Guarantee of the Labor Contract

Because of their close friendship, DaMing made a guarantee and wrote a contract of guarantee for AhDe. Unfortunately, AhDe disappeared when a dispute arose. Hence, the company claimed an indemnity against the guarantor, DaMing, rather than against AhDe. The lawyer in support of DaMing argued that the company and DaMing are not subjects with equal legal status and the contract of guarantee had violated the spirit of equality. The lawyer in support of the company held the point of view that the contract of guarantee should be effective because DaMing freely signed this guarantee.

I. Case Playback

Fellow townsmen DaMing and AhDe came to Shanghai in search of work, leaving their village hometown. They got along well with each other and frequently visited each other. Their relationship reflected an old Chinese saying: “While two fellow townsmen meet outside their hometowns, occasionally, their eyes are brimmed with tears.” One day, AhDe came to DaMing telling him that he had encountered some difficulties. As a matter of fact, AhDe found a new job with good salary and benefits. Unfortunately, AhDe’s job was to take care of goods and cargo and the boss had not been willing to sign a labor contract with him unless a guarantor was willing to make a guarantee with written form. DaMing realized it was unwise to arbitrarily act as a guarantor for his fellow townsmen. However, AhDe reassured him saying that it was merely a kind of testimonial useful when the labor contract would be signed between him and the unit.
DaMing and AhDe went together to the office where the contract of guarantee was signed between DaMing and the company. The contract of guarantee stated that DaMing was personally willing to be the guarantor for AhDe. DaMing would be responsible for all the losses of the company including those of the third party caused by AhDe should he violate company rules or national laws and regulations during his working period. The guarantor bears joint liability for the economic losses of the unit as long as such losses were caused by the warrantee. Moreover, it also stated that the effective guarantee period in this legal document would begin on the date when a contact of guarantee was signed and it would not be concluded until the termination date stipulated in the labor contract.
AhDe later signed a labor contract with this company. However, after six months, several boxes of cargo under AhDe’s supervision were lost and never recovered. Finally, the Court confirmed RMB 40,000 or more in economic losses. However, AhDe disappeared when the judgment was issued. With such a judgment, the company then sued DaMing.

Representatives of the company held the point of view that since DaMing had signed a contract of guarantee to the company at the time when a labor contract was signed between AhDe and the company, he should bear joint and several liabilities for the economic losses caused by AhDe’s fault. The contract was valid from the time point of signing to the time damages were incurred during the contract period. A final judgment of this case issued by the Court stating that AhDe should bear the compensation liability for the plaintiff’s economic loss was valid. The contents of this contract of guarantee were a true declaration of will between the company, DaMing and AhDe. Additionally, the labor contract and the contract of guarantee were both signed under the principles of equality and non-coercion which should be considered legal and effective. As a result, DaMing should bear the joint liability.
DaMing considered that this guarantee contract was not signed voluntarily; the provision of the company’s format contract states, “If the party refuses to perform his obligation to pay penalties and indemnities, the guarantor bears this liability.” This was an obligation forced upon the signer of the contract of guarantee that does not fulfill the condition of non-coercion. DaMing produced an internal company bylaw which states “Those employees whose contracts of guarantee expire should handle the procedure again and those employees who do not undertake the formal procedures within the set time limit would be subject to dismissal.” This rule does not conform to the legal regulation that contracts should be signed under a principle of equal and voluntary.
DaMing further stated that he made a guarantee regarding the labor contract that was related to the labor relationship. The contract of guarantee was a supplementary contract where the performance of debt was guaranteed. However, this “creditor’s right” exerted over AhDe by the company was determined through arbitration and litigation. The defendant had not guaranteed the result of the judgment. Moreover, the current scope of the Guarantee Law does not include labor contracts. Consequently, the contract of guarantee signed between the defendant and plaintiff was an invalid contract. The claim by the plaintiff that the defendant should bear joint liability lacks a legal basis
Should DaMing compensate the company for their economic losses? And does the labor contract allow these kinds of liability provisions and contracts of guarantee?

