If the debtor does not know the existence of a guarantee, whether the guarantor could directly seek for compensation to the debtor after assuming the guarantee liability?
In May 2019, Zhang borrowed 100,000 CNY from Lee for purchasing an apartment. Zhang issued an IOU, in which Zhang promised to repay in 1 year. Later, due to the epidemic, Lee was afraid that he would not able to recover the debt on the due time; he planned to ask Zhang to repay earlier. Lee went to Zhang’s home, and Zhang was not at home, but Lee met Zhang’s classmate Sun who visited Zhang’s parents. Lee told Sun about Zhang’s debt, Sun decided to offer a guarantee and signed on the IOU. In May 2020, Zhang failed to repay on the due time, and Lee required Sun to assume the guarantee liability. Sun repaid to Lee, and then sought compensation to Zhang, but Zhang refused. The problem comes, if Zhang does not know that Sun has provided a guarantee, whether he shall compensate to Sun?
The essence of this problem is that whether the guarantee is valid without the debtor’s consent?
Regarding this problem, there are two totally different opinions. The first opinion is that such guarantee is invalid, because the guarantee without the debtor’s consent may harm the debtor’s interests, which has violated the principle of party autonomy, and the guarantor shall not seek compensation to the debtor. Another opinion is that although the guarantor has bot obtained the debtor’s consent, he has created an obligation for himself, which is beneficial to the debtor, so such guarantee shall be valid; if such guarantee is deemed as invalid, the guarantor could seek compensation based on the unjust enrichment instead of guarantee.
In view of the current laws, judicial interpretations, although there is no specified provision on this problem, the judicial practice would tend to support the second opinion. Article 6 of the “Security Law” stipulates that the term guarantee shall refer to the act of a guarantor, pursuant to an agreement between the guarantor and the creditor, in performing the obligations of or bearing liability for a debtor when that debtor fails to perform his obligations. According to this article, it does not require the debtor as a party of a guarantee, not to say the consent of the debtor. In addition, Article 22 of the “Interpretations of the Supreme People’s Court on Several Issues Concerning the Application of the Security Law” prescribes that if a third party unilaterally issues a written letter of guarantee to the creditor and the creditor accepts such letter of guarantee without objections, a guarantee contract is formed. The article also does not require the debtor to know the establishment of the guarantee as well.
In view of the relevant judgments, in judicial practice, local courts tend to support the second opinion as well. Courts have analyzed from the three perspectives. The first perspective is that such guarantee has not aggravated the debtor’s obligations [1], and even provides more time for the debtor to arrange repayment [2]. The second perspective is that according to the current regulations, the guarantor could provide a guarantee only based on the agreement between the guarantor and the creditor [3], if the debtor claims that the guarantee is not binding because the he does not know the existence of the guarantee, then such claim shall be deemed as lacking of legal basis. The third perspective is that if the debtor refuses to compensate to the guarantor, the principle of fairness in civil conduct would be violated.
In practice, there are some exceptions in individual cases. For example, in the contract dispute between Xu and Company H, in the first-instance, the court held that Xu had not signed on the “Confirmation Letter of Guarantee (Lease)”, and Company H had provided payment evidence which could not prove that such payment was the payment for assuming the guarantee liability, so the court rejected Company H’s claim. In the second-instance, the court supported Company H’s claim. To think deeper, the root reason for such exceptions is whether the guarantor could prove that it has assumed the guarantee liability, especially when the guarantor and the creditor have more than one transaction.
From the perspective of risk prevention, it is recommended that the guarantor shall retain the evidence to prove that the debtor knows the existence of the guarantee. If the guarantor failed to let the debtor to know, and there are some other transactions between the guarantor and the creditor, then the guarantor shall assume the guarantee liability separately.
In addition, if a party repays the debt for a debtor without a mandatory or agreed obligation, the party could consider seeking compensation based on the negotiorum gestio.
[1] (2020) Zhe 07Min Zhong No.2259
[2] (2018) Wan 0221Min Chu No.63
[3] (2019) Nei 07Min Zhong No.38