Date: 16 Jun 2023
To achieve the maximum protection for creditors’ interests in commercial transactions, it is common for a third party to assume liability for the debt. This can typically take place in two ways: joint assumption of debt, or a guaranty. Judicial practice has always been plagued by the natural similarity in concept of the two, as well as the ambiguity in expression of intention caused by transaction flexibility and other factors by the third party. This article details the standard for distinguishing between joint assumption of debt and guaranty, based on arbitration precedents.
PRIORITY OF CONTEXT
It is generally believed that an undertaking letter or agreement may be identified as guaranty if it contains such words as “suretyship” or “guaranty”. If “joinder of debt” or “joint repayment” is specified, it may be identified as joint assumption of debt.
For example, in a dispute arising from a platform business co-operation agreement, the respondent’s letter of undertaking expressly stipulated the provision of “irrevocable joint and several guaranty liability”. This allowed the tribunal to deem the arrangement to be a guaranty.
In another dispute over a movie and television contract, the parties entered a joint assumption of debt agreement for their main contract. Although the respondent argued that its intention was, in fact, guaranty, the tribunal used clause texts to determine the clause to constitute a joint assumption of debt.
Although wording is undoubtedly the first and foremost reflection of parties’ intention, any rigid interpretation should be avoided. First, the polysemic nature of words such as “guaranty” and “suretyship” should be viewed in combination with the context. Second, as some may be unfamiliar with the legal concepts and the expressed legal language may be inconsistent with their actual performance, a tribunal should seek the parties’ true intentions by considering the facts without rigidly adhering to the wording.
INTERPRETATION OF MEANING
If the wording is clear, distinguishing between joint assumption of debt and guaranty would be all but self-evident. However, in practice, it is common for third parties to provide credit enhancement measures such as a deficiency agreement, repurchasing upon maturity and liquidity support, without including clear expressions of either guaranty or joint assumption of debt. As such, joint assumption of debt and guaranty must be differentiated by their nature, and from the perspectives of interest relationship and the sequence of performance.
In terms of the sequence of performance, due to the supplementary nature of general guaranty, a guarantor is responsible only when a debtor is unable to perform. Therefore, if it is agreed as a precondition of third-party performance that the principal debtor “cannot” or is “unable” to perform the obligation before expiration, the general guaranty, as defined under article 687 of the Civil Code, may be distinguished from joint assumption of debt.
Vice versa, as the assumption of obligation by a guarantor is subject to the non-performance of the debtor, if a commitment or agreement directly indicates that a third party will perform obligations without being bound by the non-performance of the debtor (e.g. an agreement that stipulates that a third party shall act or make payment in the debtor’s place), it would obviously constitute joint assumption of debt.
From the perspective of interest relationship, if the third party has actual economic benefits from the performance of the debt, it is generally deemed as joint assumption of debt; otherwise, it constitutes guaranty.
This is primarily because the liability arising from joint assumption of debt is heavier compared with guaranty. Under the assumption of the “economic man” who pursues a balance between risk and return, a third party who actually benefits from the performance of the obligation has a deduced intention of jointly assuming the debt.
For instance, in a dispute over a sales contract, a third party issued a repayment agreement stating the respondent’s legal person (i.e. the third party) agreed to repay the loan individually.
Based on his status as the company’s legal representative, he was deemed to have a substantial interest in the sales contract. Additionally, he had paid for the applicant’s subsequent compensation, so the contract was identified as being a joint assumption of debt.
It is worth noting that although the interest relationship is an important element of accession of obligations, it is neither a necessary nor a sufficient condition in a given case; it is only a consideration.
Even if the true intention of parties at the time of signing a contract can be derived from the texts or interpretation, in practice, wording can be ambiguous, resulting in the utter loss of the true intention. Where there is doubt, article 36.3 of the Judicial Interpretation on the Guaranty shall prevail, and the undertaking would be presumed as guaranty in principle.
In terms of liability, the presumption is reasonable. Compared with a guaranty, the joint assumption of debt has no limitation on guarantee period, and no right of recourse unless specifically agreed, let alone the right of prior action defence.
It is generally believed that the obligation of joint assumption of debt is significantly higher than that of guaranty. On this basis, if the parties’ intentions are unclear, it should be deemed to constitute guaranty, rather than joint assumption of debt, in order to balance the interests of all parties.
With the emergence of many credit enhancement measures, the challenge in distinguishing between guaranty and joint assumption of debt will only become greater.
In practice, the real intention of the parties, and the liability, should be ascertained not by the name of an agreement but by its actual content. In principle, the intention of the wording should be given priority, supplemented by the interest relationship, the sequence of performance and other criteria. If the intention is unclear, the rules of presumption shall be applied to distinguish joint assumption of debt from guaranty.
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