II. Legal Background

A guarantee is an act regarding particular property or the rights of a debtor or third party of the creditor to establish specific rights to safeguard property and ensure debt responsibility.  The forms of guarantee regulated in the Guarantee Law include assurances and promises, mortgages, hypothecation and collateral, liens and down payments. Assurance, being a guarantee by a person, means that under a stipulation between the guarantor and the creditor, the guarantor shall either perform the obligation or bear liability according to an agreement if the debtor refuses to perform his obligation. Mortgages, hypothecation and collateral, liens and down payments are all guarantees on property; the debtor or the third party takes property or rights to property as the guarantee for the debt payment. When the debtor refuses to perform his obligation, the creditor can take the designated property and claim his debt.
Whether or not the guarantee can be agreed upon as a stipulation between a laborer and a unit has not been regulated either in the Guarantee Law or the Labor Law. In addition, it is clearly presented in Article 24 of Some Suggestions about the Problems of Enforcing the Labor Law that none of the following types of guarantee including down payment, deposits, collateral, or mortgage compensation can be collected from the laborer when a labor contract is signed between the laborer and the employing unit. As a result, guarantees of property are excluded from the labor relationship. However, a legal gap exists in the personal guarantee system. Regulations with quite different attitude toward this legal gap have been expressed in local legislation. The system of personal guarantee has not been specifically permitted by most local legislation. But, the application of a system of personal guarantees in the labor contract is definitely regulated in the occasional local legislation, for instance, the city Xia Men.
Articles in the Labor Contract Law have filled in these legal gaps. It is regulated in Article 9 that “When hiring a laborer, a Unit may not require him to provide any guarantee or collect property from the laborer as collateral, nor may it retain the laborer’s resident identification card or other papers.” It can be concluded from review of the new law that application of any form of guarantee has been excluded. Moreover, it had been regulated that the employer could be fined or be liable for the damages by Article 84 of this new law in the event that the employer violates Article 11.

III. Lawyer Debate

Guarantees can be stipulated in a labor contract.
Lawyer Wang Pei Qiang from Shanghai White Magnolia Law Firm in support of the unit

Guarantees can be stipulated in the labor contract and therefore DaMing should bear the relevant liability. Although the employing unit presented had the advantage when the labor contract was signed with AhDe, AhDe was not forced to sign this labor contract with the employing unit. AhDe enjoyed the right to make his own decision as to whether he should sign this contract or not. As a result, AhDe decided to sign a labor contract with the employing unit where his true declaration of will was reflected which conformed to the principles of equality and non-coercion in the Contract Law. This labor contract should be determined to be legally valid.
The contract of guarantee between DaMing and the company is also valid. There were no conditions of coercion or fraud concealed in the contract of guarantee between DaMing and the company. All the actions performed were voluntary; it is untenable to say their actions were not in line with the relevant regulations in Contract Law and Guarantee Law. Hence, the contract of guarantee is also legal and effective. DaMing should bear the liability as a legally responsible guarantor.
Second, there are no prohibitive articles against guarantees in labor contracts although a labor contract has not been listed in the scope of what may be guaranteed according to the Guarantee Law. According to judicial interpretations of the Guarantee Law by the Supreme People’s Court, guarantees created under the forms regulated in the Guarantee Law for debts created from civil legal relationships are valid as long as they are not in conflict with other laws and regulations. It can be seen that not only are economic acts covered by the Guarantee Law, but all civil acts are also covered by this law. In summary, the claims of the plaintiff should be supported by the Court and DaMing should bear the liability to pay the RMB 40,000 loss to the company.

DaMing does not need to compensate the economic losses.
Lawyer Jiang Jing from Shanghai Xin Min Law Firm in support of DaMing

First, the contract of guarantee is void. According to the requirements of the current Contract Law in China, a contract should be signed between subjects with equal status. The contract of guarantee was signed according to the company’s requirements. Warrantee AhDe and guarantor DaMing had no choice and therefore, they were not the subjects with equal status. Also, it is required in the Guarantee Law that those who sign a contract of guarantee should also be subjects with equal status.
    A labor contract is a contract signed between the laborer and the employing unit in which a managerial relationship is established between them. Naturally, they are not subjects with equal status. A contract signed between subjects with unequal status does not belong within the scope of the Guarantee Law and thus, the contract of guarantee is void. So, although the principle labor contract was valid, the supplementary contract of guarantee signed between DaMing and the company was void.
Second, the contract of guarantee signed by DaMing was to guarantee the labor contract. However, the contents of a labor contract are not related to debts but rather to the managerial contract; DaMing guaranteed the working conduct of AhDe, not the payment of debts DaMing should not bear liability for debts caused by AhDe.
Third, according to the judicial interpretation issued by the Supreme People’s Court, such cases of labor contract guarantee are excluded from the scope of cases the Court will hear. Hence, a determination to dismiss the plaintiff’s action should be made by the Court.

