A few months ago, I did a post on chops in China, entitled, China Contracts: Is That A Real Seal/Chop?

“Clarence” yesterday left the following comment to that post:

A valuable post would be “What does a real seal look like? What are its characteristics? What features does the law require? What are some examples of fake stamps and what’s wrong with them?”

All I know is to be real it has to have a tax number on it. Circle or oval, what’s the difference?

Good question, to which my co-blogger Steve Dickinson has provided us with the following answer:

Every contract with a Chinese company must be executed by a person with authority and must be chopped by the official company chop/seal. However, there are many types of chops. Which one should be used? How do you know if the chop is real? Here is how you should deal with the situation.

The rules/requirements for chops are different in every city, so there is oftentimes no way to know whether a chop is a proper, legally registered and authorized chop or not, just by looking at it. Given that situation, the Chinese courts have decided that they do not care. That is, so long as the document is chopped with something that purports to be the company chop and so long as the signer is either the legal rep or a person with apparent authority based on the business card of that person, Chinese courts will not invalidate the contract based on a technical argument related to the validity of the chop or the authority of the signer.

Since there are so many kinds of chops, it is best to insist on the standard company round chop using red ink. Some of these chops are numbered and some are not. This varies by district and is not an indicator of validity. The oval chops in black and purple are not common and should be avoided for companies that want to take the cautious approach. Unfortunately, some districts have moved to using these oval chops for reasons that are not clear. Nonetheless, I have never personally dealt with a Chinese company that did not have access to the standard round chop with a star in the middle.

However, the bottom line is that so long as the chop looks authoritative to the average person and so long as the signer has apparent authority, that is all that is required. Due to the variations in practice from district to district regarding company chops, it is usually going to be a waste of effort to do anything more. However, insisting that that any legal document be chopped is still required in China, so the basic best practice described above should be used for all China contracts.

It is not uncommon for one of our China lawyers to receive an email along the following lines:

I am leaving for China tomorrow to meet with potential Chinese manufacturers and I just learned that a US-style NDA is of little to no value in protecting my trade secrets from Chinese companies.  Can you get me an NNN Agreement by tomorrow and how much will it cost?

Our response to these emails is usually something like the following:

I am sorry but there is no way we can complete such an agreement in one day.  The way we do these is to send you a fairly substantial questionnaire and we usually have follow-up questions after that. We then draft the NNN Agreement in English and then secure your approval to that.  We then have one of our lawyers fluent in Chinese translate it into Chinese for use in China. This typically takes us 3-7 business days.

We then talk about their other options, which vary depending on the nature of the business.

Over Thanksgiving we took on a quasi-rush job (well over one day) for a China NNN Agreement and we just completed that NNN Agreement.  Because the time frame was so short, we had to condense much of our instructions into fewer emails.  The following comes from the email from us to the client, enclosing the completed NNN Agreement. We are posting the bulk of this email below as it is helpful in explaining a bit more about what it takes to secure an enforceable NNN Agreement with a Chinese company.

  • An OEM agreement would contain similar non-disclosure, non-compete, and non-circumvent provisions to those in this NNN agreement, and if you were certain that a you were going to be using a certain Chinese factory to manufacture your product and that their price/quality/speed was acceptable, then you could just skip the NNN agreement and go straight to an OEM agreement.
  • It is of course difficult to know whether a given manufacturer can meet your specifications before it has manufactured a single item. The ideal way to handle manufacturing in China of unique products such as yours is to have three agreements. First, an NNN Agreement, for the situation where you reveal confidential information to determine, conceptually, if the Chinese party can make the product. Second, a development agreement, to cover the cost/procedure/ownership of rights/etc. of product development, and to figure out if the Chinese party can in fact make the product you want at a sufficiently high level of quality, in a suitable timeframe and at an acceptable cost. Third, an Original Equipment Manufacturing (OEM) contract, to cover the manufacturing and purchase of the product(s). Many vendors want to cram everything into one agreement, promising that they can of course manufacture what you want, and any product development will be folded into the manufacturing contract. It’s an awkward fit. A manufacturing agreement is not a development agreement.
  • I note that you are dealing with a Hong Kong company that is related somehow to a Chinese company. Your replies suggest that the counter-party should be the Chinese company, and we have drafted the agreement accordingly. As a general rule, the counter-party in an NNN agreement should be the entity to which you are directly sending confidential information.
  • Assuming that the Chinese company is the proper counter-party, you should be sure to follow the terms of the NNN Agreement. Only send information to the Chinese company. Do not send information directly to the Hong Kong company unless the Hong Kong company also signs an NNN agreement (which would have to be revised to be enforceable in Hong Kong). Be careful not to treat the Hong Kong entity and the Chinese entity as the same company — regardless of what the Chinese side might say. They are not the same company, and a court would not treat them the same.
  • You had asked about whether both ______ and ______ should be signatories. It does not matter much who signs the agreement on behalf of the Chinese company, so long as the company chop is affixed. That said, ideally you would find out the name of the Chinese company’s legal representative (listed on the company’s business license) and have that person sign the NNN agreement. It is also possible to have both _____ and ______ sign in their personal capacities — that is, to be personally liable — but I doubt they would agree to that.

