How to set the guarantee term after the implantation of the “Civil Code”

Compared with the previous “Guarantee Law” and the relevant judicial interpretations, the “Civil Code” which came into force on Jan. 1, 2021 has amended the guarantee term.

According to the “Civil Code”, where there is no agreement in the contract between the creditor and the guarantor on the guarantee term or such agreement is unclear, the guarantee term shall be six months from the date of expiration of the term for performing the principal obligation. Meanwhile, according to Article 32 of the “Interpretation of Supreme People’s Court on Application of the Security System under the Civil Code”, where a guarantee contract provides that the guarantor shall undertake guarantee liability until the principal of the principal debt and the interest thereon have been paid off, or when other similar stipulations are made, such stipulation shall be deemed as unclear, and the term of guarantee shall be six months from the date of maturity of the principal debt. However, the rules on the guarantee term is different in Article 32, paragraph 2 of the “Interpretations of the Supreme People’s Court on Several Issues Concerning the Application of the Guarantee Law”, which says if the guarantee contract specifies that the guarantor will bear guarantee liability until the principal of the debt has been fully repaid together with all the interest thereon or contains similar stipulations, such stipulations will be deemed to be unclear and the guarantee term will be two years from the date of the expiration of the term for performing the principal obligation.

In view of the above, if the guarantee term is not agreed clearly, then the statutory guarantee term has been changed from 2 years to 6 months. From the perspective of the legislative intent, the “Civil Code” shows more favor to the guarantor, because the guarantee contract is unilateral and gratuitous, and the guarantor bears more liabilities. Therefore, if a creditor plans to set a longer guarantee term, it recommended agreeing on a specific term.

Then is there any limit on the length for such specific term? For example, whether we can agree for 3 years, 5 years or even 10 years?

Let’s see a judgment of the Supreme People’s Court. In the case (2019) Zui Gao Fa Min Shen No. 6911, Company Y borrowed money from Feng in 2014, Zhang and Peng signed the “Loan Contract” as the guarantor. The “Loan Contract” stipulates that the guarantor shall bear joint guarantee responsibilities for all debts under the contract, and the guarantee term shall be 5 years from the date of expiry of the loan period. In the second instance, the court in Guizhou determined that the guarantors should perform the guarantee responsibility in accordance with the contract. The guarantors appealed to the Supreme People’s Court with the reason that the guarantee term should be 2 years according to the relevant judicial interpretation. In the retrial judgment, the Supreme People’s Court pointed out, “in this case, the “Loan Contract” clearly stipulates that the guarantee term is 5 years, so Article 32 shall not be applied. This provision is valid, and does not violate any laws, or mandatory provisions of administrative regulations. Therefore, the original trial determined that the 5 years guarantee term was valid and not improper.”

After the implementation of the “Civil Code”, since there is no limit on the length of the guarantee term, the creditor and guarantor could agree on a specific period.

If the guarantee term exceeds the statute of limitations period for the debt, in fact, the guarantee liability and the debt have their respective performance periods and statute of limitations, which could be existed at the same time. If the statute of limitations period for the debt lawsuit has expired, but the guarantee term has not expired, the guarantor may defend the statute of limitations of the debtor against the creditor based on the subordinate nature of the guarantee liability. From the perspective of the creditor, if the agreed guarantee term is longer than the statute of limitations period for the debt litigation, it is recommended to preserve the evidence that urges the debtor to perform the debt.