IV. Final Judgment

The Court held that, as a person with full civil capacity, DaMing should bear civil liability for his own actions. There was no evidence that DaMing was threatened into signing this guarantee contract for AhDe; it was his true declaration of intention. This contract of guarantee is effective as long as it is not in conflict with any other laws and regulations. This is a dispute over a contract of guarantee and the signing date does not affect the effectiveness of this contract. DaMing should naturally bear joint and several liability for what he promised in the contract of guarantee. This judgment was affirmed after the appeal.

V. Expert Evaluation

“Guarantees” should be given substantial consideration.
Professor Dong Baohua from East China University of Political Science and Law

Generally speaking, a guarantee is created for a property contract. The aim of a guarantee is to assure the creditor’s claim for the debt in the case of contract violation. The guarantor will have to pay the debts on behalf of the original debtor. The original guarantee relationship between the guarantor and the warrantee is changed into a debtor-creditor relationship after the debt is paid by the guarantor on behalf of the warrantee. The guarantor enjoys the right to recover the damages from the original debtor after he pays the debt. Guarantees are generally conducted in relation to a pure “property relationship”. Regarding certain social relationships such as the labor relationship in which both personal and property relationships are involved, there are three points of view on whether the guarantee agreement between the two parties is allowable or not and people are divided on this issue.
One point of view states that a guarantee can be created in a labor contract. According to the current Contract Law in China, the parties have a right to sign contract freely and willingly; if a contract of guarantee is signed willingly by the parties, it should be considered legal and effective. In this case, the Court ruling that the guarantor should bear the liability was correct according to the regulation above. As for Article 2 of the Guarantee Law, the reason why the labor contract has not been included within the scope of Guarantee Law is that it is impossible to take into account all situations when a law is being made.
The gist of the Guarantee Law indicates that a guarantee can be created as long as it is related to debt. A debt is formed when work-related losses are caused by the laborer. It is not inappropriate to create a guarantee in a laborer contract. Because it is not prohibited in the law, a free negotiation between the parties should be allowable. As a matter of fact, the term of service regulated in the labor relationship is itself a kind of guarantee, but such kinds of guarantees are related to labor rather than property. Some benefits such as housing and training provided by the company when a labor contract is signed are called ‘payment in advance’ from which a debt is formed between the two parties. Employees provide labor to repay the ‘debt.’ If the employee refuses to carry out the agreement, the company should be allowed to claim economic compensation for the lack of performance of the labor contract. After all, if the employee insists on not performing his obligations, certainly it will be more costly for the unit to coerce the laborer to perform his obligations than to claim for compensation. A guarantee should be allowed in order to maintain the rights of the units.
Another point of view indicates that the effectiveness of a guarantee included in a labor contract should be judged based on the specific situation. Unlike in Criminal Law, Civil Law allows the parties to sign agreements as long as such agreements are not explicitly prohibited. As the labor relationship has not been completely excluded from the scope of the Guarantee Law, a part of the labor relationship can include specified guarantees.
A third point of view contends that a guarantee cannot be included within the labor contract. The function of the contract of guarantee is to guarantee the creditor’s rights, not to eliminate risk during the performance of a labor contract. Therefore, a labor contract should not be regulated by the Guarantee Law or civil and commercial regulation mechanisms.
We have to take the results of the verdict into consideration. If the contract of guarantee is supported, the employing unit will be encouraged to require the laborer to bear operational risks. Criminal acts such as corruption and stealing money belong to the scope of criminal law and should be subject to criminal liabilities. If the act of guarantee is encouraged, we are likely to see a revival of an ancient criminal penalty called lianzuo , which means once one is convicted of crime, his relatives will also receive the same penalty even if they had nothing to do with the crime. Since a regulation on down payment prohibitions has been issued by the Labor and Social Security Department, personal guarantees should not be permitted either.
Legislation in China is generally against the idea that guarantee agreements can be created within the labor contract. From the perspective of legal divisions, a labor relationship should be regulated by the Labor Law, which is typically characterized by the social law where are found such principles as “the freedom to enter a contract ought not to be subject to frequent intervention by the government.” As a result, it is inappropriate for the labor relationship to be regulated by either the Guarantee Law or the Civil Law. The Guarantee Law regulates guarantees of debt while the labor relationship regulates a personal relationship; it is improper to regulate personal relationships according to the Guarantee Law.
