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defendants to determine the bad faith collusion to evade the matured debts. Note that in this case the courts seem to suggest that the matured creditor right be exercised through litigation or arbitration or otherwise the right may be deemed as having not been actively exercised.

6. Guarantee of Performance

In addition to the rights of subrogation and cancellation, the parties may set fort through agreement a guarantee to ensure the performance of the contract. In addition, the guarantee for performance of the contract may also be provided by the law (e.g. lien). Because of its purpose to ensure that the contract is to be performed, the performance guarantee is also called guarantee of contract. At present, the primary legal source for the performance guarantees is the 1986 Civil Code. Under the Civil Code, a performance guarantee, made by the agreement of the parties or by operation of law, may take the form of suretyship, security interest, money deposit or lien. In addition, the establishment of guarantee is subject to the Guaranty Law of the People’s Republic of China.57

6.1. Suretyship

Suretyship is a personal guarantee provided by a third party to the obligee to ensure that the contract obligations will be performed. Such a personal guarantee is based on the third party’s credibility or assets, and in case where the obligor defaults in performance, the third party as a guarantor is obligated to perform for the benefit of the obligee or will be held jointly liable for breach of the contract. Under Article 89 (1) of the Civil Code, a guarantor may guarantee to the creditor that the debtor will perform its debt obligation. If the debtor fails to perform, the guarantor shall perform the debt obligation or jointly and severally bear the liability as agreed. After performing the debt obligation, the guarantor shall have the right for indemnity against the debtor.

To provide suretyship, the guarantor may be a legal person, other organization or citizen who is capable of assuming debts. But no government agency or pubic affairs institute may serve as the guarantor in commercial contracts.58 In addition, the branches or functioning departments of a business company also may not act as guarantor unless authorized expressly in writing by the

57The Guaranty Law was adopted on June 30, 1995, effective October 1, 1995.

58Pursuant to the Guaranty Law of China, a government agency, as approved by the State Council, may act as a guarantor in the case of securing loans, for re-lending, from a foreign government or an international economic organization.

company to the extent authorized. According to the Supreme People’s Court, a suretyship made by the branch of a company shall generally be deemed invalid, but the branch shall bear the property liability incurred thereof. If however the branch is insolvent, the liability shall be borne by the company.59 There is a statutory requirement for the creation of suretyship. Under Article 13 of the Guaranty Law, to create a suretyship, a written contract shall be made between guarantor and obligee.60 It is also required in Article 15 of the Guaranty Law that the suretyship contract shall include the follows contents: (a) type and amount of the principal claim guaranteed, (b) the time limit for the debtor to perform the obligation, (c) methods of guaranty, (d) scope of surety-

ship, (e) term of suretyship, and (f) other matters the parties deem appropriate.

6.2. Security Interest

In order to guarantee the performance of contract, the parties may agree that obligor or a third party provides obligee with certain property as security from which the obligee may be compensated in case the obligor defaults. In China, the security interest is divided into two major categories: mortgage and pledge. Mortgage is defined as the interest in real property or right to the use of land that is provided by the obligor or a third party to obligee to guarantee the debts without transferring the right of possession of the property. It should keep in mind that no land but right to the use of the land may be used as mortgage in China. Pledge, also termed as pledge of movables, means that the obligor or a third party transfers the possession of his movables to the obligee as a security for debts. The movables include negotiable instruments (e.g. stocks).

As provided in Article 89 (2) of the Civil Code, the obligor or a third party may offer a specific property as security for the performance of obligations. If the obligor defaults, the obligee shall, in accordance with the provisions of law, be entitled to using the property in security to offset the debts or to having the priority in payment out of the proceeds from the sale of the property pledged. Because of the requirement for the transfer of the possession of the pledged property, the pledge will not take effect until the delivery of the property. In addition, if the pledge consists of negotiable instruments, the right to the exclusive use of trademarks, the property right in patents or copyright, which are transferable under the law, a registration is required in order for the pledge to become effective.

59See Supreme People’s Court, Opinions on Implementation of the General Principles of Civil Law of the People’s Republic of China (1988), art. 107.

60The Supreme People’s Court seemed to be flexible about the writing requirement. It is held that the oral guarantee between citizens, if witnessed by more than two uninterested people, will be deemed as a guarantee contract, unless otherwise provided by law. See id, art. 108.

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6.3. Money Deposit

Money deposit, or earnest money, is a security in the agreed amount of money to guarantee the obligee’s creditor right. Under Article 89 (3) of the 1986 Civil Code, within the limits of the law, the parties to a contract may agree that one party deposits with the other party certain amount of money as a guarantee to perform the contract. The money so deposited shall be refunded or credited against the contract price after the contract obligations are performed. The depositor shall have no right to reclaim the money if its fails to perform the contract obligations. If, however, the party who receives the deposit fails to perform, he is required, as a penalty, to double refund the deposited money.

Article 90 of the Guaranty Law mandates that the deposit money be executed in writing. And in the writing, the parties shall specify the time limit for the delivery of the deposit, and the written agreement for the deposit shall be effective on the date of actual delivery of the deposit. Pursuant to Article 91 of the Guaranty Law, the parties are fee to determine the money amount for the deposit, but the amount is capped at 20% of the total price of the contract.

6.4. Lien

The parties to a contract may also provide a lien by agreement to ensure the performance of contract obligations. The lien is defined in Article 82 of Guaranty law to mean the obligee’s possession of obligor’s movables, under which the obligee may retain the property or have the priority in payment out of money converted from the property or the proceeds from sale of the property or auction. The main difference between lien and pledge is that the property under lien is in the possession of the obligee before or on the date when the creditor right is created, while the pledge involves the transfer of property on or after the creation of the creditor right. In addition, the lien may only be made on the property of obligor, but the pledge may be placed on the property of a third party.

According to Article 89 (4) of the 1986 Civil Code, if a party has possession of the other party’s property according to the contract and the other party violates the contract by failure to pay the required sum of money within stipulated time period, the possessor shall have the right of lien against the property and thereby may retain the property to offset the debts or have the priority of being compensated out of the proceeds from the sale of the property. The contracts in which the obligee normally has the right of lien in case of obligor’s failure to perform are the contracts for storage, transportation or processing.