Weekly Case | Breaking Through the "Back-to-Back" Contract Clause Setting: A Successful Retrial

          Xie Xudong, Lawyer; Member of the Management Committee; Director of the Legal Aid and Public Welfare Committee; Director of the Administrative Business Department
 

          Xie Xudong, Lawyer, Male, Han nationality, 1978 Year 1 Born in month, Hangzhou, Zhejiang Province, a member of the Communist Party of China, graduated from the Law School of Zhejiang University with a master's degree. He has handled hundreds of cases, is proficient in criminal defense; specializes in corporate legal affairs, contract review and disputes, enterprise labor dispute resolution, construction engineering disputes, infringement disputes, domestic and foreign inheritance disputes, etc.; skillfully handles administrative penalties and administrative enforcement, relocation, administrative compensation and other administrative litigation; serves as legal counsel; handles various major, complex and difficult cases.

Contact Information:

Phone: 13858050716 Email: xiexudong@htxls.com

Successful retrial in a case that broke through the "back-to-back" contract clause setting

Case Summary

Zhu Mou, Lu Mou, and Xu Mou signed a "Project Cooperation Agreement" in May 2016 to cooperate in undertaking the renovation project of Company A. On May 28, 2018, they signed a "Payment Agreement" stating that "the renovation project has been completed, and the settlement and cost have been confirmed by both parties." It was finally agreed that Xu Mou would be paid 500,000 yuan "after the remaining payment from Company A is received," and Xu Mou's breach of contract liability was set at 30% of the total amount. Later, Zhu Mou and Lu Mou learned that the project had been settled in September 2018, but Xu Mou had been delaying payment. Zhu Mou and Lu Mou then entrusted Xie Xudong, lawyer of this firm, to sue the court.

The first-instance court held that the condition for Xu Mou to pay 500,000 yuan was that Xu Mou received the remaining payment from Company A. The plaintiffs, Zhu Mou and Lu Mou, claimed that Company A had paid the remaining payment, but stated that they were unsure whether it was paid to Xu Mou. In this regard, Xu Mou denied receiving the remaining payment, and the plaintiffs, Zhu Mou and Lu Mou, failed to submit evidence to prove their claim. Therefore, the first-instance court dismissed the plaintiffs' claims.

After the first-instance judgment, Zhu Mou and Lu Mou, with the help of their first-instance lawyer, actively contacted Company A to obtain key evidence, proving that the last payment for the project was completed on September 3, 2018, and that all payments had been settled. At the same time, Company A provided Zhu Mou and Lu Mou with a list of all payment recipients, showing that none of the payments made by Company A were made to Xu Mou. Zhu Mou and Lu Mou then continued to entrust Xie Xudong, lawyer of this firm, to appeal. In the second instance, Xu Mou argued that the payment agreement stipulated that the condition for payment was that the remaining payment from Company A was received by Xu Mou, and therefore insisted that Zhu Mou and Lu Mou should prove that Xu Mou had received the remaining payment from Company A, rather than Company A paying the money to other units.

Agency Strategy

Xie Xudong, lawyer, believed that the key to this case was how to understand the agreement on the arrival of the remaining payment from Company A in the payment agreement. Xu Mou believed that it should be understood as Xu Mou himself receiving the remaining payment. The appellants believed that the remaining payment from Company A could be deemed to have arrived once Company A had settled all the remaining payments. Xie Xudong, lawyer and entrusted agent of the appellants Zhu Mou and Lu Mou, argued: 1. The payment agreement states that the obligor for the remaining payment is Company A. Now Company A has issued a statement of facts stating that it completed the payment of the last payment for the project on September 3, 2018, and that all payments for the project have been settled. Therefore, even if Xu Mou has not received the remaining payment due to reasons with a third party, it cannot deny the fact that Company A has already paid the remaining payment, and Xu Mou cannot use this as a reason to claim that the payment condition has not been fulfilled. 2. Although Xu Mou claimed that he did not receive the remaining payment, he admitted in court that he had not used litigation or arbitration to claim payment from the third party or Company A in the past three years, and should be considered as the condition having been fulfilled because of the improper prevention of the fulfillment of the condition.

Judgment Result

The second instance adopted the appellants' opinion, and the second-instance court also believed that from the perspective of the burden of proof, when the appellants had already proved that Company A had completed the payment of the last payment for the project on September 3, 2018, and that all payments for the project had been settled, it would be too harsh to require the appellants to prove that Xu Mou had actually received the remaining payment, because the appellants could hardly prove the flow of funds between Xu Mou and the third party. In summary, based on the analysis of all circumstances of this case, it should be determined that the condition for Xu Mou to pay 500,000 yuan and liquidated damages as stipulated in the payment agreement has been fulfilled. Due to the emergence of new evidence during the second instance, the second-instance court finally made a final judgment on April 8, 2021:

1. The first-instance judgment is revoked.

2. Xu Mou shall pay 500,000 yuan and 150,000 yuan in liquidated damages within ten days from the effective date of this judgment.

Analysis

This case essentially provides an interpretation of the "back-to-back" contract clause that is more in line with the principle of good faith. "Back-to-back" contracts are widely used in engineering contracting, system integration, and commodity trade. At present, China's laws and regulations do not have clear provisions on the legal nature and validity of "back-to-back" clauses, and there are certain disputes in judicial practice. Some courts still make judgments by strictly interpreting the literal meaning of the contract clauses, some courts believe that "back-to-back" clauses are invalid, and some courts believe that "back-to-back" clauses are valid, but do not constitute conditional civil legal acts, but constitute civil legal acts with a time limit but unclear agreement. This case, however, makes an interpretation favorable to the creditor based on the principles of good faith and fairness, given that the appellee failed to exercise his rights and the appellant had fully proved that the project had been finally completed.

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