I. Analysis of Liability Bearing When the Affiliate Signs a Contract in Their Own Name

From a legal perspective, in accordance with the provisions on the relativity of contracts in the Civil Code of the People's Republic of China, a legally established contract is only legally binding on the parties thereto. When an affiliate enters into a contract with a counterparty in their own name, the parties to the contract are clearly the affiliate and the counterparty.

This means that the rights and obligations arising from the contract shall be borne by these two parties. Unless there are special circumstances stipulated otherwise by law, the affiliated party is not a party to the contract and shall not be bound by the rights and obligations under the contract. The Judicial Interpretation (I) of the Supreme People's Court on Construction Engineering further clarifies that in the field of construction engineering, if an affiliate signs a contract with a third party in their own name, they shall bear corresponding liabilities for the performance of the contract.

This is determined based on the subject of the contract signing and the actual performance, aiming to maintain the stability of contracts and the security of transactions. If the relativity of contracts is arbitrarily broken to make the affiliated party (who is not a counterparty to the contract) liable, it will disrupt market transaction rules and increase the uncertainty and risks of transactions.

[Case Support]

Case Name：(2021) Yu 03 Min Zhong No.2583, a dispute over a construction project contract between Henan Yuhong Construction Engineering Co., Ltd. and Li Mou.

Case Facts：Li Mou borrowed the qualification of Henan Yuhong Construction Engineering Co., Ltd. to undertake a commercial complex construction project. During the construction period, Li Mou signed a "Building Materials Supply Contract" with Zhang Mou in his own name, agreeing that Zhang Mou would supply materials and settle accounts monthly based on actual quantities; he also signed a "Labor Subcontract Contract" with Wang Mou, where Wang Mou was responsible for the construction of the main structure, and labor fees would be paid in installments according to the project progress nodes. The project proceeded smoothly in the early stage, but later due to Li Mou's capital turnover problems, he defaulted on Zhang Mou's material payment and Wang Mou's labor fees. Zhang Mou supplied materials totaling 3 million yuan, but Li Mou only paid 1 million yuan; when two-thirds of the main structure construction was completed, Li Mou should have paid Wang Mou about 1.5 million yuan in labor fees as agreed, but only paid 500,000 yuan. After the project was completed, Zhang Mou and Wang Mou repeatedly demanded payment but failed, so they sued Li Mou to the court for the remaining payment, and also requested Henan Yuhong Construction Engineering Co., Ltd. to bear joint and several liability on the grounds that Li Mou undertook the project by affiliating with the company.

Court Trial：

• First Instance Court held that although Li Mou was affiliated with Henan Yuhong Construction Engineering Co., Ltd., he signed and settled the contracts in his own name. In accordance with the principle of contract relativity, there was no evidence to prove that the company was involved in the conclusion and performance of the contracts or other circumstances that would make it liable. Therefore, the court ruled that Li Mou should be liable and dismissed the claim against the company.
• Some counterparties refused to accept the judgment and appealed. The Second Instance Court, after trial, held that the facts found in the first instance were clear and the application of law was correct. In accordance with the principle of contract relativity, there was no legal provision that the affiliated party should bear joint and several liability in such circumstances, so it dismissed the appeal and upheld the original judgment.

Case Summary：This case once again clarifies that in disputes over construction project contracts, when an affiliate signs and settles a contract with a third party in their own name, the affiliated party is generally not liable for joint and several liability. It reflects the respect and maintenance of the principle of contract relativity, and also provides a reference example for the trial of similar cases. When determining whether the affiliated party should be liable, it is necessary to strictly judge based on legal provisions and actual circumstances, and shall not arbitrarily break the principle of contract relativity to make the affiliated party liable.

II. Suggestions for Legal Risk Prevention

[From the Counterparty's Perspective]

Counterparties should exercise a high degree of caution when conducting transactions with affiliates:

1. Verify the Identity of the Transaction Counterparty：Before signing a contract, it is imperative to carefully verify the true identity and qualification of the transaction counterparty. For individuals or entities claiming to be affiliated with qualified enterprises, further verify the authenticity and validity of the affiliation relationship between them and the affiliated party, and may request the affiliate to provide relevant supporting documents such as the affiliation agreement.

2. Clarify the Subject of the Contract：Clearly define the rights and obligations of all parties in the contract terms to avoid ambiguous expressions. If the counterparty wishes the affiliated party to bear contractual liability, strive to have the affiliated party sign and seal the contract during the contract signing process, or obtain a written document from the affiliated party explicitly agreeing to bear contractual liability.

3. Investigate Performance Capacity：Investigate the business reputation and performance capacity of the affiliate through various means, such as inquiring about their past transaction records and understanding their reputation in the industry.

4. Closely Monitor the Performance Process：During the performance of the contract, closely monitor the affiliate's performance. If any abnormalities are found, take timely measures to protect their own rights and interests.

III. Summary

In cases where an affiliate enters into and performs a contract with a counterparty in their own name, the counterparty's claim for rights agreed in the contract against the affiliated party needs to comprehensively consider various factors such as the principle of contract relativity and the constitution of apparent agency.

In most cases where the principle of contract relativity is followed, it is difficult for the counterparty to claim rights against the affiliated party. However, when the strict conditions for apparent agency are met, the affiliated party may be liable accordingly.

For counterparties, it is crucial to carefully review the subject of the contract during transactions, clarify the rights and obligations of all parties, so as to reduce their own legal risks. Affiliated parties should also strengthen the management of affiliation behaviors, standardize the affiliation process, and avoid unnecessary legal disputes. Only when all parties clearly understand their own rights, obligations and legal risks can they effectively protect their legitimate rights and interests and ensure the safety and stability of transactions in the complex market environment.