Ensure whether the liquidated damages clause in the contract can be upheld

On April 19, 2018, a bank of the plaintiff, a surety surnamed Jin and a property co-owner surnamed Shi signed a Maximum Amount Guarantee Contract, agreeing that the surety would provide joint and several liability guarantee for the claims arising between a bank and a company outside the case, and the maximum amount of the principal amount of the claims under the main contract was RMB 390 million. The types of business, interest rates, and the time limit for the performance of the debtor's debts shall be subject to the provisions of the master contract. The scope of the guarantee shall be the principal, interest, compound interest and penalty interest of the creditor's rights under the main contract, liquidated damages, damages and expenses for realizing the creditor's rights. Article 9 of the Maximum Amount Guarantee Contract stipulates that "(2) After this contract comes into force, both parties shall fully perform their obligations under this contract. If the guarantor fails to perform or fails to fully perform his obligations under this contract, he shall pay the creditor liquidated damages amounting to 10% of the sum of the principal amount under the signed master contract and compensate the creditor for all losses caused thereby."

【 Disagreement 】

In a guaranty contract, the two parties generally agree that the scope of guaranty liability is the loss caused to the creditor, that is, the principal, interest, penalty interest, compound interest and the cost of realizing the creditor's right, etc. In this case, the liability for liquidated damages is also specifically agreed. There are three views on how to deal with the validity of liquidated damages clause in warranty contracts:

The first view is that the liquidated damages clause is legal and valid. This view holds that Article 21 of the guarantee Law has clearly stipulated that "if the guarantee contract stipulates otherwise, the agreement shall be made according to the agreement", and the law may not prohibit it. The agreement between creditors and guarantors on liquidated damages is based on the principle of freedom of contract and should be supported.

The second view is that the liquidated damages clause is valid within a certain range. This view believes that the guarantor and the guaranteed can agree on a liquidated damages clause separately, but the total amount of "liquidated damages of the main contract + interest, penalty interest, compound interest, etc. + liquidated damages of the guarantee contract" should implement the provisions of 4 times the LPR ceiling. This view is actually a revision of the first view, which is a neutral view after referring to the private lending standards protected by law.

The third view is that the liquidated damages clause is invalid. This view maintains that if liquidated damages are separately stipulated in the warranty contract, they will not be supported. One is to ensure that the contract has subordination. Taking the scope of the main debt as the scope of the guarantee liability is enough to make up for the loss of the creditor. Based on the requirement of the subordination of the guarantee, the scope of the guarantee liability cannot be greater than the scope of the main debt. The second is to ensure that the contract is a single contract. The current law only stipulates that the guarantor can exercise the right of recovery against the debtor within the scope of the main creditor's right, but it does not make clear whether the guarantor can request the debtor to repay the liquidated damages. If the guarantor bears the penalty interest, compound interest and liquidated damages at the same time, the penalty is too heavy and cannot be recovered, which violates the principle of fairness and causes the interest imbalance between the parties.

【 Analysis 】

I agree with the third view.

First, from the perspective of the legislative purpose of the guarantee contract. According to the provisions of Article 21 of the Guarantee Law, the scope of the guarantee includes the main claim and interest, liquidated damages, damages and expenses for realizing the claim. If the warranty contract provides otherwise, such agreement shall apply. The effective party considers that this article gives the parties the free option to agree on their own obligations other than those within the scope of the principal obligation. The author does not agree with this view, "otherwise agreed, according to the agreement" does not mean that the agreement of the parties is valid, and the agreement between the two parties should still be based on the premise of ensuring the legislative purpose of the contract. The author believes that the subordination is the essential attribute of the warranty contract, and also the basic premise to be followed when interpreting and applying the contract terms. In other words, the warranty liability is essentially a substitute performance of the debtor's obligation, which is also in line with the legislative intent of the warranty contract.

Second, from the perspective of the positioning of the guaranty liability in the legal mechanism to protect the realization of contractual claims. The legal system of our country builds a interlocking framework for the realization of contractual claims, including contract liability system, contract guarantee system, liability property preservation system and so on, and the guarantee liability belongs to one of the contract guarantee systems. This legislative arrangement determines that when interpreting and applying the terms of the warranty contract, the scope of liability should be determined from its functional positioning under the general framework.

Third, from the spirit of the Supreme People's Court's trial guidelines. According to Article 55 of the Minutes of the Civil and Commercial Trial Work Conference of the National Court, the scope of guarantee liability undertaken by the guarantor should not be greater than the main debt, which is an inevitable requirement for the subordination of the guarantee. If the scope of the security liability agreed by the parties is larger than the main debt, such as the special breach liability agreed on the security liability, etc., the agreement larger than the main debt should be deemed invalid, so that the security liability can be reduced to the scope of the main debt. Therefore, the view that the liquidated damages clause in the contract is invalid also conforms to the spirit of the above minutes.