Chang Dongmei,He is a senior partner of Beijing Zhanda Law Firm, deputy director of the real estate and construction engineering department, a member of the Construction Engineering Professional Committee of the Beijing Lawyers Association, the deputy director of the Real Estate and Construction Engineering Business Research Association of the Beijing Dongcheng District Lawyers Association, and an expert of the "Civil and Administrative Procuratorial Expert Consultation Network" of the Supreme People's Procuratorate.
Introduction:
With the successive thunderstorms of real estate development enterprises in recent years, the situation of construction enterprises closely related to them has become more and more difficult, and more and more construction enterprises choose to protect their legitimate rights and interests through litigation. There is no clear legal provision, and different judges in different courts have different understandings, so that lawyers have a lot of room to study and fight for in the process of the case.
Engaged in construction litigation business for more than ten years, lawyer Chang Dongmei, senior partner of Beijing Zhanda Law Firm and deputy director of the real estate and construction engineering department, has encountered more and more practical problems in the process of handling cases, and has become more and more complex.
This article is the third article in a series to analyze the application of back-to-back clauses in construction contracts.
Back-to-back clauses in a construction contract usually refer to the agreement between the general contractor and the subcontractor in the subcontract that the general contractor will pay the corresponding amount to the subcontractor after the employer pays the project price to the general contractor. It is precisely because of this understanding that the determination of the validity and applicable conditions of back-to-back clauses in judicial practice will first consider the risk transfer, and then consider the principle of fairness. In the event of a dispute, the general contractor wants to apply the back-to-back clause to delay payment, and the subcontractor wants the back-to-back clause to be invalid or unable to be applied in a timely manner.
In view of the fact that there is no regulation of the definition and application conditions of back-to-back clauses in China's legal provisions, this paper hopes to summarize, summarize and reverse the conditions for the application of back-to-back clauses by combing the current situation of judicial practice of back-to-back clauses.
With regard to the concept and application of back-to-back clauses, there are currently no clear and specific legal provisions, nor are there uniform adjudication rules, so legal practitioners mostly analyze the connotation and extension of back-to-back clauses from the perspective of their validity and nature.
1) If the contract is valid as a whole, the back-to-back clause shall be valid.
From the perspective of legal logic, the application of the analysis clause should first consider whether the clause is valid, and if it is valid, then consider whether it can be applied. At present, there is no clear legal provision on whether back-to-back clauses are valid or invalid, and the author believes that under the premise that the contract is valid as a whole, the parties are already aware of the risks corresponding to the back-to-back clauses at the time of entering into the contract, which is the true intention of both parties, and the parties should have a full prediction of their commercial risks, and both the general contractor and the subcontractor should weigh the pros and cons before signing the contract, and once the back-to-back clauses are signed, they should bear the corresponding risks and perform their obligations in accordance with the contract. As for some opinions that back-to-back clauses are invalid because they violate the principle of fairness, the author believes that the principle of fairness can be considered at the stage of whether and how back-to-back clauses are applicable, and should not break through the provisions of the law on the invalidity of contracts, so as to maintain the security of transactions.
2) Back-to-back clauses should be special agreements on the performance of the contract.
Regarding the nature of back-to-back clauses, most analysts believe that back-to-back clauses are either conditional contracts or contracts with time limits, while others believe that they are neither conditional nor time-limited, but special agreements between the parties to the contract on the performance of the contract. Article 158 of the Civil Code stipulates that "civil juristic acts may be conditional, except that they may not be conditional on the basis of their nature." Civil juristic acts with conditions for taking effect take effect when the conditions are fulfilled. Civil juristic acts with conditions for rescission shall become invalid when the conditions are fulfilled. Article 160 stipulates that "a time limit may be attached to a civil juristic act, except where a time limit may not be attached according to its nature." Civil juristic acts with a time limit for taking effect shall take effect at the end of the time limit. Civil juristic acts with a time limit for termination shall become invalid upon the expiration of the time limit. "The Understanding and Application of the General Provisions of the Civil Code of the People's Republic of China (II), edited by the Leading Group for the Implementation of the Civil Code of the Supreme People's Court, clarifies the concept of conditional and time-limited civil juristic acts, and conditional legal acts refer to the fact that the parties use the objectively uncertain occurrence of the future as an appendix to the validity of the civil juristic act, that is, the condition is a future contingent fact, which may or may not occur in the future; A legal act with a time limit refers to a civil juristic act in which a party sets a certain time limit in a civil juristic act and takes the arrival of the time limit as the basis for the occurrence or extinction of the effectiveness of the civil juristic act, and the attached time limit is a fact that will definitely occur in the future.
