China Security System II | Dentons
I. Concept of surety
According to article 681.1 of the Civil Code,1 suretyship refers to a promise made by the surety “for the purpose of securing performance of an underlying debt” that he “would perform the obligation or bear the liability when the debtor fails to perform the debt. obligation when due or a circumstance agreed upon by the parties occurs ”.
II. Forms of surety
There are two forms of surety bond under PRC law. Article 686.1 of the Civil Code provides that “The surety consists of the general surety and the joint surety”.
III. Rules of presumption on the form of security
The form of bond is an arbitrary matter that can be mutually agreed upon by the parties involved in the bond contract. If there is no agreement on the bond form or if the agreement is not clear, the rules of presumption apply.
article 19 of the Security law provided: “in the absence of agreement on the form of the surety or if the relevant agreement is not clear, the surety bears the liability as in the form of a joint surety”. This clause specified that the presumed surety was a joint surety. The reason for such an arrangement was both to facilitate the realization of the obligee’s right and to induce the surety to conclude a specific agreement on the form of the suretyship in the contract, failing which the surety would bear the negative consequences.2
However, article 686.2 of the Civil Code makes a subverted modification to the rules of presumption as set out in the Security law by providing that “When there is no agreement in the suretyship contract on the form of surety or the relevant agreement is not clear, the surety assumes responsibility as in the form of a surety bond. general ”. According to which, the presumed form of the surety is now the general surety instead of the joint surety. The rationale for this change is that the bond is free and unilateral and that the bond assumes the obligation without any rights under a bond. It would be manifestly unfair to further aggravate the surety’s obligation by presuming the surety as joint and several liability where no agreement reached on the surety bond form or the relevant agreement is clear, especially where the debtor himself is able to perform the obligation or bear the responsibility.
This clause also reflects that the Civil Code has changed the legislative focus and further emphasizes the balance between creditor and surety over the preference of the law on security interests for the protection of creditors. Therefore, in the event that there is no convincing interpretation of the surety contract, a presumption in the sense of a lesser obligation on the part of the surety must be made.3
This inclination is also found in the rule of recognition between the surety bond and the joinder of the obligation.
IV. TimefEffect of the new rules of presumption laid down in the Civil Code
For contracts concluded after the entry into force of the Civil Code, there is no doubt that the rules of presumption to determine the form of surety set out in the Civil Code apply. The problem is to know which rule of presumption will apply to contracts signed and executed before the Civil Code.
The principle of non-retroactivity of the law is a general principle, in accordance with Article 2 of several provisions of the Supreme People’s Court on the effect of time for the application of the Civil Code of the People’s Republic of China (the ” “Provisions on the effect of time“),” for civil disputes arising from legal facts prior to the entry into force of the Civil Code, if there are relevant provisions in laws and judicial interpretations at that time, these provisions apply “. Consequently, if the surety contract signed before the entry into force of the Civil Code and does not include a specific agreement on the surety form or if the agreement is not clear, the surety is presumed jointly and severally liable on the basis of the law on securities, i.e. in the case of He Fujun v. Zhang zhifeng,4 the court ruled that the contract had been signed before the Civil Code and that the law of security in force and judicial interpretations then applied. Since there is no agreed bond formula, the formula is assumed to be a joint bond.
Some may refer to the rule of beneficial retroactive application as an exception to the principle of non-retroactivity of the law, the rule can also be found in Article 2 of the provisions on the effect in time as follows: ” … unless the application of the provisions of the Civil Code is more beneficial to the protection of the rights and legitimate interests of civil subjects, to the maintenance of social and economic order and to the promotion of fundamental socialist values ”(the“Three more beneficial standards“). However, the author is of a negative opinion because the situation does not correspond to the three more advantageous standards and cannot trigger the exception. First, the expression “more favorable to the protection of the rights and legitimate interests of civil subjects” does not specify which interest of the party is more favorable. The beneficial retroactive rule will be used to the extent that it would benefit both parties, or benefit at least one party provided that the interest of the other party is not compromised.5 If the new rules of presumption of form of surety in the Civil Code applied, this would be detrimental to the interest of the creditor. In addition, the reasonable expectations of the parties are based on the law at the time of legal behavior and must be protected. In accordance with the rules of presumption stipulated in the law on security interests, it is deemed to be known to the parties as soon as it is published. Therefore, the reasonable expectation of the parties when signing a surety bond before the entry into force of the Civil Code will be “if there is no agreement on the form of the bond or if the relevant agreement is not clear, the surety bond will assume liability in the form of a joint surety bond. If the beneficial retroactive rule applies, it would be contrary to the reasonable expectations of the parties and would not be beneficial to the maintenance of social and economic order.
V. Conditions of application of the rule
The presumption rules on the form of the bond only apply if no agreement has been made in the bond contract on the bond form or if the relevant agreement is not clear. For example, some surety bond contracts may contain phrases on both bond forms, which is a typical unclear agreement situation. In addition, in Wang Jiahui vs. Long Xueyi and Li Weilong,6 the court concluded that the surety only signed the corresponding signature block without any agreed bond form. Therefore, the court considered it to be a general bond. However, if the intention of the parties could be deduced following the rules of interpretation on the expression of intention, the rules of presumption will not apply directly.
Article 142.1 of the Civil Code provides: “when an expression of intent is addressed to a specific person, the meaning of the expression is interpreted according to the words and phrases used, with reference to the relevant terms, the nature and the object of the civil legal act, custom and the principle of good faith. This establishes the method and the sequence of interpretation of the meaning of the expression, which are, in the order of application, the semantic interpretation, the global interpretation, the teleological interpretation, the customary interpretation and interpretation based on the principle of good faith. If a higher order method is sufficient to clearly determine the intention of the parties, the interpretation process will be terminated. Only when the previous method fails to determine intent can we move on to the next method (s). For example, in the case of BOC Zibo v. Zibo Wanjie Hospital, Zibo Boyi Fiber Ltd. and Wanjie Group Ltd,7 the court held that from the point of view of the interpretation of the contract, when the parties have disputes over the terms of the contract, the actual expression of the intention of the parties should be verified. The main method for judging the textual meaning of their formulations is known as semantic interpretation. Only when the semantic interpretation method fails to infer intent, other methods must be applied to find the meaning of clauses and fill in the gaps. For more caution, it is only when the terms of the contract are unclear, ambiguous and / or has more than two meanings that it should be explained by the aforementioned methods of interpretation.
Please see below for quick access to our previous series articles on “China Security System”:
- Unless otherwise specified, the terms of this article have the meanings defined in “China Security System I Rules for External Company Security”, which can be found at https://www.dentons.com/en/insights/articles/2021/july/23/security-system-in-china-i
- See the Civil Law Office of the Legal Working Committee of the Standing Committee of the National People’s Congress, Interpretation of the PRC Security Law (1995), p25.
- See Liu Guixiang, Several Important Security Issues in the Civil Code, Law Enforcement, 2021, No. 01.
- Case No. (2020) Su 0830 Minchu 4398), Xvyu County Primary People’s Court of Jiangsu Province
- See Supreme Court Working Group on the Implementation of the Civil Code, Understanding and Application of Several Provisions of the Supreme People’s Court on the Temporal Effect of the Application of the Civil Code of the People’s Republic of China, People’s Justice, 2021, n ° 10.
- Case No. (2021) Yue 1803 Minchu 18, Qingxin District Primary People’s Court of Qingyuan City, Guangdong Province
- Case No. (2007) Min’er Zhongzi 99, Supreme People’s Court of the PRC.