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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2014 LC CASE SUMMARIES [2000] Yi Jing Yi Zhong No. 50
English Version Prepared by Saibo JIN's team
Abstracted by Ruochen CHEN, Beijing Commerce & Finance Law Offices
Topics: Guarantee contract; Independent Guarantee; Joint and several liability guarantee.
Type of lawsuits: Creditor sued borrower for outstanding loan.
Parties: Respondent/Plaintiff/Creditor-- Bank of China Cangzhou Branch
Defendant/Borrower--Cangzhou Heyun District Mining and Construction Material Company
Appellant/Defendant/Guarantor--Cangzhou Jianfa Protein Amino Acid Company
Underlying Transaction: Creditor sued Borrower for a RMB 500,000 loan agreement with a 9.24% yearly interest rate.
Guarantee: Joint and several liability guarantee.
Decision: The People's High Court of Hebei Province set aside the judgment of the first instance and entered judgment in favor of the Respondent/Plaintiff/Creditor.
Rationale: A guarantee contract to secure loan granted by the same creditor to pay back its previous loan is valid. An independent clause in a guarantee contract that states it is separate with the loan agreement is enforceable.
Article
Factual Summary: Borrower signed a loan agreement with Creditor, which granted Borrower a500,000 RMB loan for one year term with a 9.24% annual interest rate, secured by a joint and several liability guarantee provided by the Guarantor. The guarantee period was for two years. When the loan fully matured neither Borrower nor Guarantor paid the debt. Creditor sued Borrower and Guarantor in the Intermediate Court of Cangzhou. The court ruled in favor of Creditor and ordered Borrower to pay the amount of the loan to Creditor, plus court costs and interest. The court also ruled that Guarantor was jointly and severally liable for those amounts. Guarantor appealed the judgment of the trial court in favor of Creditor.
On appeal the High People's Court of Hebei Province set aside the judgment of the trial court and ordered the Guarantor to undertake to clear off all the debts and interests it owed to Creditor.
Legal Analysis:
The Guarantor argues that the dispute between the Creditor and the Borrower arose in 1995 when another company was acting a guarantor of a previous loan. When this previous loan expired Creditor attempted to collect the loan amount and they issued a new loan to the Borrower. It was for that loan the Guarantor, being unaware of the previous loan, agreed to guarantee the loan for Borrower. Therefore, Guarantor argued that there was a misrepresentation and that the guarantee it provided to secure the Borrower's loan was made under false pretenses. Guarantor further argued that,because there was a misrepresentation by Borrower, the court should void the guarantee agreement and release Guarantor from liability.
The Appellate court found out that, the Borrower originally signed a loan agreement for 500,000 RMB with Bank of China Cangzhou Office (which later consolidated with Bank of China Cangzhou Branch), and the guarantor for this agreement was Wujing Cangzhou Border Supplies Company, when the loan was due, the Borrower was not able to pay off the debts, and the prior guarantor refuse to extend the guarantee. In order to clear off the previous debts, the Creditor subsequently granted two loans to the Borrower, and for both loans, the Guarantor was the jointly and severally liable. In the guarantee there was a special clause, which stated the guarantee contract is separated with the loan agreement, the invalidation of the loan agreement would not affect the validity of this guarantee contract.
The court's findings contradicted the Guarantor's claims of misrepresentation. the fact that during the two subsequent loan, the legal representatives of the Borrower and the Guarantor was brother and both the Borrower and the Guarantor stamped on Creditor's collection notice in which it stated the money the Borrower borrowed was used to pay off its previous loan. Due to the special clause that was added to the subsequent loans, the fact that the Borrower was compelled by the Chinese government's Industrial and Commercial Bureau to cancel its registration did not effect the guarantee contract.
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