From the above perspective, the view that back-to-back clauses are time-limited is partially unreasonable, that is, the term is uncertain, and if the payment term agreed between the general contractor and the subcontractor is a definite point in time, then the clause cannot be called a back-to-back clause; However, the view that back-to-back clauses are conditional may also be flawed, because it is the contractual obligation of the employer to pay the project price to the general contractor, which is inevitable from the perspective of the contract agreement, and is not a contingent fact, but whether the employer can actually pay the project price in the end is limited to the employer's ability to pay, and if the employer is unable to pay the project price for a long time or even has gone bankrupt, then according to the principle of relativity of contract and the principle of fairness, the risk of not being able to collect the money can only be transferred back to the general contractor. However, in current judicial practice, back-to-back clauses are mostly recognized as conditional legal acts, so Article 159 of the Civil Code applies: "Where a party improperly prevents the fulfillment of a conditional civil juristic act for its own interests, it shall be deemed that the condition has been fulfilled; where the conditions are improperly promoted, it is deemed that the conditions have not been fulfilled".
In the author's opinion, back-to-back clauses are only special agreements between the parties to the contract on payment and should be enforceable by reference, but in the absence of clear legal provisions, it is reasonable to consider the principles of transaction security and fairness and refer to similar provisions in Article 159 of the Civil Code to review back-to-back clauses.
In order to clarify the court's determination of the validity and application of back-to-back clauses, as well as the focus of the court's application, the author searched the cases of courts across the country on the application of back-to-back clauses, and found that the courts did not hold negative opinions on the validity of back-to-back clauses when the contract was valid as a whole, and there were certain commonalities in the applicable conditions.
1) The determination of the validity and application of back-to-back clauses by local courts.
1.Supreme People's Court.
In the (2020) Zui Gao Fa Min Zhong No. 106 Civil Judgment, the Supreme People's Court held that China Construction First Bureau proposed that the two parties had agreed that in the event that Dadong Construction did not pay for the project, China Construction First Bureau would not have the obligation to pay. However, the exemption of China Construction First Bureau should be premised on its normal performance of its obligations to assist in acceptance, settlement and collection, and as the collection obligor of the Dadong Construction Project, China Construction First Bureau did not provide effective evidence to prove that it had actively performed the above obligations after the completion of the project involved in the case and before the litigation of this case, and urged Dadong Construction to accept, audit, settle and collect money. On the contrary, the testimony of Fang Mou, a staff member of China Construction First Bureau, confirmed that China Construction First Bureau subjectively neglected to perform its duties, refused Qiyue Company's request, and never actively claimed rights from Dadong Construction, which belongs to the second paragraph of Article 45 of the Contract Law of the People's Republic of China, if the parties to a conditional contract improperly prevent the fulfillment of the conditions for their own interests, it shall be deemed that the conditions have been fulfilled. In this case, the Supreme People's Court understood the back-to-back clause as a conditional contract, and focused on whether the application of the back-to-back clause was whether China Construction First Bureau had fulfilled its obligations to assist in acceptance, settlement and collection.
2.Xinjiang High Court.
