Real estate perspective: the legal application of "back-to-back" clauses in construction subcontracts.

Published:

2021-10-14

The raising of the problem In the field of construction projects, the general contractor and the subcontractor agree in the subcontract terms such as "payment according to the progress of the construction unit", "payment according to the proportion after the construction unit's funds arrive", "payment to the subcontractor on the premise of receiving the construction unit's project funds", because the general contractor takes the payment to the employer (construction unit) as the premise of its payment to the subcontractor, such clauses are therefore referred to as "back-to-back" clauses. In this way, the general contractor transfers part of the risk of the construction unit paying for the project to the subcontractor, and for whatever reason, it seems that it can use this as a reason to oppose the subcontractor's payment request before the construction unit fails to pay the project. But how should this provision be applied? Especially in the case that the general contractor neglects to exercise its creditor's rights against the construction unit or the two parties are in a payment impasse due to disputes, how should the subcontractor safeguard its legitimate rights and interests? view of judicial adjudication 1. If the "back-to-back" clause is valid and the agreed conditions for payment are not met, it shall be deemed that the conditions for payment are not met, such as (2020) Supreme Law No. 655: Wu Jikui and Ningbo Construction Engineering (contractor) for the construction of the construction of the internal contract relationship, Wu Jikui to Ningbo Construction Engineering issued a "letter of commitment", confirming that Wu Jikui contracted profit or income to achieve the way for Ningbo Construction Engineering to obtain and Feng Real Estate (contractor) of the 14 sets of housing sales rebates. The "Letter of Commitment" involved in the case agreed to use the 14 sets of housing sales of Hefeng Real Estate as Ningbo Construction to pay Wu Jikui contract profits or income conditions do not have. Although Wu Jikui has the right to claim the contract profit or income from Ningbo Construction Engineering, the conditions for Ningbo Construction Engineering to pay the contract profit or income to Wu Jikui have not yet been fulfilled because the project contractor and Feng Real Estate still owes Ningbo Construction Engineering money. 2. If the "back-to-back" clause is valid and one party fails to perform the relevant obligations, the back-to-back condition may be deemed to have been fulfilled, such as (2020) Supreme Law Minzong Judgment No. 106: The "Subcontract" and supplementary agreement signed by China Construction First Bureau and Qiyue Company are the true intentions of both parties. The content does not violate the mandatory provisions of the law and is legal and effective. The contract has made a "back-to-back" agreement that "the completed project shall be completed with the approval of the employer and the payment shall be audited and settled in advance, and the professional contractor may require the project contractor to make progress payment according to the proportion paid by the employer". as to whether the payment terms have been fulfilled, China construction first bureau proposed that both parties have agreed that China construction first bureau shall not have the payment obligation if Dadong construction fails to pay the project payment. However, the exemption of China Construction First Bureau shall be based on its normal performance of its obligations such as assisting in acceptance, settlement and collection. As the collection obligor of Dadong construction project funds, China Construction First Bureau has not provided valid evidence to prove that it has actively fulfilled the above obligations after the completion of the project involved in the case and before the lawsuit in this case, and has issued a collection, audit, settlement and collection for Dadong construction. On the contrary, the testimony of Fang Mou, a staff member of China Construction First Bureau, confirmed that China Construction First Bureau was negligent in performing its duties, refused the request of Qiyue Company, and never actively claimed rights to Dadong Construction. This situation belongs to the situation in which the parties improperly prevent the achievement of conditions for their own interests in the conditional contract stipulated in Article 45, paragraph 2 of the the People's Republic of China Contract Law, which is regarded as the achievement of conditions, therefore, the claim that the "back-to-back" condition has not been fulfilled and that the China Construction Bureau does not have the obligation to pay is not justified. Corresponding to the above cases, if the contractor does not fail to perform its obligations, it shall comply with the "back-to-back" clause. Such as (2019) Lu 01 Min Zhong No. 10060 involved in the contract agreed that "Party B (subcontractor) on the 25th of each month to report the completion of the project volume and output value of the current month, after Party A (general