In China, Does a Guarantor Bear No Responsibility If a Guarantee Contract Is Invalid? Interpretation of Article 17 of the Judicial Interpretation on the Guarantee System in the Civil Code | Civil Code | Shenzhen Lawyer | Beijing Lawyer in Shenzhen
This is the 57th. article on Lawyer Xu Hongpeng’s Legal Blog: [Corporate Disputes and Criminal Defense]
In December 2020, the Supreme People’s Court issued the Judicial Interpretation of the Supreme People’s Court on the Application of the Guarantee System under the Civil Code of the People’s Republic of China (hereinafter referred to as the Interpretation of the Guarantee System), which comprehensively organizes and clarifies the guarantee provisions scattered throughout the Civil Code. The guarantee system is crucial in both our daily lives and commercial activities, involving loans, leases, sales, and other economic activities. Therefore, understanding the legal provisions of the guarantee system is highly beneficial to everyone. In the following series of articles (each between 500 and 1000 words), we will interpret these provisions.
Today, let’s address the question: Does a guarantor bear no responsibility if a guarantee contract is invalid?
The bank provided Wang Ergou with a loan of 5 million yuan, while Wang Dagou offered his property as a guarantee to the bank. Later, Wang Ergou was unable to repay the loan, and the bank directly claimed Wang Dagou’s property to enforce the mortgage. So, can the bank ultimately claim the mortgage on Wang Dagou’s property?
Wang Ergou, initially relieved by having someone else to repay the debt first, was suddenly alarmed upon discovering that the guarantee contract was invalid!
- It turned out that when Wang Dagou and the bank signed the guarantee contract, they failed to follow the relevant legal procedures, and the bank’s staff neglected to review the guarantee formalities, rendering the contract invalid. Because of this, the mortgage was not established, and the bank could not directly exercise its mortgage rights over the property. However, since Wang Dagou was partly responsible for the invalidity of the contract, he was liable for compensation, but no more than half of the amount Wang Ergou could not repay.
- Wang Dagou, reluctant to provide the guarantee initially, but bound by brotherly ties, came up with a plan. Since the local area was underdeveloped and property information was not yet networked, the bank could only verify the property’s authenticity through correspondence with the real estate registration office. Wang Dagou forged a highly realistic property certificate and bribed officials at the registration office. Ultimately, the bank signed the mortgage contract and issued the loan to Wang Ergou.
In this case, the mortgage was also not established, but since Wang Dagou was entirely responsible for the invalidity of the contract, he was liable for the portion of Wang Ergou’s debt that could not be repaid.
- What if Wang Dagou sincerely intended to act as the guarantor, but the bank’s staff failed to follow the required procedures, leading to the invalidity of the guarantee contract?
In this scenario, the mortgage was not established, but Wang Dagou bore no fault and thus assumed no responsibility.
- If Wang Dagou suddenly discovered that, while the bank signed a loan contract with Wang Ergou, no actual loan was ever issued, and the bank, shockingly, colluded to fabricate a false contractual relationship, then Wang Dagou would bear no responsibility.
- What if, while signing the loan contract, the wrong stamp was used? When stamping the contract, Wang Dagou, who was present, saw a stamp from the local meat and vegetable market on the ground, mistakenly believed it to be the bank’s stamp, and used it on the contract. Neither Wang Ergou nor the bank’s staff noticed the error.
In this case, the loan contract is invalid, and because the primary contract is invalid, the guarantee contract is also invalid. However, since the bank, Wang Dagou, and Wang Ergou all share responsibility, Wang Dagou’s liability for compensation cannot exceed one-third of the unpaid portion of Wang Ergou’s debt.
Relevant Legal Provision:
Article 17: If the primary contract is valid but the third party’s guarantee contract is invalid, the People’s Court shall determine the guarantor’s liability for compensation based on the specific circumstances:
(1) If both the creditor and the guarantor are at fault, the guarantor’s liability for compensation shall not exceed half of the unpaid portion of the debtor’s debt;
(2) If the guarantor is at fault but the creditor is not, the guarantor shall be liable for the unpaid portion of the debtor’s debt;
(3) If the creditor is at fault but the guarantor is not, the guarantor shall not be liable for compensation.
If the invalidity of the primary contract leads to the invalidity of the third party’s guarantee contract, and the guarantor is not at fault, the guarantor bears no liability for compensation; if the guarantor is at fault, the liability for compensation shall not exceed one-third of the unpaid portion of the debtor’s debt.
Xu Hongpeng, Senior Partner at Long An Law Firm (Shenzhen), formerly worked at a Procuratorate in Beijing. He is now a Beijing-based lawyer stationed at the Shenzhen branch, specializing in criminal defense, criminal compliance, complex commercial litigation, and cryptocurrency crime research.
Contact Information:
Phone: 13691688640
Email: xuhongpeng@longanlaw.com
Address: Long An Law Firm (Shenzhen)
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