The High People's Court of Xinjiang Uygur Autonomous Region held in the (2022) Xin Min Zai No. 157 Civil Judgment that the back-to-back clauses established in the construction project subcontract are the agreement of the parties on the time of payment of the project price, that is, the time when the general contractor should pay the project price to the subcontractor is determined by the time when the employer pays the project price to the general contractor, so this clause only determines the performance period of the general contractor to pay the project price, but does not affect the establishment of its obligation to pay the project price. That is, before the performance period of the general contractor arrives, the rights and obligations of both parties have been established, and they should be bound by legal acts. It has been six years since Taidian completed all construction obligations and completed the acceptance and delivery of its subcontracted professional works on October 30, 2016. On November 17, 2020, the two parties settled the subcontracted project and signed the Agreement to determine the project price, which has been more than two years since then. According to the (2020) Xin Min Zhong No. 385 effective judgment and enforcement ruling, the employer, Xinjiang Yihe Xingda Real Estate Development, has no property available for enforcement. Under the circumstance that there is great uncertainty as to whether the employer can pay the project payment to the XPCC Construction Company, and the claim of Taidian Company for the project payment has clearly exceeded a reasonable period, although the back-to-back clauses agreed in the subcontract and the undertaking of Taidian Company should be valid, according to the objective facts of this case, the continued application of the back-to-back clauses will make it difficult for Taidian Company to realize the project payment claim for a long time after the completion of the construction obligations, resulting in an obvious imbalance of interests between the two parties. Therefore, the XPCC Construction Company's refusal to pay the project price on the back-to-back clause is inconsistent with the purpose of the subcontract between the two parties, and is also inconsistent with the principles of good faith, equivalent compensation, and fairness and justice, and it is difficult for this court to support it.
In this case, the Xinjiang High People's Court clarified the validity of back-to-back clauses, holding that back-to-back clauses are only an agreement on the performance period, which does not prevent the establishment of the payment obligation, that is, it is not conditional. At the same time, the Xinjiang High People's Court considered that the time for the employer to pay the project price could not be determined, and if the back-to-back clause continued to be applied, the interests of both parties would be obviously unbalanced, and the principle of fairness was placed on the issue of whether the interests of the two parties were balanced, and came to the conclusion that the back-to-back clause could not be applied.
3.Jiangxi High Court.
The Jiangxi Provincial High People's Court held in the (2020) Gan Min Zhong No. 958 Civil Judgment that in a construction project subcontract, the contractor and the subcontractor agree in the contract that clauses such as "payment shall be made in accordance with the progress payment of the owner" and "the receipt of the construction unit's project payment shall be the premise of payment to the subcontractor", which refers to the payment of the project price by the construction unit (owner) to the contractor as a condition for the contractor to pay the project payment to the subcontractor, which is usually called a "back-to-back" clause. It is a valid agreement between the parties to the subcontract on the conditional payment of the project price, which is formally a conditional contract clause and is binding on all parties to the contract.
In this case, the appellant, Shanghai Urban Construction Company, undertook the Nanchang Chaoyang Bridge project, and subcontracted part of the construction tasks by way of public bidding, and the commercial bid clause of the bidding documents had already specified that the owner's appropriation was a condition for the payment of the project price, and the appellee, Wuchuan Heavy Industry Co., Ltd., had already known the risks corresponding to the conditions at the time of bidding. At the time of signing the subcontract, as an enterprise engaged in the field of construction engineering for a long time, it was very familiar with the "back-to-back clauses" agreed in the contract, and the company could make a rational judgment on the risk burden of paying the contract price according to its own risk tolerance, and had the right to choose whether to accept the clause, and its signing behavior was the true expression of the intention to accept the risk. Therefore, the agreement on the payment of the contract price in the first part of the agreement, the second part of the general clause and the third part of the special clause of the "Construction Engineering Professional Subcontract" signed between the appellant Shanghai Urban Construction Company and the appellee Wuchuan Heavy Industry Co., Ltd. is an expression of the true intention of both parties, does not violate the mandatory provisions of laws and administrative regulations, and should be found to be legal and valid. In a subcontract, the main contractual obligation of the contractor is to pay for the project, the main contractual obligation of the subcontractor is to carry out the construction of the project, and the main contractual right is to collect the corresponding project payment. Since the "back-to-back" clause gives the contractor a condition for the contractor to pay the contractor (the owner) as a condition for its payment to the