contractor) audit and confirmation depending on the owner's funds in place to pay Party B in proportion. After the completion of the project, the settlement of the project is audited by the owner, and the payment is made on a pro rata basis according to the availability of the owner's funds until the settlement" The court held that "the 'back-to-back' clause is by nature a conditional contract clause. This clause is a true expression of the meaning of the parties and there are no other factors that cause the clause to be invalid, and it shall be a valid clause. Lucheng Construction Company submitted settlement reports to China Construction Third Bureau Company both before and after the lawsuit, indicating that it actively claimed its rights to China Construction Third Bureau Company and that there was no delay in exercising its rights. In the case that the settlement value between the two parties has not been determined, it is impossible to determine the proportion and amount of the project payment payable by Lucheng Construction Company to Amber Labor Company, so the conditions for the payment of the project payment in dispute are not yet available." 3, the parties only agreed on "back-to-back" payment, as the agreement is not clear, should be in accordance with the law within a reasonable period of time to perform, such as (2021) Beijing 03 Min Zhong No. 7492: The contract stipulates that "the contract between Party A (the general contractor) and Hesheng Company (the owner) shall be attached to the contract, and the payment method shall be paid according to the back-to-back payment method of Party A and Hesheng contract, and it is agreed to accept the construction according to the technical requirements of Party A and Hesheng contract". Although both parties sign the contract and agree to use the back-to-back payment method, the contract is obvious violation of the contract, therefore, it should be determined that both parties to the contract do not know the payment method. In this case, the reasonable performance method of both parties can be determined according to the context of the contract and the relevant provisions of the law. However, since the project involved in the case was accepted and put into use many years ago, Qibaoliang Company filed the lawsuit in this case only after the warranty period of the project involved was exceeded, in view of Tongda Jiyuan Company's failure to submit sufficient evidence to prove that it had raised quality problems with Qibao Liang Company during the warranty period of the project involved, according to the opinions and spirit of relevant judicial interpretations, it should be deemed that the quality of the project involved installed by Qibao Liang Company is qualified, the payment terms have been fulfilled, and Tongda Jiyuan Company should pay the corresponding contract money to Qibao Liang Company. legal analysis Effect and nature of back-to-back clauses in (I) 1. Effect of "back-to-back" clauses There are a few views in judicial practice that deny the effect of "back-to-back" clauses on the grounds that they violate the relativity of the contract or violate the principle of fairness. However, the former confuses the contractual rights and obligations with the terms of payment attached to the contract, arguing that the premise of third-party payment as payment in this contract (subcontract) breaks through the relativity of the contract. The latter analyzes from a realistic point of view, and thinks that the clause obviously puts the subcontractor at a disadvantage and violates the principle of fairness, while ignoring the principle of fairness. It focuses on whether the two parties are in a considerable position at the time of the establishment of the contract. It is true that in the "buyer's market" environment of the contract relationship in the construction market, the subcontractor has realized the legal risks of the clause and has to bear the risks of the clause. Especially in the "A-refers to subcontracting" model, the general contractor is closer to the role of the project management company, the economic benefits in the designated subcontracting project is usually very limited, generally limited to management fees, through the "back-to-back" clause to avoid payment risk, it is understandable. Therefore, there is no case of showing fairness from the perspective of understanding, and even if it is obviously unfair, the legal effect it leads to is not invalid, but revocable. Therefore, there is no factual and legal basis for denying the validity of the "back-to-back" clause on the grounds that it violates the relativity of the contract or is obviously unfair. On the premise that the subcontract is valid, the "back-to-back" clause itself does not violate the mandatory provisions of laws and administrative regulations, and if it belongs to the true intention between the parties rather than the malicious collusion between the contractor and the general contractor to harm the interests of the subcontractor, it shall be a valid clause. Some local high courts clarify their effectiveness through answers and guidance opinions, such as Article 22 of the Beijing Higher People's