Hello, this is Attorney Park Jong-han from Cheongchul Law Firm.

In construction subcontracting contracts, name lending is one of the common occurrences. Many agreements are made using the name of a company that holds a construction business license, and one of the issues that can arise in relation to name lending is “who should be regarded as the contracting party.” The reason is that the counterpart who can claim performance of the contract or damages varies depending on who the contracting party is.

[Question]

In the case of name lending in construction subcontracting contracts, who is the contracting party?

[Answer]

A. Legal Principles

If an actor performing a contract acts in another's name, regarding who should be regarded as a party, it is first determined that if the intentions of the actor and the counterpart coincide, then the actor or the name lender is defined as the party according to that agreed intention. That is, if both contracting parties agreed to designate either the name lender or the actor as the contracting party, then the party is determined according to that intention.

If the intentions of both parties do not coincide, it will be determined based on the specific circumstances surrounding the contract before and after its execution, taking into account the nature, content, purpose, and circumstances of the contract, and if the counterpart is a reasonable person, it will be understood who among the actor and the name lender is to be regarded as the contracting party. In other words, the name lender in the contract does not always become the contracting party.

The above legal principle also applies directly to situations involving lending licenses in construction works, commonly referred to as name lending. If a subcontractor not registered as a general contractor enters into a construction subcontract with the client, and by mutual agreement, the name of the subcontractor in the contract is presented as a business registered as a general contractor, but in reality, the unregistered subcontractor carries out the work directly and receives the payment for the work on their own account, it can be recognized that they intended to be the contracting party, therefore the contracting party would be the unregistered subcontractor (Supreme Court ruling on March 10, 2016, case number 2015Da240768, Supreme Court ruling on September 6, 2007, case number 2007Da319990).

B. When the lender of the construction business license is considered not to be the subcontractor

[Supreme Court ruling on December 8, 1998, case number 98Da11963]

The plaintiff lent the license to A, who then entered into a construction subcontract with the defendant in the name of the plaintiff and performed the work. The defendant was also aware of this situation, and it was determined that the unregistered subcontractor was the contracting party.

“Considering that the defendant was aware of the fact of the license being lent and various circumstances revealed by the record, namely, the plaintiff was hardly involved in the work, A was the one who mainly executed the work, and although tax invoices were issued in the name of the plaintiff, in reality, A received the payment from the defendant and paid subcontractors or workers, it can be seen that for the remaining construction contract, the actual subcontractor was not the license lender (the plaintiff) but the actor (A), with the intention of A and the defendant aligned, or at least if the defendant were a reasonable person, it is fully acknowledged that A would have been understood as the contracting party of the subcontract).”

C. When the lender of the construction business license is considered the subcontractor

[Supreme Court ruling on September 6, 2007, case number 2007Da31990]

The plaintiff paid a license lending fee to A Company and agreed to rent the general construction license to perform the work, and in doing so, designated the name as A Company while formally subcontracting the entire work from A Company, receiving payment through A Company and issuing the tax invoice in the name of A Company.

“In the standard construction subcontract agreement, it was noted that ‘Defendant 1’ was listed in the contractor field and ‘A Company, CEO (name omitted) 4’ in the subcontractor field, along with ‘Defendant 1’ in the constructor field of the attached construction contract, and during the process of changing the title of the owner from Defendant 1 to Defendant 2, it was noted as ‘Defendant 2’ in the contractor field and ‘A Company, CEO (name omitted) 4’ in the subcontractor field in the contract change, confirming that the plaintiff had verified the change of ownership. After completing the work, the plaintiff, failing to receive the remaining payment from A Company, claimed to be a subcontractor of A Company and asked A Company to request the remaining payment from the owner or demanded payment from A Company. It is evident that Defendants remitted a total of 2.45 billion won as construction payment into A Company’s corporate account seven times from December 30, 2003, to July 30, 2004, and that during the period from August 16, 2004, to December 1, 2004, Defendant 2, who acquired the status of the owner, remitted a total of 3.3 billion won to A Company’s corporate account four times, and that the defendants have never directly paid the plaintiff or deposited any money into the plaintiff’s account. Based on these facts, it is reasonable to conclude that the court’s belief that the defendants and the plaintiff had mutual agreement on the plaintiff being the contracting party was based on the circumstance that the defendants regarded the plaintiff not as the contracting party but as a site manager of subcontractor A Company. There were no materials to find that there was any mutual agreement that the plaintiff should be regarded as the subcontractor. Therefore, in assessing the nature, content, purpose, and circumstances surrounding the subcontract, it should be determined how the defendants, as reasonable individuals, understood whether the plaintiff or A Company was the contracting party; and based on the circumstances just mentioned, it is reasonable to conclude that the defendants understood A Company to be the contracting party and executed the subcontract with them.”

In this way, we briefly examined the criteria for determining who the contracting party is in cases of name lending in construction subcontracting contracts. In disputes related to construction works, the relevant laws are quite complex, and because of the characteristics inherent to the construction field, knowledge and experience are necessary. It is also important to be well aware of not only court rulings but also practical cases, administrative interpretations, and handling examples related to disputes. Therefore, it is advised to seek the assistance of Attorney Park Jong-han, who possesses expertise in construction and real estate as well as extensive experience in various dispute resolutions.

Cheongchul Law Firm is comprised solely of attorneys from the top 5 law firms in the country, prosecutors, and corporate legal teams, and does not deploy just one attorney, but rather forms a team of specialists in the relevant fields related to the case. Cheongchul provides comprehensive solutions to business matters, focusing ultimately on achieving what the client desires, beyond just addressing specific issues. If you need assistance in achieving your goals, please don't hesitate to contact Cheongchul.