Perspective | Legal Interpretation [2024] No. 11 (Invalidity of Back-to-Back Clauses) in the Practical Application and Insights in Contract Disputes
Published:
2024-12-31
This article focuses on the "Reply of the Supreme People's Court on the Effectiveness of the Clause Requiring Third-Party Payment as a Precondition for Payment in Agreements between Large Enterprises and Small and Medium Enterprises" (Fa Shi [2024] No. 11). It combines four contract dispute cases to deeply analyze the specific application of this reply in judicial practice. By examining the reasoning and outcomes of each case, it elucidates the important role of this reply in safeguarding the legitimate rights and interests of contracting parties and regulating market transaction order. Additionally, it explores the insights brought by this reply in practice, providing references for handling similar contract disputes and promoting fairness and stability in market transactions.
Abstract:This article focuses on the "Reply of the Supreme People's Court on the Validity of the Clause that Large Enterprises and Small and Medium Enterprises Agree to Use Third-Party Payments as a Precondition for Payment" (Fa Shi [2024] No. 11), combined with four contract dispute cases, to deeply analyze the specific application of this reply in judicial practice. By analyzing the reasoning and results of each case, it elaborates on its important role in safeguarding the legitimate rights and interests of contracting parties and regulating market transaction order, and discusses the insights brought by this reply in practice, providing references for handling similar contract disputes and promoting fairness and stability in market transactions.
Keywords:Fa Shi [2024] No. 11 Contract Dispute Back-to-Back Clause Judicial Practice
1. Introduction
In commercial activities, contract relationships between large enterprises and small and medium enterprises are widespread, among which the "back-to-back" clause that uses third-party payments as a precondition for payment is common. However, such clauses often lead to disputes due to potential harm to the rights and interests of small and medium enterprises. The introduction of Fa Shi [2024] No. 11 provides a clear legal basis for resolving such disputes. By analyzing relevant cases, a deeper understanding of the application and impact of this reply in judicial practice can be gained; it also helps to answer questions for consulting clients, with some enterprises proactively informing about the invalidity of "back-to-back" clauses.
2. Overview of Key Points of Fa Shi [2024] No. 11
Fa Shi [2024] No. 11 clearly stipulates that when large enterprises engage in construction projects, procurement of goods or services, and agree with small and medium enterprises that payment is contingent upon receiving payments from third parties, such agreements are invalid due to violations of the relevant provisions of the "Regulations on Ensuring Payment to Small and Medium Enterprises". According to Article 153, Paragraph 1 of the Civil Code, after the clause is deemed invalid, the court should reasonably determine the payment period and liability for breach of contract for the large enterprise based on the circumstances of the case.
3. Case Analysis
3.1 Contract Dispute between a Company and Mr. Hou (2024) Jing 02 Min Zhong 15335
Case Focus:Whether there is an employment relationship between the company and Mr. He, whether the payment conditions are met, and whether the statute of limitations has expired.
Application of the Reply:The company signed an agreement with individual Mr. Hou stipulating that "after receiving 90% of the owner's project payment, the total service fee and wages of the personnel assigned by Party B will be paid within 10 days." The court, based on the spirit of Fa Shi [2024] No. 11, ruled that this "back-to-back" clause is invalid, as the project in question was completed and accepted before January 2019, and the company has been in arrears since then, thus its appeal regarding the non-fulfillment of payment conditions was not accepted.
Insights:This case shows that even if one party to the contract is an individual, similar "back-to-back" clauses may also be deemed invalid due to significant unfairness or violation of relevant regulations, effectively protecting the rights and interests of the other party to the contract. It also emphasizes that when determining contract relationships and payment conditions, multiple factors should be considered to avoid making judgments based solely on a single factor.
3.2 Dispute over Sales Contract between Wuhan Certain Construction Group Co., Ltd. and Hubei Certain Ready-Mixed Concrete Co., Ltd. (2024) E 01 Min Zhong 15700
Case Focus:The validity of the clause in the "Material Purchase and Sale Contract" stating "Party A shall pay Party B the project payment in proportion to the progress of the project payment received."
Application of the Reply:The court, based on the first article of Fa Shi [2024] No. 11, determined that the purpose of this clause is to transfer payment risks and reduce the financial pressure on Company A, which is unfair to Company B, and should be deemed invalid. Company B can directly claim the payment without being bound by this clause. The first-instance judgment ordered Company A to pay the goods payment and overdue penalty, which was upheld in the second instance.
Insights:It clarified that if a "back-to-back" clause involves unreasonable risk transfer and harms the interests of small and medium enterprises, it will be deemed invalid, safeguarding the payment rights of small and medium enterprises in sales contracts and prompting large enterprises to actively fulfill their payment obligations.
3.3 Dispute over Construction Design Contract between Inner Mongolia Certain Research Institute Co., Ltd. and Inner Mongolia Certain Real Estate Development Co., Ltd. (2024) Nei 01 Min Zhong 5640
Case Focus:Whether the payment conditions for design fees are met and how the amount is determined.
