempt themselves from compensation liability, the key is to provide evidence to prove that there is no fault with the invalidity of the guarantee contract when the main contract is invalid. For example, (1) if the main contract is signed before and the guarantee contract is signed after, the guarantee provided by the guarantor cannot create reasonable trust for the creditor and thus facilitate the signing of the main contract. (2) The validity of the main contract is uncertain and requires judicial confirmation before final confirmation of its invalidity can be obtained. The guarantor cannot accurately foresee that the main contract is invalid. (3) The debtor concealed the invalidity of the main contract from the guarantor, resulting in the guarantor providing a guarantee.

References and comments (slide down to view)

[1] Article 388 of the Civil Code stipulates: "In establishing a security interest, a security contract shall be concluded in accordance with the provisions of this Law and other laws. The security contract includes a mortgage contract, a pledge contract, and other contracts with a security function. The security contract is a subordinate contract to the main creditor's debt contract. If the main creditor's debt contract is invalid, the security contract shall be invalid, except as otherwise provided by law.
After the guarantee contract is confirmed to be invalid, if the debtor, guarantor, or creditor is at fault, they shall each bear corresponding civil liability based on their respective faults
[2] Article 17, Paragraph 2 of the Interpretation of the Supreme People's Court on the Application of the Guarantee System in the Civil Code of the People's Republic of China stipulates: "If the invalidity of the main contract results in the invalidity of the guarantee contract provided by a third party, the guarantor shall not be liable for compensation if there is no fault; if the guarantor is at fault, the liability for compensation shall not exceed one-third of the debtor's inability to repay the debt
[3] (2019) Supreme Court Civil Judgment No. 403.
[4] (2021) Supreme Court Civil Ruling No. 5129.
[5] (2016) Jin 02 Min Chu No. 554 Civil Judgment.
[6] (2017) Jinminzhong Civil Judgment No. 408.
[7] (2019) Supreme Court Civil Ruling No. 4252.
[8] (2018) Supreme Court Civil Judgment No. 267.