One-to-one correspondence between the Principal Contract and its Guarantee Contract?

Company A and Company B have long-term business relations. To secure debt recovery and simplify procedures, Company A requires the guarantor to issue a general guarantee undertaking, covering all debts between the two companies. Although this practice is similar to the “maximum amount guarantee” stipulated in the “Civil Code”, the differences are obvious: the latter requires a definite term and generally sets a maximum limit on the creditor’s claim. Then whether Company A’s requirement is valid?

In judicial practice, the key to determining the validity lies in whether there is an identifiable main contract or fundamental principal claim.

Firstly, if the guarantee contract specifies the title of the main contract, it cannot be extended to other contracts. For example, in the case (2019) Xin 01 Min Chu No. 612, the guarantor undertook joint and several liability for debts under the Framework Agreement. However, the parties did not perform the Framework Agreement but separately signed a General Engineering Construction Contract and other agreements. The creditor later demanded liability based on these later agreements and the guarantee. The court held that the main contract was limited and could not be extended to other separate agreements for the same business.

Secondly, the validity shall be determined based on the interpretation of “all contracts” shall be determined by the context, wording, and circumstances of signing. In the case (2013) Zhe Hang Shang Wai Chu No. 2110, the court interpreted the term “all contracts” in the guarantee by comparing it with “accessory contracts” used elsewhere in the same clause. Combining the facts that Company J authorized the legal representative of Company JT to handle the coal tar cooperation and sign the Cooperation Agreement, the court held that Company J knew the status of all existing contracts and the creditor’s demand for additional security. The guarantee for “all contracts” was interpreted as covering all outstanding business contracts between Company JT and Company W, and the court upheld Company W’s claim.

Thirdly, the validity shall be recognized based on the principle of party autonomy. In the case (2023) Su 0214 Min Chu No. 6515, the Guarantee Contract stipulated that the principal debt contracts included all contracts (both existing and future) signed between the Company A and the Company B. Afterward, multiple sales and procurement contracts were executed. The court ruled that requiring the guarantor to bear joint and several liability for these debts complied with the law and the agreement, and supported the claim.

In addition, the signing dates of the principal and guarantee contracts may also be taken into consideration. In the case (2022) Yu 0527 Min Chu No. 2289, the guarantee undertaking was signed in 2015, while the principal contract was signed in 2016. The court held that the one-year-earlier guarantee could not be deemed to correspond to the later principal contract.

In summary, in judicial practice, there is no unified judicial standard has been formed, so judges would define the relationship between the principal contracts and the guarantee contracts case by case. Given the accessory nature of guarantee contracts, the above-mentioned issues shall be taken into consideration in defining the validity regarding the relationship between the principal contracts and the guarantee contracts. Therefore, for enterprises, it is recommended to avoid the above issues.