Application of the Reply:Although the contract stipulates that the design fee will be paid after government special funds are in place, the court found that the arrangement of the fund's use and the application for funds by the contracting party had issues, and the defense that the payment conditions were not fulfilled was not established, ruling that the design fee and overdue interest should be paid. Although this case did not directly cite Fa Shi [2024] No. 11, it indirectly reflects that when determining payment conditions, the court will comprehensively consider the performance of the contract and the actual use of funds, aligning with the spirit of the reply to maintain fair transactions and protect the rights and interests of the contracting parties.
Insights:For agreements that make payment contingent upon third-party funds being in place, the court not only examines the contract clauses but also pays attention to the management and use of funds by the contracting party, ensuring the reasonableness of payment conditions and further safeguarding the legitimate rights and interests of the contracting parties.
3.4 Dispute over Construction Contract between Guangzhou Certain Development Co., Ltd. and Guangzhou Certain Engineering Co., Ltd. (2024) Yue 01 Min Zhong 22356
Case Focus:The validity of the payment clause and the conditions for the final payment in the "Civil Air Defense Equipment Installation Engineering Construction Contract."
Application of the Reply:The court, based on the "Regulations on Ensuring Payment to Small and Medium Enterprises" and the first article of Fa Shi [2024] No. 11, ruled that the clause in the contract stating "Party A shall pay Party B the relevant project payment only after receiving the project payment for the civil air defense project allocated by the construction unit" is invalid, as it requires Company A to accept unreasonable payment deadlines and conditions, violating mandatory provisions of administrative regulations. The first-instance judgment ordered Zhujiang Company to pay 90% of the quality assurance deposit, which was upheld in the second instance.
Insights:It further emphasizes that in the field of construction contracts, if "back-to-back" clauses harm the rights and interests of small and medium enterprises, they will be deemed invalid, providing strong protection for the payment rights of small and medium enterprises in the construction field and regulating the payment order in the construction market.
4. The Significance of Fa Shi [2024] No. 11 in Practice
4.1 Protecting the Legitimate Rights and Interests of Small and Medium Enterprises
Fa Shi [2024] No. 11 effectively curbs the behavior of large enterprises unreasonably delaying payments using "back-to-back" clauses, allowing small and medium enterprises to avoid falling into collection difficulties due to payment disputes between large enterprises and third parties, ensuring their legitimate rights and interests are promptly protected.
4.2 Regulating Market Transaction Order
This reply unifies judicial adjudication standards and clarifies the rules for determining the validity of "back-to-back" clauses, prompting large enterprises to adhere to principles of fairness and reasonableness when signing contracts, avoiding the abuse of dominant positions to set unreasonable clauses, thereby regulating market transaction behavior and maintaining market transaction order.
4.3 Promoting Contract Performance and Economic Development
By ensuring the payment rights of small and medium-sized enterprises, it enhances their liquidity and operational stability, helping them better fulfill contractual obligations and promoting the healthy development of the entire market economy.
V. Conclusion
Document No. 11 [2024] has played an important role in the judicial practice of contract disputes. Analysis of relevant cases shows that this reply provides clear guidance for resolving disputes arising from "back-to-back" clauses between large enterprises and small and medium-sized enterprises. In future market transactions, all parties should fully recognize the impact of this reply, adhere to the principles of fairness and reasonableness when signing contracts, and avoid setting unreasonable payment conditions. At the same time, judicial practice should continue to uphold the spirit of this reply, make fair judgments, maintain the fairness and stability of market transactions, and promote the healthy and orderly development of the market economy.
The Supreme People's Court's Reply on the Validity of Payment Conditions Based on Third-Party Payments Agreed Upon by Large Enterprises and Small and Medium-Sized Enterprises
Document No. 11 [2024]
The "Supreme People's Court's Reply on the Validity of Payment Conditions Based on Third-Party Payments Agreed Upon by Large Enterprises and Small and Medium-Sized Enterprises" was adopted at the 1921st meeting of the Supreme People's Court Judicial Committee on June 3, 2024, and is now published, effective from August 27, 2024.
Supreme People's Court
August 27, 2024
The Supreme People's Court's Reply on the Validity of Payment Conditions Based on Third-Party Payments Agreed Upon by Large Enterprises and Small and Medium-Sized Enterprises
(Adopted at the 1921st meeting of the Supreme People's Court Judicial Committee on June 3, 2024, effective from August 27, 2024)
Shandong Provincial High People's Court:
Your court's request regarding the validity of "back-to-back" clauses in contract dispute cases has been received. After research, the reply is as follows:
1. If a large enterprise agrees with a small or medium-sized enterprise that payment is contingent upon receiving payments from a third party during the construction, procurement of goods, or services, and this content violates Articles 6 and 8 of the "Regulations on Ensuring Payment to Small and Medium-Sized Enterprises," the people's court should determine that the agreed clause is invalid according to the provisions of Article 153, Paragraph 1 of the Civil Code.
2. After determining that the contract clause is invalid, the people's court should reasonably determine the payment period and corresponding breach of contract liability of the large enterprise based on the specific circumstances of the case, combined with industry norms and the trading habits of both parties. If both parties have agreed on the interest calculation standard for overdue payments, it should be handled according to the agreement; if the agreement is illegal or there is no agreement, interest should be calculated according to the one-year loan market quotation rate published by the National Interbank Lending Center. If the large enterprise requests to reduce breach of contract liability on the grounds that the contract price already includes compensation for overdue payments, and the defense reasons are valid upon review, the people's court may support it.
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