Company Sanctioned by the Fair Trade Commission for Poor Management of an Entrustment Contract: What Is the Difference Between Entrustment and Contract for Work?

An entrustment contract is a form of agreement used when a company assigns specific affairs to an outside specialist firm or individual. As issues such as the failure to prepare written contracts and disputes over payment have recently arisen in subcontracting transactions, the need to understand its legal structure and scope of liability accurately has grown.

Cases in which poor contract management, such as the failure to prepare written contracts or delays in payment, leads to corporate sanctions have recently occurred in succession during subcontracting transactions.

The Fair Trade Commission detected that Hanon Systems, a manufacturer of automotive climate-control products, had failed to properly perform its obligations, including the issuance of written contracts, the notification of inspection results, and the payment of amounts due, in the course of entrusting the production of molds to a partner company, and it imposed a corrective order together with a penalty surcharge of approximately 1.4 billion won.

The investigation found that, from 2020 to 2023, the company had conducted transactions with nine partner companies in a customary oral-contract form, omitting signatures and seals on contracts or failing to issue written contracts.

In addition, numerous cases were confirmed in which the company received deliveries but failed to issue receipts of acceptance or failed to comply with the statutory obligation to notify inspection results in writing within ten days after delivery.

It was further revealed that, in the course of paying subcontract amounts, the company failed to pay the delay interest and the bill-substitute settlement fees that arose from exceeding the 60-day payment deadline.

The Fair Trade Commission stated that, through this measure, it had detected the oral contracts and delayed-payment practices that had customarily occurred in the mold industry, and that it intended to encourage improvements in transaction practices through the use of standard subcontract forms and the specification of conditions for advance and interim payments.

One of the most basic forms used when a company assigns work to an outside specialist firm or individual is the entrustment contract.

An entrustment contract applies the provisions on mandate under the Civil Act mutatis mutandis, and it places emphasis on the very ‘process of performing the work diligently’ by the mandatary who has undertaken the work.

This means that, even if the result does not necessarily meet expectations, the mandatary is regarded as having fulfilled its contractual responsibility if it has discharged the duties required of it in the course of performing the work.

The most important indicator in an entrustment contract is how professionally and diligently the mandatary handled the affairs.

Accordingly, when concluding an entrustment contract, it is above all important to set out in concrete terms the method of performing the work, the reporting system, and the scope of the duty of care.

A contract for work, which is frequently compared with an entrustment contract, is directed at the ‘completion of a task’.

Under Article 664 of the Civil Act, a contract for work takes effect when one party agrees to complete a certain task and the other party agrees to pay remuneration for the result of the task.

In other words, no matter how diligent the process may have been, the contract is not regarded as having been performed if the promised result is not produced.

The distinction between the two contracts serves as the standard for determining where liability lies when a dispute arises.

An entrustment contract examines the ‘appropriateness of the handling of affairs,’ whereas a contract for work examines ‘whether the result is defective.’

If software development was entrusted and the program does not run, this becomes a matter of warranty liability against defects under the contract for work, but if legal advice was entrusted and the case was lost, the question becomes whether the attorney fulfilled the duty of care of a good manager.

An entrustment contract commonly involves payment of a monthly fee according to the period of handling affairs.

A contract for work, by contrast, as a rule involves paying amounts in installments according to the progress of the work, or paying the balance after inspecting the final result.

From a company's standpoint, even the payment conditions alone can indicate which nature a given contract is closer to.

There are many cases in which the title of the contract is drafted as an entrustment contract while the actual operation resembles a contract for work or an employment contract.

Such mixed use heightens legal risk to the greatest degree, particularly in connection with the management of personnel.

If a company uses outside personnel in the form of an entrustment contract while, in substance, the company's own employees give specific work instructions and manage attendance directly, this may develop into an issue of ‘disguised subcontracting’ or ‘illegal dispatch.’

In this case, the personnel concerned may be recognized as workers under the Labor Standards Act, giving rise not only to claims for severance pay and annual-leave allowances but also to administrative sanctions for failure to enroll in the four major insurances.

In addition, there are frequent cases in which a transaction subject to the Fair Transactions in Subcontracting Act is treated as a simple entrustment contract, thereby violating the provisions on payment deadlines or delay interest.

The ‘Substantive Content of the Work’ Matters More Than the Name of the Contract

The court is not bound by whether the contract is named an entrustment contract or a contract for work, but determines the nature of the contract by comprehensively considering the actual manner in which the work is performed and the relationship of direction and command.

Accordingly, from the stage of drafting the contract, one must clarify the scope of the work and design carefully the extent to which independent authority to perform the work will be granted.

• It is unclear whether the purpose under the contract is the ‘handling of affairs’ or the ‘completion of a result.’
• The mandatary is assigned and controlled as to specific working hours and place.
• Amounts are paid in proportion to the number of personnel deployed, regardless of the work result.
• A clause on where liability lies or on the right to claim correction and supplementation in the event of a defect is missing.
• The structure makes it difficult to recognize the independent business-operator status of the contracting counterparty.

If these risks are left unaddressed, they may operate very unfavorably for the company in a future investigation or lawsuit by the Fair Trade Commission or the Ministry of Employment and Labor.

In particular, when carrying out a new project in cooperation with an outside party, one must first define whether the essence of the work is ‘process’ or ‘result’ and then insert the contract clauses that match it.

A company needs a strategy of blocking risks in advance through careful review by a corporate attorney from before the contract is concluded.