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Thursday, December 1, 2022

Some legal loopholes with respect to the provisions on guarantee of the 2015 Civil Code

Updated: 15:00’ - 07/07/2022
Nguyen Thanh Linh
Hanoi Law University

Introduction

In addition to the commonly used security devices like charge and pledge, guarantee is often considered by parties an alternative, especially in the event that the securing party does not have adequate assets. The 2015 Civil Code (the Code), which officially took effect on January 1, 2017, introduces a number of changes in the provisions on guarantee. However, there exist problems around the provisions on guarantee which require further research and improvement. Particularly, there are some legal loopholes which may lead to inconsistent interpretation and implementation. This article identifies the incompleteness and proposes recommendations in order to improve the Code’s provisions on guarantee. 

Definition of guarantee

The definition of guarantee in the Code is slightly different from that in the 2005 Civil Code, but unfortunately, it is this change that causes this provision to be incomplete.

Article 335.2 of the Code stipulates: “Parties may agree that the guarantor shall only perform the obligation for the principal in the event that the principal is incapable of performing the guaranty obligation.”.  

In contrast, Article 361 of the 2005 Civil Code provides: “Parties may agree on that the guarantor shall only perform the obligation for the principal in the event that the principal is incapable of performing his obligation.”.

There is a fundamental legislative error with respect to the phrase “guaranty obligation” at the end of Article 335.2 of the Code. In a guarantee relation, the guaranty obligation is not the obligation of the principal, but rather the obligation of the guarantor in the guarantee contract which he has concluded with the beneficiary.

For this reason, the use of the phrase “guaranty obligation” in the sentence “…the principal is incapable of performing the guaranty obligation” in this clause is obviously unsuitable. The overall notion of this Article is not different from that of the corresponding Article of the 2005 Civil Code.

Notwithstanding, because of the misuse of phrase, it is not complete and might potentially cause confusion for the parties and even the court. This provision will be more complete if the phrase “guaranty obligation” is replaced by the phrase “guaranteed obligation” or “his obligation” (similar to the use of phrase in the 2005 Civil Code).

A question might also arise from Article 335 of the Code: whether the guarantor shall perform the guaranty obligation in case where the obligation falls due and the principal fails to fully perform the obligation (the principal only performs part of the obligation)[1].

Fortunately, the aforementioned omission in Article 335 has been fixed by Decree 21/2021/ND-CP[2]. Specifically, under Article 44.1.c of Decree 21, the guarantor is obliged to perform the guaranty obligation in the event that the principal fails to fully perform his obligation.

Notwithstanding, there should still be a supplementation to Article 335 of the Code specifying the case where the principal fails to fully perform his obligation. This would contribute to making the provision on definition of guarantee in the Code more comprehensive.

Guarantee is often considered a less risky alternative for other security devices like charge and pledge__Photo: Internet

Contribution of joint guarantors

Under Article 338 of the Code, after a joint-guarantor has fully performed the obligation, that guarantor is entitled to request the other joint-guarantors to perform “their portions of obligation” to him.

The general rationale behind this provision is that, when multiple guarantors conclude a joint-guarantee, it means that each person is an obligor in the guarantee relation and they share the equal responsibility since each of them may be requested by the beneficiary to perform the guaranty obligation in its entirety.

When a joint guarantor has performed the entire guaranty obligation, the guaranty obligation terminates and other joint guarantors are not obliged to perform their obligation to the beneficiary anymore.

For this reason, the Code entitles the joint guarantor who has fully performed the guaranty obligation to request other joint guarantors to perform their portions of guaranty obligation to him.

However, the provision on determination of “portions of obligation” in case of joint guarantee remains quite vague in the Code.

Despite not being specified in the Code, the joint guarantors are allowed to agree in the guarantee contract on the division of the guaranty obligation into portions. These portions might or might not be equal. The parties must specify both the division of the guaranty obligation into separate portions as well as the joint guarantee in the guarantee document.

By agreeing on these two important issues, the risk of the guarantors being deemed as multiple independent guarantors by the court, as well as the issues around the determination of portions of the guaranty obligation in the joint guarantee will be effectively addressed.

The problem here is that due to the lack of legal provisions, in the absence of parties’ agreement or in the event that parties are unable to reach an agreement, how should parties and the court determine the portion of the obligation of each joint guarantor? Perhaps in those two cases, dividing the guaranty obligation into equal portions might be a possible solution.

There should be a supplementation to Article 338 recognizing parties’ agreement on dividing the joint guaranty obligation into portions as well as dealing with the absence of parties’ agreement thereon.

Furthermore, when the obligation falls due and the principal fails to properly perform the obligation, the beneficiary is not required to request one of the joint guarantors to fully perform the obligation.

As the ultimate purpose of the joint-guarantee is that all joint guarantors are obliged to ensure the performance of the guaranty obligation, therefore, the beneficiary might request several or even all guarantors to perform particular portions of the guaranty obligation. Though not being clearly stated in Article 338, it can still be indicated that the beneficiary is not prohibited from requesting each joint guarantor to perform a particular portion of the obligation.

