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In order to further solve the problem of overdue accounts of enterprises, ensure that small and medium-sized enterprises can participate in market competition fairly, safeguard the legitimate rights and interests of enterprises in accordance with the law, and boost the confidence of business entities, the Supreme People's Court has studied and formulated the "Reply on the Validity of Clauses Agreed by Large Enterprises and Small and Medium-sized Enterprises to Use Third-Party Payments as a Precondition for Payment" (hereinafter referred to as the "Reply"), which was officially released on August 27. This is an important judicial measure taken by the Supreme People's Court to implement the decision-making and deployment of the Party Central Committee and the State Council on clearing overdue accounts of enterprises.

The "Approval" has a total of 2 articles. First, it gives a negative evaluation on the effectiveness of the agreement between large enterprises and small and medium-sized enterprises to use third-party payment as a payment condition. Secondly, it stipulates how to determine the payment period and breach of contract liability after the relevant terms become invalid.

The positions of large enterprises and small and medium-sized enterprises in the market are naturally unequal, which is particularly evident in the "back-to-back" clauses agreed upon by both parties.

The so-called "back-to-back clause" usually appears in contracts between large enterprises and small and medium-sized enterprises. Its core meaning is that the payment terms between large enterprises (Party A) and small and medium-sized enterprises (Party B) are directly related to the time and conditions for Party A to receive payment from its customers (third parties). The contract stipulates that Party A will only pay the contract amount to Party B after it receives the corresponding payment from the third party. This means that even if Party B strictly performs its contract with Party A, the time of its receipt of payment is completely dependent on the payment of the third party.

For small and medium-sized enterprises, the unfairness of "back-to-back" clauses is obvious. The relevant clauses transfer the payment risk between Party A and its customers to Party B, which means that if the third party delays or refuses to pay, Party B may face the risk of delayed or even impossible payment.

In addition, due to the asymmetry of status and information, SMEs are usually unable to timely understand the performance of contracts between large enterprises and third parties, and it is difficult to control the payment risks of third parties. Sometimes, even if the third party has paid the money to Party A, the SME as Party B may not be able to obtain relevant information in a timely manner.

Why are SMEs willing to sign such obviously unfair terms? The reason is that large enterprises have a stronger negotiating position and can push for contract terms containing "back-to-back" clauses when bargaining with SMEs. SMEs are often dependent on large enterprises for business and are often forced to accept these terms.

This situation has had a serious impact on the production and operation of small and medium-sized enterprises, the most prominent of which is that large enterprises often default on payments to small and medium-sized enterprises.

At the end of 2023, in order to solve the increasingly serious problem of large enterprises owing accounts to small and medium-sized enterprises and to effectively protect the legitimate rights and interests of small and medium-sized enterprises, the State Administration for Market Regulation launched a special campaign to crack down on large enterprises owing accounts to small and medium-sized enterprises.

In March this year, at the National People's Congress, a relevant person in charge of the Supreme People's Court revealed that in 2023, the Supreme Court launched a special action against large enterprises for arrears of accounts payable to small and medium-sized enterprises, and executed 18.78 billion yuan. The severity of the problem can be seen from the above data.

The judicial organs have an inescapable responsibility to solve this problem. Compared with large enterprises, the weak position of small and medium-sized enterprises in market transactions is difficult to change. However, if the judicial organs strengthen litigation guidance and explanation in the litigation procedures, it can prevent the weak position of small and medium-sized enterprises in market transactions from turning into a weak position in litigation.

The Supreme Court’s “Reply” is not only timely but also of great significance.

By denying the validity of the "back-to-back" clause, the "Approval" will help solve the problem of large enterprises owing accounts to small and medium-sized enterprises and promote timely payment of funds, thereby reducing the financial burden of small and medium-sized enterprises and ensuring that they can carry out production and business activities more stably.

The "Approval" sends a signal that encourages large enterprises and small and medium-sized enterprises to establish a more equal cooperative relationship, and reflects a clear attitude of guaranteeing small and medium-sized enterprises' fair participation in market competition and safeguarding their legitimate rights and interests in accordance with the law.

The Reply also provides clear guidance to people's courts at all levels. From now on, when hearing relevant cases, it will ensure that the courts apply the law consistently and effectively, and the predictability and authority of judicial decisions will be greatly enhanced.