subcontractor, the contractor has the obligation to actively claim the project payment from the employer (owner) to ensure that the subcontractor's main contractual rights can be realized. This is also the concrete embodiment of the principle of good faith in the "back-to-back" payment clause of the subcontract, and the application of the payment clause should be conditional on the contractor fulfilling the corresponding obligations. Article 159 of the General Provisions of the Civil Law of the People's Republic of China stipulates: "Where a party improperly prevents the fulfillment of a condition for its own benefit in a conditional civil juristic act, it shall be deemed that the condition has been fulfilled; Where conditions are improperly promoted, it is to be viewed as conditions not being fulfilled. According to the above-mentioned legal provisions and the principle of good faith, the appellant Shanghai Urban Construction Company has the obligation to actively claim the project payment from the employer (owner) to ensure that the "back-to-back" payment clause between it and the appellee Wuchuan Heavy Industry Co., Ltd. can be fulfilled, which is also a legal restriction on the exercise of its right of defense. Shanghai Urban Construction Company shall bear the burden of proof for the settlement between it and the employer and the fact that it has fulfilled its obligation to actively claim payment from the employer. If there is a delay in settlement, negligence in claiming project payment from the employer, etc., the negligence in handling the settlement shall be regarded as an omission to prevent the fulfillment of the performance of the conditions, and then the payment terms shall be deemed to have been fulfilled in accordance with the law, and the appellee, Wuchuan Heavy Industry Co., Ltd., shall not be opposed to the appellee's request for payment. In the above-mentioned case, the Jiangxi Higher People's Court not only confirmed the validity of the back-to-back clauses, holding that the back-to-back clauses were conditional, but also pointed out that the general contractor had the obligation to actively claim the project payment from the employer to ensure that the back-to-back clauses signed by the general contractor and the subcontractor could be fulfilled, and analyzed and determined the applicable conditions of the back-to-back clauses.
4.Beijing Second Intermediate People's Court.
In the (2020) Jing 02 Min Zhong No. 9249 Civil Judgment, the Beijing No. 2 Intermediate People's Court held that with regard to the payment terms of the purchase price, the procurement contract signed by the two parties stipulated that the four parties would pay 95% of the total amount of the goods after the acceptance and settlement with the owner, and China Construction First Bureau Company claimed that the payment terms of 80% to 95% of the payment price in this case had not been fulfilled. After investigation, although the Hefei BOE project involved in the case has not yet completed the settlement, it was accepted and delivered by the four parties as early as November 28, 2017. In addition, civil entities engaged in civil activities shall follow the principles of fairness and good faith, and China Construction First Bureau, as the demander, shall complete the settlement with the owner in a timely manner and actively perform its contractual obligations. Based on the relativity of the contract, it is not the contractual obligation of the Dangmei Building Materials Business Department to complete the settlement with the owner, and the project has not yet been settled and is not based on the fault of the Dangmei Building Materials Business Department.
As mentioned below, the Beijing High Court has corresponding judicial documents for back-to-back clauses, so the courts in Beijing are more uniform in the application of back-to-back clauses, holding that although the clauses are valid, the general contractor must actively perform the settlement and collection obligations before the back-to-back clauses can be applied.
5.Chongqing High Court.
On December 28, 2023, the Chongqing High People's Court released typical cases of construction project contract disputes, of which the fourth case, "A Construction Company in Sichuan v. a Construction Company in Chongqing, a Construction Project Subcontract Dispute", involves the application of back-to-back clauses. In this case, the court held that the clause agreed by the parties that the construction unit should pay the general contract project price as a condition for the payment of the subcontracted project price was essentially a "back-to-back" clause. This clause is the true expression of the intention of both parties, does not violate the mandatory provisions of laws and administrative regulations, and shall be legal and valid. In the case of signing the "back-to-back" clause, a construction company in Chongqing also had the obligation to claim the project payment from the construction unit in a timely manner to ensure the smooth performance of the contract between it and a construction company in Sichuan. In this case, under the circumstance that the project involved in the case had been completed and accepted and met the settlement conditions, a construction company in Chongqing did not actively promote the audit work after submitting the settlement materials to the construction committee of a certain district, nor did it claim the project payment from the construction committee of a certain district through litigation or other means, and it should be determined that a construction company in Chongqing was negligent in performing its obligations to handle settlement and collect project money, and it should be deemed that the payment terms have been fulfilled. The above-mentioned cases of the Chongqing High Court are basically the same as the above-mentioned Jiangxi High Court's determination priorities.
