If the principal claim-debt contract is altered, whether the guarantee liability shall be altered correspondingly?

In practice, if a seller has concerns on whether the buyer may be able to make payments timely, normally it may require the buyer to mortgage properties or provide a third-party’s guarantee. Where the buyer provides a third-party’s guarantee, if the principal claim-debt contract is altered, whether the guarantee liability shall be altered correspondingly?

The answer is negative. There are different circumstances regarding such alteration, which shall be discussed separately.

The first circumstance is that the guarantee liability shall be altered correspondingly. Article 695, Paragraph 1 of the “Civil Code” stipulates: “Where the creditor and debtor, without the written consent of the guarantor, alter the contents of the principal claim-debt contract through consultation to reduce the debt, the guarantor shall continue to bear guarantee liability for the altered debt…….” Therefore, either with the written consent of the guarantor, or by reducing the debt, the guarantee liability shall be altered correspondingly.

The second circumstance is that the guarantee liability shall remain unchanged. Article 695, Paragraph 1 of the “Civil Code” stipulates: “Where the creditor and debtor, without the written consent of the guarantor, alter the contents of the principal claim-debt contract through consultation ……If the debt is increased, the guarantee liability shall remain unchanged.” In judicial practice, there are disputes on how to determine the debt is increased. For example, in the case (2021) Zui Gao Fa Min Zai No. 330, the court held that the consequences of Bank H and Company A agreeing to change the loan purpose did not increase the debt of Company A, nor did it cause losses to the guarantor Company L. Therefore, the guarantor Company L should bear the guarantee liability for the remaining loan principal and interest. However, if a debtor applies for a loan for production, but it uses the loan for investment or repays for another loan, and the loan principal is decreased, the court may hold differently. In addition, there is a special circumstance, Article 695, Paragraph 1 of the “Civil Code” stipulates: “Where the creditor and debtor modify the term for performance of the principal claim-debt contract without the written consent of the guarantor, the guarantee term shall not be affected.” Many people believe that this alteration has reduced the liability of the guarantor, but in fact, such alteration has shortened the performance period for the debtor to raising funds, which may not be beneficial to the guarantor. Therefore, the “Civil Code” specifically provides a provision regarding this special circumstance.

The third circumstance is that the guarantor no longer assumes the guarantee liability. If the alteration in the principal claim-debt contract results in the loss of the contract basis, such as a change in circumstances, the guarantor may no longer be liable for the guarantee without its own written consent. For example, the main points of the judgment in case (2022) Hu 02 Min Shen No.159, as recorded in the People’s Court Case Library, state: “After the implementation of the ‘Civil Code’, the addition or reduction of debt caused by alterations to the loan payment account should be distinguished according to Article 695. In cases where the alteration cannot be separated and increases the debt, the rule of loss of contract basis in Article 533 should be applied. When the alteration leads to a separable increase, the reason for exempting the increased part of the guarantee liability is the prohibition of disposal by others; when the alteration leads to an indivisible increase, the reason for exempting all guarantee liability is the loss of the transaction basis. When the alteration has no impact on the guarantee burden, it does not affect the scope of guarantee liability.”

In addition, the case of “repaying old loans with new loans” is more complex compared to the above circumstances, so the “Interpretation of the Supreme People’s Court on the Application of the Relevant Guarantee System in the Civil Code” has made a special provision for such circumstance. Article 16 stipulates: “Where the parties to a principal claim-debt contract agree to repay an old loan with a new one, and the creditor requests the guarantor of the old loan to assume the guarantee liability, the people’s court shall not uphold such request; where the creditor requests the guarantor of the new loan to assume guarantee liability, the following provisions shall apply: (1) where the guarantors of both the new loan and the old loan are the same, the people’s court shall uphold such request; or (2) where the guarantors of the new loan and the old loan are different, or the old loan is unsecured but the new one is secured, the people’s court shall not uphold such request, unless the creditor has evidence to prove that the guarantor of the new loan knows or should have known the fact that the old loan is repaid with a new loan when providing the guarantee. Where the parties to the principal claim-debt contract agree to repay an old loan with a new one, and the guarantor of the object of the old loan agrees to continue providing guarantee for the new loan under circumstances where the registration thereof has not been cancelled, and creates guarantee interests with such secured property for other creditors before the conclusion of a new loan contract, if the other creditors claim that the sequence of their guarantee interests has priority over that of the creditor of the new loan, the people’s court shall not uphold such claim.”