The rationale behind the above statement is that at the end of the day, the ultimate purpose of guarantee is to ensure that the principal’s obligation is properly performed. In addition, all the guarantors when entering into the joint guarantee relation have clearly expressed theirs intent to be responsible for performing the obligation in its entirety in case the principal fails to do so. Therefore, there is no ground for them to refuse to perform particular portions of the guaranty obligation upon being requested by the beneficiary.

The above analysis brings about a question: in the event that the joint guarantors have previously agreed on the division of the guaranty obligation into portions while the beneficiary requests each of them to perform a different portion under their agreement, how should the matter of contribution among joint guarantors be addressed? 

The current provisions on joint guarantors in the Code do not regulate this matter. This is obviously a loophole in the Code, which might potentially lead to disputes among the joint guarantors regarding the contribution obligation. The lawmaker should recognize that in such case, the joint guarantor who has performed a portion exceeding the portion previously agreed upon between the joint guarantors is entitled to request other joint guarantors to perform that exceeding portion of obligation to him. 

A guarantor simultaneously guaranteeing for multiple principals

Despite the fact that the Code has a provision on multiple guarantors, it does not have any provisions on the case in which a guarantor concludes multiple guarantee contracts with multiple beneficiaries in different guarantee relations.

In order to protect interests of the beneficiary, the  Code should specify conditions for a guarantor to guarantee for multiple different obligations at a time, e.g. having an adequate financial capability to perform all guaranty obligations.

There should be an additional provision requiring the guarantor to give notice to the beneficiary when he simultaneously guarantees for multiple principals. Contents of such a notice should include critical information, such as the number of guarantees, scope of guarantee, and term of guarantee.

Such provision will help ensure that:
  • The beneficiary is aware of the fact that the guarantor is currently guaranteeing for multiple obligations, 
  • based on which he is able to make a better decision on whether or not to receive the guarantee;
  • The guarantor is capable of properly performing his guaranty obligation; and
  • The lawful rights and interests of the beneficiary are protected.
Performance of obligation toward joint beneficiaries

Another issue arising from the subjects of guarantee is that the current provisions on guarantee only deal with the case where multiple guarantors jointly guarantee for the performance of an obligation, but not the case where multiple beneficiaries jointly receive guarantee from a guarantor.

The relationship among the joint beneficiaries; and the relationship between the joint beneficiaries and the guarantor should be clearly provided; otherwise it might provoke disputes between parties. Despite the absence of relevant provisions on joint beneficiaries in a guarantee relation, the matter may still be regulated by the general provisions on obligation of the Code[3].

It can be inferred from Article 289 of the Code that in a guarantee relation where there are multiple beneficiaries jointly taking guarantee from a guarantor, each beneficiary might request the guarantor to perform the guaranty obligation in its entirety in case where the obligation falls due and the principal fails to properly perform. The guarantor may perform the obligation in its entirety to any joint beneficiary.

However, it is unclear that in case the guarantor has performed the entire obligation to a joint beneficiary, whether a joint beneficiary is obliged to perform the corresponding portion of obligation to other joint beneficiaries? The provisions on indemnity obligation among the joint obligees also stay silent thereon[4]. This lack of legal provisions might potentially provoke disputes among the joint beneficiaries. 

Guarantee for a future obligation

Article 336.4 of the Code deals with the guarantee for the performance of a future obligation.

Normally, a guarantee contract is only formed after or at the same time with the formation of the primary contract since the reason why the guarantee contract exists is to secure for the performance of the obligation arising from the primary contract. However, the Code allows parties to agree on guarantee for the performance of a future obligation.

Article 336.4 of the Code stipulates: “When the guaranteed obligation is a future obligation, the scope of the guarantee shall not include any obligation arising after the guarantor dies or the legal person guarantor[5] terminates its existence”. This provision is reasonable and necessary.

When a guarantor dies (in case of a natural person) or terminates its existence (in case of a legal person), it is obvious that the guarantor can no longer become a party in the guarantee contract or any civil transactions.

For this reason, although the guarantor has concluded a guarantee contract with the beneficiary to secure for the performance of future obligations, any obligations emerging after the guarantor’s death or termination of existence will not fall into the scope of guarantee.

It should be noted in this regard that there is a minor incompleteness in Article 336.4 of the Civil Code, which is the word “after”.

Being formulated with the word “after”, specifically “after the guarantor dies or the legal person guarantor terminates its existence”, this provision might cause some unnecessary ambiguity and confusion.

A question arises: how long after the guarantor dies or terminates its existence shall he/it be released from his/its obligation?

This is a purely legislative technical fault when the lawmakers formulate this provision and the ambiguity can be addressed by simply replacing the word “after” with the phrase “from the time when” or “upon”.

Termination of obligations between the beneficiary and the principal

Under Article 339.3 of the Code, the guarantor is not obliged to perform the guaranty obligation if the beneficiary is able to offset the obligations with the principal.