Court's Answers to Several Difficult Questions in the Trial of Construction Contract Disputes, and the Anhui Higher People's Court on the Trial of Construction (II) Guiding Opinions on Legal Issues Applicable to Construction Contract Disputes. In judicial practice, most of them have recognized its effectiveness, but there are differences in how to apply it. 2. On the nature of the "back-to-back" clause One view is that the "back-to-back" clause is a conditional clause, broadly on the grounds that, from a practical point of view, the owner's payment is not inevitable, the owner's payment is an act for the owner, but an event for the general contractor, and whether the event occurs depends on the will of the owner and is therefore an uncertain fact. Another view is that according to the basic principles of the law and relevant provisions, under the premise of qualified project quality, the construction unit to pay for the project should be a definite fact, only the length of the payment period, which is also in line with the reasonable expectations at the time of the signing of the contract, so tend to "back-to-back" clause as a term clause. There is also a view that the clause is neither conditional nor time-limited, since the conditions and periods of time provided by law are conditions of entry into force, lapse or duration, while the "back-to-back" clause is not a condition of entry into force for payment, but merely an agreement between the parties on the time of payment. The above three views are based on objective facts, the logic of contract performance and the basic provisions of the law, and draw different conclusions about the nature of the "back-to-back" clause, forming a logical vortex. Therefore, in the judgment instrument on how the "back-to-back" clause applies, few instruments will analyze whether the clause is a conditional clause or a term clause, but directly identify it as a conditional clause or an explicit payment term agreement is unclear and then apply its corresponding legal consequences in conjunction with the facts of the case. From this perspective, different determinations about the nature of "back-to-back" clauses will also have different coping ideas and legal applications. The application of law in the case of the validity of the "back-to-back" clause of the (II). On the premise that the subcontract is valid, there are several legal logics in the application of the "back-to-back" clause: first, the agreement of the "back-to-back" clause should be observed under certain circumstances; Second, the general contractor's failure to exercise its rights to the employer to prevent the conditions from being fulfilled is deemed to have been fulfilled. Third, if "back-to-back" is recognized as the payment term, it may be deemed that the agreement is unclear. 1. Under certain circumstances, the subcontractor shall comply with the agreement of the "back-to-back" clause. The "back-to-back" clause belongs to the autonomy of the parties, does not violate the mandatory provisions of laws and administrative regulations, and is legal and effective. However, the "back-to-back" clause cannot be the permanent defense for the general contractor to refuse to pay, and the subcontractor should be bound by the "back-to-back" clause only under certain circumstances. Under the premise of the validity of the subcontract, there should be at least three requirements:(1) The content of the "back-to-back" clause should be clear, and the general contractor should not only agree to pay the subcontractor after the payment on behalf of the employer or the construction unit, instead, the specific proportion and scope of payment should be agreed, because the payment of construction works is generally phased and proportional payment, the general agreement will be regarded as the agreement is unclear. (2) The general contractor does not have the situation of idle exercise of rights, according to the principle of easy control of the near cause of proof, after the payment conditions are available, the general contractor should prove that it has actively claimed claims to the contractor. (3) The "back-to-back" clause can only be a defense for the general contractor within a reasonable period, I .e. within a reasonable period of time after the completion, delivery or expiration of the warranty period, the reasonable period can be determined in combination with the facts of the case. To the extent that all of these conditions are met, it may be tempting to assume that the subcontractor should be bound by the "back-to-back" clause. 