A owed B money, but was unable to pay it back. B found that C owed A money, then he required C to repay the money directly to himself. This is a typical case of the implementation of subrogation. Article 535 of the “Civil Code” stipulates that, “where the obligor is remiss in exercising its claims or the accessory rights related to its claims, thereby affecting the realization of the matured claims of the obligee, the obligee may petition the People’s Court to exercise the rights of the obligor against the counterparty in subrogation in its own name, except that such rights exclusively belong to the obligor.”
Therefore, the subrogation is a legal right, to implement such right does not require the consent of the debtor or the secondary debtor. However, such implementation shall meet the requirements stipulated in Article 535 of the “Civil Code”, that is, the creditor shall prove that “the creditor’s rights have expired” and “the debtor is remiss in exercising its creditor’s rights to the secondary debtor”.
Then, how can a creditor prove that the debtor has a due claim against the secondary debtor?
Because of the protection of trade secrets and the relativity of contracts principle, it is difficult for the creditor to get to know the debtor’s claims. In practice, there are mainly two methods to solve this problem: (1) the debtor is willing to cooperate with the creditor, e.g., the debtor would send a notice of assignment of the creditor’s rights to the secondary debtor (essentially this is an act of assignment of creditor’s rights), or the debtor provides evidence related to those creditor’s rights. For example, in the case of (2022) Jing 02 Min Zhong No. 7638, the debtor sent a notice of assignment of the creditor’s rights to the secondary debtor, and the secondary debtor confirmed the amount of the secondary debt; and (2) relevant parties have a chain contract relationship, a common circumstance is the relationship between the owner, the general contractor and the subcontractor in the construction contract. For example, in the case of (2022) Hu 02 Min Zhong No. 6293, the sub-subcontractor skipped the subcontractor and sued the general contractor claiming for the secondary creditor’s rights, the court upheld the sub-subcontract’s claim. Overall, the probability of success through the former method is much higher than the later one. However, when adopting the former method, we suggest the creditor to seize two timings: (1) when the debtor cooperates in issuing the notice of assignment of the creditor’s rights, it would be better to require the debtor to provide evidence related to such creditor’s rights, such as contracts, other documents which have confirmed the amount of the creditor’s rights, etc., so as to avoid relying solely on the notice, which is easy to be successfully defended by the secondary debtor; and (2) it would be better to include the debtor as a third party in the lawsuit against the secondary debtor.
Regarding the requirement of “the debtor is remiss in exercising its creditor’s rights to the secondary debtor”, in the current judicial practice, the main opinion is that the debtor has not claimed its due debts from the secondary debtor by means of litigation or arbitration.
In addition, the creditor is puzzled by the arrangement of relevant lawsuits, that is, whether the creditor could sue the secondary debtor directly; or it shall sue the debtor firstly and then sue the secondary debtor?
It depends. If the due debt is clear without any disputes, the creditor could sue the secondary debtor directly. From the perspective of judicial practice, if the amount of the due debt is fixed, such as borrowing, or the debtor confirms the amount of the due debt in a certain way, normally the court would uphold the creditor’s claim for subrogation. In many cases, if the debtor raises an objection to the creditor’s due claim, or there is a dispute over the liquidated damages, etc., by which the court may hold that the amount of the due claim is uncertain, then the court may reject the creditor’s claim after hearing. For example, in the case of (2021) Hu 0116 Min Chu No. 12697, the debtor defended that there was liquidated damages, so the amount of the due claim was uncertain. Under such circumstance, the creditor has to sue the debtor first, and then prove that the claim against the debtor is due and clear by execution documents, such as judgment, mediation or arbitration award, and then sue the secondary debtor to exercise the subrogation. Typical cases are (2020) Supreme Court Min Zai No. 231, (2022) Hu 02 Min Zhong No. 6293, (2022) Beijing 02 Min Zhong No. 6005, etc.