2) The application of back-to-back clauses in local judicial documents.
Although the application of back-to-back clauses is common in construction project dispute cases, not all local courts have made clear provisions in judicial documents, and the author only retrieved that the Beijing High People's Court has made provisions on the validity and application of back-to-back clauses in the Answers to Several Difficult Questions Concerning the Trial of Construction Contract Dispute Cases by the Beijing High People's Court, Article 22 of which stipulates that the subcontract stipulates that after the general contractor and the employer settle the settlement and the employer pays the project price, the subcontract stipulates that after the general contractor and the employer settle the settlement and the employer pays the project price, If the general contractor pays the subcontractor for the project, the agreement shall be valid. If the subcontractor is unable to obtain the project payment in a timely manner due to the general contractor's delay in settlement or negligence in exercising its due creditor's rights, and the subcontractor requests the general contractor to pay the outstanding project payment, it shall be supported. The general contractor bears the burden of proof for the settlement between it and the employer and the fact that the employer paid for the project.
Judging from the above cases and the court's interpretation, the court generally does not object to the validity of back-to-back clauses when the contract is valid as a whole, but it can also be seen that most courts still believe that back-to-back clauses are a way for the general contractor to avoid the risk of project costs, and simple application will be contrary to fairness and justice. It is also necessary to be more proactive and active to the employer and subcontractor in the process of contract performance.
1) Back-to-back clauses should be operable.
At present, most of the agreed contents of the back-to-back clauses between the general contractor and the subcontractor are as follows: "the general contractor shall pay the money to the subcontractor's account after receiving the payment from the owner", "the general contractor shall not have the obligation to pay the subcontractor if the owner fails to pay the project price to the general contractor", "the payment of the general contractor to the subcontractor shall be subject to the payment node of the owner's payment to the general contractor", etc., similar expressions can indicate that the payment methods agreed by the two parties are back-to-back. However, when it comes to the actual performance process, there is a risk that the actual performance cannot be achieved because the terms are not clear. For example, the agreement between the two parties that "the subcontractor submits an application for payment, the general contractor applies to the owner according to the schedule, and the general contractor pays the corresponding amount to the subcontractor's account after the owner makes the payment", which seems to be clear and specific, but when the general contractor applies for progress payment to the employer, it may include all the current payments payable including the money applied by the subcontractor. In particular, if the employer does not pay in full accordance with the node and proportion, it is even more impossible to prove whether the subcontractor's payment has been paid. Therefore, in back-to-back clauses, payment nodes and conditions should be more specifically agreed to make the clauses operational.
2) The general contractor shall assert the creditor's rights in a timely manner.
In the cases retrieved by the author, almost all courts will examine whether the general contractor is actively asserting claims against the employer when adjudicating back-to-back clauses. Although the effect of recognizing back-to-back clauses respects the autonomy of the two parties, and the effect of the general contractor's act of transferring part of the risk of the project payment to the subcontractor is deemed to be valid, such behavior must be subject to corresponding restrictions, that is, the general contractor must fulfill the obligation to demand the project payment from the employer, in which case the contract payment between the general contractor and the subcontractor can be paid smoothly, otherwise the rights of the general contractor will be infinitely magnified, which is contrary to the fairness of the transaction. Although the general contractor is also in a disadvantaged position in the face of the employer and has to consider many influencing factors, if the general contractor does not actively settle with the employer or neglects to claim creditor's rights against the employer, it will be difficult to apply the back-to-back clause.