Hello, this is Attorney Bae Gi-hyung from the law firm Chungchul.

In the previous post, we discussed the legal relationship surrounding the ‘loaning of names in the construction industry,’ specifically who becomes the contracting party between the lender and the borrower of the name.

The Construction Industry Basic Act states that one must be registered in the construction industry to engage in construction activities, and that contracts for subcontracting can only be established for business types corresponding to the nature of the work. Therefore, unlicensed construction workers often borrow the names of licensed contractors.

In particular, in state contracts/local contracts/public procurement contracts where competitive bidding is conducted, being registered in the construction industry is a condition for bidding, and thus there have been instances where participation in bids occurs via name loaning in the construction industry.

Then, when a construction contract is concluded through name loaning, what kind of ‘civil liability’ do the name lender and the name borrower actually bear?

[Question]

In cases of name loaning in the construction industry, what responsibilities do the name lender and name borrower have towards the contracting party?

[Answer]

The civil liabilities of the name lender and name borrower will vary depending on who is regarded as the contracting party.

(i) If the name lender is the contracting party, the name lender will be fully responsible for all liabilities under the construction contract, and the name borrower cannot be held liable under the construction contract. However, if the name borrower committed illegal acts during the execution of the contract, the name borrower will be liable for damages according to Article 750 of the Civil Act.

(ii) If the name borrower is the contracting party, it may seem that, in principle, the name lender cannot be held contractually responsible, but the Commercial Act Article 24 stipulates that the name lender bears joint responsibility with the name borrower.

The Supreme Court ruling also stated, “Article 24 of the Commercial Act is a provision meant to protect the interests of the contracting party who mistakenly believed the name lender to be the main operator of the business. According to this, the name lender bears the responsibility to repay the debts incurred by the name borrower during the business transaction. Furthermore, it can be said that the person who lent their construction license allowed the use of their name or business for the purposes of engaging in construction, and since it is typical for the construction industry to involve subcontracting, unless there are special circumstances, it should be acknowledged that borrowing the construction license for subcontracting transactions under the name of the lender is permitted, thus the name lender is responsible as the name lender, even if the person who borrowed the license represents or acts on behalf of the name lender in subcontracting transactions.” (Supreme Court ruling of October 23, 2008, 2008Da46555).

However, the Supreme Court has determined that “The liability of the name lender under Article 24 of the Commercial Act is to protect third parties who transact under the mistaken belief that the name holder is the main operator, thus if the contracting party was aware of the name loaning or had serious negligence regarding that fact, the name lender is not held liable.” (Supreme Court ruling of November 12, 1991, 91Da18309), indicating that the liability of the name lender may vary based on the presence of serious negligence.

Additionally, if the name borrower committed an illegal act, the name lender will be liable under Article 756 of the Civil Act for vicarious liability.

The Supreme Court decision also stated, “When one permits another to use their name regarding a certain business, that business is considered to be the business of the name holder in external relations, regardless of whether it is not the name holder's business internally, and even if it is not an employee of the name holder. Therefore, if the person allowed to use the name causes damage to another person intentionally or negligently while performing their duties, the person who permitted the name usage will be liable for that damage under Article 756 of the Civil Act, and with respect to the name borrowing relationship, the criteria for whether a relationship of use exists, as a condition of vicarious liability as per Article 756, should be decided based on whether the user was in a position to direct and supervise the wrongdoer, regardless of whether they actually did so.” (Supreme Court ruling of February 25, 2005, 2003Da36133).

Attorney Bae Gi-hyung has experience in providing legal advice on large-scale construction projects, national facility projects, and SOC construction businesses throughout their entirety, including government contracting, while working in the construction/real estate team of the Defense Facility Administration and a major law firm. With substantial experience and expertise in resolving related lawsuits, please feel free to contact us if you need assistance regarding government contracts, private construction projects, public procurement, state property, local property, or public property.

The law firm Chungchul consists solely of attorneys from the four largest law firms in Korea: Kim & Chang, Lee & Ko, Bae, Kim & Lee, and Sejong, and a single attorney does not handle a case. Instead, specialists in related fields form a team to respond to issues. Chungchul provides comprehensive legal consulting that focuses on achieving what the client desires, beyond just resolving specific issues. If you need help achieving your goals, do not hesitate to contact Chungchul.