There you have it.

Over the years my law firm has been called in a number of times to try to get rid of an out of control Legal Representative of a WOFE.  Typically, the company calling us thinks that it ought to be able to rid itself of its WFOE Legal Representative simply by issuing a resolution making it so.

Wrong.

The last time we executed a change of Legal Representative for a Beijing WFOE, we had to draft/provide the following:

  • Amendment of the Articles of Association in Chinese. Four originals.
  • Amendment of the Articles of Association in English.  For reference only.
  • Application letter for commercial bureau in Chinese.  Two originals.
  • Application letter for commercial bureau in English: For reference only.
  • Application letter for SAFE in Chinese.  Two originals.
  • Application letter for SAFE in English. For reference only.
  • Appointment letter in Chinese. Four originals.
  • Appointment letter in English. For reference only.
  • Introduction letter in Chinese. One original, with Beijing company chop.
  • Introduction letter in English. For reference only.
  • Letter of undertaking in Chinese. Four originals.
  • Letter of undertaking in English. For reference only.
  • Removal letter in Chinese. Four originals.
  • Removal letter in English. For reference only.
  • Resolution of the Investor/WFOE owner in Chinese. Four originals
  • Resolution of the Investor/WFOE owner in English. For reference only.
  • Power of attorney in Chinese for seal record. Two Originals.
  • Power of attorney in English for seal record in English. For reference only.
  • Power of attorney in Chinese. Four originals.
  • Power of attorney in English. For reference only.

We also needed the following documents from our client:

  • Business license. Original and two copies with Company Chop.
  • Approval certificate.  Original and two copies with Company Chop.
  • Most recent full year audit report.  Two copies with Company Chop.
  • Most recent capital verification report. Two copies with Company Chop.
  • Foreign exchange IC card. Original.
  • Enterprise code certificate. Original and one copy.
  • Tax certificate. Original and one copy.
  • Custom registration certificate. Original.
  • Financial certificate. Original and one copy.
  • Registry Book for Foreign-Invested Enterprises. Original.
  • Notice of annual inspection. One copy with Company Chop
  • Annual examination certificate. Two copies with Company Chop

The above was what was required the last time we did this in Beijing.  The requirements vary by city and even by district and by examiner within each city.

Bottom Line: Choose your legal representative wisely because it will take a lot of time and a lot of effort to remove him or her involuntarily.

“Stole” the below from an email on which I was cc’ed from one of my firm’s China lawyers setting forth who from a China SOE (State Owned Entity) should sign its China contract.

1. SOEs have business licenses just like other Chinese companies.

2. Each Chinese company has only one “legal representative” (a term of art under Chinese law). That person is identified as such on the company’s business license.

3. Any agreement signed by the legal representative is binding, whether or not a chop is attached.  (Of course, to enforce the contract you will need to prove that the signature is really that of the legal representative.)

4. Any agreement affixed with the company chop is binding, regardless of who signed on behalf of the company. (Of course, to enforce the contract you will need to prove that the chop is actually the correct chop from the correct company.) This is why control of the company chop is quite important, and the chop is usually kept by the legal representative or some high-ranking company officer/director.

5. Having an agreement signed by the legal representative AND affixed with the company chop is therefore a belt-and-suspenders approach. In China, it is also advisable.

6. It is also possible that an agreement that is not chopped and not signed by the legal representative will be enforceable against a company, if a company executes a number of agreements in this fashion. This is fact-specific and is definitely not a desirable approach.

7. One way to verify (or at least to gain some more certainty) that an agreement is executed in a technically correct fashion is to go to the company’s offices and review several other contracts that have been executed by the Chinese party. And, if possible, also contact other parties that have executed contracts with the Chinese party. Does the execution page bear the same chop? The same signature? If there are any differences, are the differences consistent? For instance: perhaps the chop is always used, but depending on the type of contract or type of customer, maybe the sales manager signs or maybe the VP signs or maybe the legal representative signs.

8. In larger companies, many (if not most) of the contracts are signed by someone other than the formal “legal representative.” For instance, the _______ contract on which we are currently working will be signed by ___________’s president and co-founder, who is not the company’s legal representative.

A member of our China Law Blog Group on Linkedin left the following comment (modified slightly) regarding Chinese company names, prompting this post:

Recently I happened to meet with a Chinese lawyer in Qingdao who told me about how the Province [Shangdong] registers the Chinese name of a company. The companies are registered only with Chinese names. Let’s say for a contract with an Indian or a US company they do use just the English name. He says it is compulsory to have the contract in English and in Chinese also. Otherwise the Chinese company simply can deny its English name to avoid participating in the arbitration. Is this true? How we can make a contract foolproof without making a Chinese contract?

