The "back-to-back" clause in the sales contract of a decoration company in Guangdong has been ruled invalid
2024-09-19
In the transaction chain of "employer contractor subcontractor/supplier" in construction projects, contractors often require the inclusion of "back-to-back" clauses in contracts with subcontractors or suppliers, transferring third-party payment risks to downstream suppliers and construction parties in the supply chain. Is this type of clause valid? Recently, the Intermediate People's Court of Guangzhou, Guangdong Province, concluded a dispute over a sales contract involving payment under the "back-to-back" clause, ruling that a decoration company should pay the purchase price and overdue interest to a sanitary ware company. A certain decoration company (large enterprise) signed a procurement contract for engineering materials with a certain sanitary ware company (small and medium-sized enterprise), and the decoration company purchased engineering materials from the sanitary ware company. The contract stipulates that all payments shall be made by a third-party real estate company (i.e. the developer) to the decoration company. Within 5 days after receiving each payment from the real estate company, the decoration company shall pay 100% of the payment to the sanitary ware company. After the sanitary ware company supplied goods to the decoration company normally, the decoration company refused to pay the sanitary ware company for the goods on the grounds that the real estate company had not paid them. The sanitary ware company then filed a lawsuit, requesting the decoration company to pay the unpaid goods and overdue payment interest. After trial, the first instance court held that although the case involved a contractual agreement that all payments were to be made by the real estate company to the decoration company, the decoration company should pay 100% of each payment made by the real estate company to the sanitary ware company within 5 days of receiving it. But the contract involved in the case still has independence and relativity with the engineering contract signed between the decoration company and the real estate company. This case is a sales contract dispute between a decoration company and a sanitary ware company. The real estate company is not a party to the contract involved in the case, so it does not comply with the principle of relativity of the contract to assume payment responsibility. In addition, in actual performance, it has been more than two years since the completion of the involved project. As the contractor of the project, the decoration company, based on existing evidence, is insufficient to prove that it actively claimed the project funds from the real estate company. Given that the decoration company is negligent in claiming project funds from the real estate company within a reasonable period of time, if the sanitary ware company is allowed to wait until the real estate company pays the decoration company before recovering the involved payment, allowing the waiting time to be extended, it will undoubtedly cause great damage to the rights of the sanitary ware company, obviously violate the principle of fairness, and inevitably have an impact on the normal transaction order and transaction safety. Based on this, the first instance court made the aforementioned judgment in accordance with the law. The decoration company is dissatisfied and has filed an appeal. The second instance judgment of Guangzhou Intermediate People's Court rejected the appeal and upheld the original verdict. The judge's statement is that the "back-to-back" clause transfers the payment risk of third parties to downstream suppliers and construction parties in the supply chain, who are mostly small and medium-sized enterprises and often lack the ability to negotiate on an equal footing with large enterprises. At the same time, it is difficult to grasp real-time information on the performance of contracts between large enterprises and third parties. This unequal information and negotiation status appears unfair to small and medium-sized enterprises that fulfill contracts with integrity. On August 27, 2024, the "Reply of the Supreme People's Court on the Validity of Third Party Payment as a Payment Precondition Clause for Large Enterprises and Small and Medium sized Enterprises" (hereinafter referred to as the "Reply") was officially released, which not only unified the judgment standards, but also provided a more smooth judicial relief channel for small and medium-sized enterprises, and has profound significance for stimulating market vitality and promoting fair competition. Of course, all types of market entities should also note that not all "back-to-back" clauses are invalid clauses, and the following factors need to be considered comprehensively: 1. In terms of the contracting parties, "back-to-back" clauses with large enterprises and small and medium-sized enterprises as counterparties are invalid. The validity of the "back-to-back" clauses signed between other parties, which require third-party payment as a prerequisite for payment, still needs to be determined in accordance with relevant laws and regulations. 2. In terms of contract types, it is mainly applicable to typical contract types such as construction projects, procurement of goods or services. 3. In terms of contractual provisions, the "back-to-back" clause states that large enterprises require payment from a third party as a prerequisite for payment. Of course, the requirement of large enterprises to pay according to the proportion of progress payments allocated to them by third parties should also be included. 4. In terms of contract signing time, the provisions of the "Reply" can only be directly applied to disputes arising from the signing of such clauses by large enterprises and small and medium-sized enterprises after September 1, 2020. In addition, it should be noted that small and medium-sized enterprises have an obligation to inform when signing contracts. According to Article 3 of the Regulations on Guaranteeing Payment of Small and Medium sized Enterprises, when small and medium-sized enterprises enter into contracts with government agencies, public institutions, and large enterprises, they should proactively inform them that they belong to small and medium-sized enterprises. (New Society)
Edit：Wangchen Responsible editor：Jia Jia
Source：http://rmfyb.chinacourt.org
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