2. If the general contractor is idle in claiming claims from the contractor, it shall be deemed that the terms of payment have been fulfilled. There are a large number of cases in judicial decisions that directly identify "back-to-back" clauses as conditional clauses, and the more typical ones include the above-mentioned (2020) Supreme Court Civil Final Judgment No. 106. Although the attached conditions are not the entry into force conditions stipulated by law, according to the interpretation method of "lifting weights to lightness", the entry into force of the contract can still be subject to conditions, and the performance of the contract can also be subject to conditions, the provisions of Article 159 of the Civil Code may be directly applied by analogy, and a conditional civil juristic act is deemed to have been fulfilled where the parties improperly prevent the achievement of the condition for their own benefit. If the general contractor is lazy in exercising the creditor's rights to the employer, the standard of "lazy in exercising" in the conditions for exercising the right of subrogation can be cited. As long as the general contractor does not exercise through litigation or arbitration, and the general contractor cannot prove that he actively claims the creditor's rights to the employer, he can be regarded as lazy in exercising the due creditor's rights, and then he can draw the conclusion that his improper prevention of the achievement of the conditions is regarded as the conditions, the subcontractor may request payment from the general contractor on this grounds. 3, "back-to-back" terms of the agreement is not clear, the general contractor should pay within a reasonable period of time. The "back-to-back" clause only takes the general contractor's receipt of the employer's payment as the premise of its payment to the subcontractor, but does not agree on the specific payment scope and proportion. The following disputes may arise between the parties:(1) when the employer pays the general contractor, the subcontractor can claim the right to the general contractor, and whether the employer must pay all the project funds as the premise;(2) As there are many different sub-projects in the construction projects, if the contractor pays the general contractor for the part other than the construction of the subcontractor, whether the subcontractor can claim the right to the general contractor. If the "back-to-back" clause is considered to be an agreement on the term of payment, the existence of the above dispute indicates that the clause itself is unclear. Article 501, paragraph 4, of the Civil Code stipulates: "If the time limit for performance is not clear, the debtor may perform at any time and the creditor may request performance at any time, but the other party shall be given the necessary preparation time. This clause establishes the legal rules that should be performed within a reasonable period of time in the event of an unknown period of performance, according to which the "back-to-back" clause is not clear, the subcontractor may request payment from the general contractor within a reasonable period of time. After the subcontractor obtains the due claim against the general contractor through litigation or arbitration according to the above ideas, if the general contractor has no ability to pay, and its delay in exercising the due claim causes damage to the subcontractor, the subcontractor may subrogate the general contractor's claim against the contractor in its own name, that is, the creditor's subrogation right stipulated in Article 535 of the Civil Code and Article 44 of the (I) of the Supreme People's Court on the Interpretation of Legal Issues Applicable to the Trial of Construction Contract Disputes. The application of law in the case of invalidity of back-to-back clauses in (III) If the subcontract is found to be invalid due to the violation of the law, the "back-to-back" clause shall also be invalid. According to Article 793 of the Civil Code: "The construction project contract is invalid, but if the construction project has passed the completion and acceptance, the contractor may be compensated at a discount by reference to the contract's agreement on the price of the project." This clause is based on the principle that restitution or restitution cannot be applied in the event of an invalid contract, so that its input is compensated at a discount by reference to the contractual agreement, and it does not lead to the conclusion that the time and conditions of payment are also applicable by reference, and the "back-to-back" clause does not apply by reference in the event of an invalid contract. At the same time, the subcontractor (the actual builder) may, in accordance with Article 43 of the Interpretation (I) of the Supreme People's Court on the Application of Legal Issues in the Trial of Disputes over Construction Contracts for Construction Projects, request the general contractor to pay and claim that the contractor shall bear joint and several liability within the scope of the outstanding payment. Summary The "back-to-back" clause is not a legal concept in the strict sense, and the application of the law and judicial interpretation is not uniform and clearly stipulated, but based on the general contractor, especially in the case of "A-finger subcontracting", the risk of price payment is avoided, and there are a large number of such clauses in practice. Most of the "back-to-back" clauses will be considered valid, and from the point of view of the application of the law, it should be analyzed in the light of the facts of the case whether the agreement of the clause is clear and whether the general contractor is lazy in claiming claims to the contractor.

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