Article 378 of the Code provides that in case the parties in an obligation relation have to perform the same type of property obligation to each other, when both obligations fall due, the parties are not required to perform their obligations to each other, and the obligations shall be deemed to have terminated, unless otherwise provided by law. In case where the value of the property or tasks is not equivalent, the parties shall pay the difference in value to each other. Property that can be valued in money can also be offset against an obligation to pay money.

Article 339.3 of the Code is not complete as it stipulates: “The guarantor is not required to perform the guaranty obligation in the event that the beneficiary can offset the obligations with the principal”.

It should be noted that in the event that the beneficiary can offset the obligations with the principal, it does not necessarily mean that the obligations are fully offset since the value of the two obligations may be different and thus, the principal still has to perform the remaining portion of his obligation (if any) though it has been offset.

Consequently, in that case, if the principal still fails to perform his remaining portion of obligation after being offset, the guarantor shall perform his guaranty obligation.

Some modifications should be made to Article 339.3 to avoid misinterpretation by parties, which might potentially lead to disputes. Specifically, the lawmakers might consider adding the word “fully” between of the two words “can” and “offset”.

Civil liability of the guarantor

The civil liability of the guarantor toward the beneficiary is a newly-created provision of the Code (as compared to the 2005 Civil Code).

Article 342 of the Code provides:

1. In the event that the principal fails to perform or improperly perform his obligation, the guarantor shall perform such obligation.

2. In the event that the guarantor improperly performs his guaranty obligation, the beneficiary has the right to request the guarantor to pay the value of the breached obligation and compensate for the damage.”

It is easy to note that Article 342.1 of the Code is quite redundant. This provision seems to neither resolve any issues nor fill in any legal loopholes in the 2005 Civil Code. 

There is no definition of civil liability in the Code but from the provisions on civil liability of Section 4, Chapter XV of the Code, “civil liability” can be construed as a negative legal consequence incurred by the person who fails to perform his obligation.

The civil liabilities mentioned in the Code include, but not limited to: continuing to perform the obligation (specific performance), paying compensation, paying late payment interest, etc.

In contrast, the act of the guarantor performing the obligation on behalf of the principal when the principal fails to properly perform such obligation is the guaranty obligation of the guarantor under the guarantee contract.

For this reason, the act of the guarantor mentioned in Article 342.1 is merely an obligation of the guarantor toward the beneficiary under the guarantee contract, rather than a negative legal consequence he incurs. The guarantor shall only incur civil liabilities in the event that he fails to properly perform his obligation under the guarantee contract (as provided in Article 342.2).

Besides, the content of Article 342.1 has already been mentioned in Articles 335 and 339 of the Code as well as in Article 44 of Decree 21. Article 342.1 appears to be redundant and unsuitable to the title of the Article and therefore should be removed. 

With regard to the liability of the guarantor when he fails to properly perform his guaranty obligation, especially in the event that the guaranty obligation is a payment, a question arises: whether or not the guarantor is liable to pay interest on the late payment to the beneficiary?

Article 342. 2 of the Code does not include the interest on late payment as one of the liabilities incurred by the guarantor. Notwithstanding that, based on Article 357 of the Code on interest on late payment, there is a ground for the beneficiary to request the guarantor to pay interest on late payment[6].

In addition, pursuant to Article 351.1 of the Code: “If an obligor fails to perform or improperly performs an obligation, he shall bear civil liability toward the obligee. Breach of an obligation means that the obligor fails to perform an obligation on time, incompletely or improperly performs an obligation.”.

The guaranty obligation of the guarantor, in its nature, is an obligation arising from the guarantee agreement concluded between the guarantor and the beneficiary. When there is a ground for the performance of this obligation, the guarantor is obliged to perform it. Failing to properly perform the guaranty obligation, the guarantor shall bear liability toward the beneficiary. Consequently, in case where the guaranty obligation is an obligation to make a payment, under Article 357.1, the beneficiary is entitled to request the guarantor to pay a late payment interest.-


[1] “Fails to perform” means that the principal does not perform the obligation at all whereas “perform incorrectly” means that the principal did perform an obligation but that the extent of the obligation performed is different from that of the obligation that he was supposed to perform towards the beneficiary under the primary contract.
[2] Government Decree 21/2021/ND-CP dated March 19, 2021, implementing the provisions of the Civil Code regarding security for the performance of obligations (Decree 21).
[3] Article 289 on performance of obligation for joint obligees.
[4] Nguyen Van Cu and Tran Thi Hue (co-chief editors) (2017), Scientific commentaries on the 2015 Civil Code of the Socialist Republic of Vietnam, People Public Security Publishing House, p. 481.
[5] E.g. a company.
[6] Article 357. Liability for late payment
1. In the event that the obligor makes late payment, he shall pay interest on the late-paid amount in correspondence with the late period.
2. Late payment interest rate shall be determined by agreement of the parties but must not exceed the interest rate prescribed in Clause 1 of Article 468 of this Code; if there is no such agreement, Clause 2 of Article 468 of this Code shall apply.

 

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