Rulings on back-to-back clauses in BRI construction contracts

As the implementation of China’s Belt and Road Initiative reaches its 10th year, disputes and project risks have become prominent, leading to an increasing normalisation of cross-border and international disputes. Consequently, controversies surrounding certain theories and practices in Chinese judicial practice have gradually emerged.

Contractual freedom lies at the core of private law autonomy, forming the premise for legislation, judicial interpretation and legislative reasoning. Legislative restrictions on contractual freedom mainly manifest as the coerciveness of public law and the internal coerciveness of private law, such as contractual justice. Judicial adjudication, based on the judge’s discretionary assessment of individual cases and public interests, often interferes with contractual freedom. However, this dispute has not received sufficient attention in disputes related to the Belt and Road Initiative. In addition, relevant research and discussions have not been incorporated into the comprehensive legal framework of the Belt and Road Initiative. This article focuses on the controversies and preliminary considerations arising from the adjudication of back-to-back clauses in international construction contract disputes in Chinese courts.

Adjudication trends

Validity of back-to-back clauses. Currently, different viewpoints exist in Chinese judicial practice. One perspective respects the risk allocation under party autonomy and generally considers back-to-back clauses valid. Another viewpoint argues that such clauses violate the principle of fairness and should be deemed invalid. However, in most cases, the courts have ruled that the back-to-back clauses in contracts do not violate the basic provisions on validity in the Civil Code and should be regarded as conditional or time-limited agreements that both parties are obliged to fulfil. Therefore, these clauses should be deemed valid and the author also holds this view.

Nature of back-to-back clauses. In practice, under the premise of recognising their validity, courts refer to relevant provisions on conditional or time-limited civil acts to determine whether the contractor should bear the payment obligation.

One perspective argues that when the payee has fulfilled contractual obligations, the payer’s payment obligation is certain, with only the payment time remaining uncertain. Therefore, back-to-back clauses essentially constitute time limits for contract performance. If the time limit is clear, the payer should fulfil the payment obligation when it expires. If the time limit is unclear, according to article 511(4) of the Civil Code, the payee can request performance at any time but should be given the necessary preparation time.

Another perspective suggests that while conditional payment agreements are valid, judicial adjudication should consider principles of fairness, specific contract performance, and the social effects of the ruling.

Reassessment of back-to-back clauses. The author believes that the clauses belong to contractual clauses regarding the conditions for contract performance, constituting special agreements made by contractors and subcontractors regarding payment obligations. In cases where the agreed conditions are not met, the contractor temporarily refrains from fulfilling certain obligations under the contract, making it a contract with conditional obligations.

Factors influencing back-to-back clause adjudication. International construction projects under the Belt and Road Initiative differ from domestic construction projects due to the following factors:

1. Risk sharing: parties involved share risks through contractual agreements based on party autonomy;
2. Cross-jurisdiction and multiple regulatory authorities: projects involve countries and regions with different cultures, languages and legal systems, with the parties primarily subject to the laws of the project host country;
3. Political and economic factors: China’s political and economic factors are closely related to the participating countries of projects; and
4. Long-term co-operation and risk management: project stakeholders need effective co-operative mechanisms and risk management measures to address challenges posed by long project cycles and complex international collaborations.

Adjudicators should consider the following factors: respecting party autonomy through discretionary power, political factors manifested in the co-operation between the Chinese government and the host country government in the project, legal provisions of the project host country, risk sharing based on party autonomy, and the lengthy construction and settlement periods.

In cases where the back-to-back clauses clearly specify payment conditions or deadlines, the parties’ contractual autonomy and risk allocation should be respected. The specific construction practice unique to China’s judicial interpretation system, which protects the rights and interests of workers when a construction contract is deemed invalid, is generally not applicable to overseas projects.

Considering the above-mentioned relevant factors, cautious judgments should be made, for example, the main contractor should not be judged solely based on whether they initiated international arbitration or litigation when proving their timely exercise of debt claims against the host government or owner. Instead, the focus should be on reducing the contractor’s burden of proof and preventing unlawful subcontractors from benefiting from illegal acts.

Rigidity in applying traditional thinking to Chinese judicial practice, such as emphasising the party’s right to resort to litigation or arbitration for debt claim disputes, should be avoided. Instead, judgments should take into consideration the practical circumstances of the construction projects.

Conclusion

From a comparative law perspective, many countries have already made clear legislative provisions regarding back-to-back clauses in construction projects. When Chinese courts handle Belt and Road construction cases, it not only concerns the interests of Chinese enterprises but also involves the legitimate rights and interests of all parties and international co-operation relationships. In the adjudication of such cases, courts should adhere to the principles of impartiality, fairness and legality. They should fully respect the parties’ contractual freedom and autonomy while considering the unique and complex nature of international co-operation. Prudent judgments should be made to ensure the fairness and impartiality in cases.

Chen Yuanfei is a partner at Anli Partners