I think that these three views are not comprehensive; they are only partial rationales. The object of security in the Guarantee Law is the property relationship, and the aim of the Law is to make sure that property debts are paid. The labor relationship combines features of the property and personal relationships. A separate space for the guarantee of property should exist within the labor relationship. For example, if a sum of RMB 100,000 for training abroad has been granted to the employee, a guarantee can be written into the contract.  It should be discussed whether or not a guarantee can be created for a personal relationship, and clarification would be needed to define the ambiguous edges between aspects of personal and property relationships.
According to the principles of the Guarantee Law, generally speaking, the object of the guarantee is the payment of debt. As for guarantees of indeterminate debts, they are strictly restricted by the Guarantee Law. The maximum amount guarantee is the only exception to the above-mentioned restriction; these quotas can be calculated based on the total debt within a regulated performance period, which means, to some extent, it is also a kind of determined debt. A labor contract cannot be regarded as the performance of property debt and, as a result, there is no space for the application of a debt guarantee. In terms of the property (i.e. debt) relationship possibly caused by a personal (i.e. labor) relationship, I think that an agreement in advance to guarantee payment for losses to the company due to employee fault should be prohibited. The enterprise should bear liability for operational risks which occur during the regular process of work.
If this kind of advance contract of guarantee is allowed, there is no doubt that this will become a means of risk transference for the unit. For instance, in the Labor Standards Law in Japan, is regulated that no advance compensation quota is allowed to be stipulated by the employer. In this case, a predetermined compensation amount had been set when the labor contract was signed. No one could guarantee whether this event would happen in the future. Besides, most of the compensation stipulations were related to risks present during regular working hours when laborers were doing assigned tasks. These are risks related to personal and subordinate relationships or operational risks inherent to the work of the enterprise. If this kind of guarantee is allowed in the labor contract, the guarantee made by the laborers is turned into a form of insurance for the enterprise. I do not believe that the contract of guarantee was valid, nor do I believe the Court verdict was correct.
Analyzing further, if a guarantee is allowed to be created in the labor relationship, we may discover that it could lead to employment discrimination and the infringement of laborer’s rights. In this case, a contract of guarantee was a prerequisite for signing a labor contract. At present, we do not have any legal definitions of employment discrimination. Only Article 12 of the Labor Law suggests that laborers should not be discriminated against in employment because of their ethnic group, race, gender, or religious belief. The contents are so simple that such regulations make it difficult for anti-discrimination in employment to be considered a fundamental principle of China’s Labor Law.
In light of regulations in other countries in the world, it is not hard to find that such regulations related to actions outside the scope of occupational skills are all prohibited as employment discrimination. For instance, in the Labor Code of the Russian Federation, employment discrimination is defined as the restrictions or preferences for laborers that are not related to the occupation. Although the Occupational Stability Law of Japan shares similar restrictions to the Labor Law of China, the scope of the law is much wider. At the same time, anti-discrimination in employment is one of the four core labor standards of the International Labor Organization. Most importantly, we should utilize international treaties to find “anti-discrimination in employment” contents and examples in order to perfect the current labor law system.
In this case, a contract of guarantee had been set as a prerequisite for signing a labor contract, but it was not part of the job requirements or work scope of the laborer. Whether the laborer could obtain a job depended on whether he was willing to provide the guarantor, not on his working capacity or skills. This is obviously a kind of employment discrimination. What’s more, such a contract of guarantee can lead to an employer’s failure to reduce operational risks and strengthen oversight and management. Such guarantees will ensure that laborers face inexhaustible difficulties when they are choosing jobs. I hold the point of view that the regulation forbidding the collection of any form of down payment, deposit, collateral or mortgage compensation or estate under mortgage from a laborer when the labor contract is signed issued by the Ministry of Labor should be understood in this way.
  Neither the personal guarantee nor the guarantee of property is allowed under the Labor Contract Law. DaMing would have won the case if it were judged according to provisions of the Labor Contract Law. Nevertheless, as is stated above, it would be irrational to ban all guarantees in the Labor Contract Law since the guarantee system is reasonable in certain situations.

From LexisNexis