According to section 5.1  of tor's specification. During the last
On failure, a server sends a
DESTROY cell to tear down the circuit.
Specifically, Section 5.4  states the circuit will be torn-down by sending
DESTROY back towards the client with the appropriate error code  in the payload.
Or chooses a new circuit completely ?
Correct. From Section 2.5  of the path specification
Requests that might have been
supported by the pending circuit thus become unsupported, and a new
circuit needs to be constructed.
 Section 5.1
 Section 5.4
 Error codes
 Section 2.5