Great questions.

Let me start out by saying that we are of the view that in most cases it makes sense to have your contract with a Chinese company be in Chinese.  We explain why we take this position in China OEM Agreements. Why Ours Are In Chinese. Flat Out:

Because international contracts are so often between parties from different countries, they commonly are written in two or more languages. Nearly all of the contracts we draft for our Western clients doing business in China are in English and Chinese (though about ten percent of the time, we also translate them into German, Spanish, Korean, or French as well). This duality of language can, if not handled properly, pose big problems.

When we do a contract in both English and Chinese, we always call for the contract to specify ONE official language to control if there is a dispute. We do not advise drafting a contract that is silent on the official language, nor do we advise drafting contracts that call for both English and Chinese to apply. Having two official languages pretty much doubles the chances for ambiguity and pretty much doubles the attorney time (and fees) that will be incurred in fighting over the meaning of the two contracts. It is expensive enough litigating on one contract; there is no benefit litigating on two.

So the question for us comes down to whether English or Chinese should be the official language of the contract and the answer to that question requires we first decide where we would most like to see disputes resolved. If we go for arbitration in English (and if the Chinese manufacturer actually agrees to this, which is quite rare), then we almost certainly will want English as the official language. But if we decide the Chinese courts will be the best place to resolve conflicts, then we want Chinese to be the official language.

But, having said this, it is not true (as many seem to believe) that English language contracts will be deemed invalid by Chinese courts or arbitral bodies.

But what about company names?  The only official company name is the Chinese language version and this is true as well for WFOEs in China and Joint Ventures as well.  If you are going to form a China WFOE, you must come up with a Chinese name for your WFOE and that Chinese name will become your one and only official name.

But must one put the Chinese name on any contract with a Chinese company?  No, this is not required, but it is certainly smart to do so. I have actually never heard of a Chinese company claiming it is not them who signed a particular contract using the English language version of their name, but it absolutely does not surprise me to hear that happens.  Our firm has always used the Chinese language version of a Chinese company’s name, even on the English language version of our contracts and we do so for clarity. We also typically put in the address of the company as well and sometimes its license number as well.

I can certainly imagine a Chinese company seeking to get out of a contract by claiming that it never signed one because the contract at issue does not contain its Chinese language name. But at the same time, I also think that someone facing such a claim ought to — in most instances — be able to prevail against it by marshaling evidence to show that it was indeed the Chinese company that signed the contract. This will be particularly easy if the Chinese company has a well-known and often used English language name or if the English language name is a direct translation of a unique Chinese language name.

I actually think the bigger issue regarding contracts with Chinese companies is whether the contract is sealed or not.  In How To Write A Chinese Contract That Works, we wrote on how Chinese companies were notorious for trying to get out of contracts they had not sealed/chopped:

For written contracts in China to be effective, one of the following must be true:

  1. The company’s legal representative signed it. Chinese law provides that a company’s legal representative has apparent authority to bind the company. This means that even if that representative lacks the actual authority to bind the company (maybe because the board of directors or the shareholders never gave the representative the authority to contract with you), the legal representative’s signature will bind the company. There is, however an exception to this and that is when you know that the legal representative lacks the authority to bind the company.
  2. The contract is appropriately sealed.  An appropriate seal (oftentimes called a chop) is applied to the contract. It does not matter who applies the seal, so long as it is the right seal. This means it must be sealed either with a contract seal that sets forth the name of the company or, as is more commonly done, with the Company Seal. Each Chinese company has only one company seal (no copies).

Chinese companies are notorious for trying to get out of contracts by claiming they never actually signed them or that they were signed without the proper authority and so if your contract is big enough and important enough, you should consider doing all of the following to minimize even further the likelihood of the Chinese company seeking to get out of your contract:

  1. A signature from the company’s legal representative. Of course, you must first confirm from the company’s business license who exactly is the company’s legal representative.
  2. A resolution from the company’s board explicitly approving the contract and authorizing the legal representative to sign it.
  3. The affixation to the contract of the company seal or the company’s contract seal.

In that same post, we set out the basics of what it takes to write a good Chinese contract:

If you want to greatly increase your chances of being able to enforce your contract with your Chinese counter-party, you should do the following (you should do a lot more than this, both within and outside your contract, but I am limiting this post to just those things directly related to being able to enforce the contract and its terms)

  1. Have a written contract (see this, this and this);
  2. Have that written contract be in Chinese;
  3. Have that written contract set out clearly how disputes are to be resolved and, even more importantly, pick the right forum for those disputes;
  4. Have that written contract set out in excruciating detail what the Chinese company must do to be in compliance with the contract;
  5. Set out the liquidated damages the Chinese company must pay if it fails to comply with the contract;
  6. Make sure the Chinese company signs AND seals your contract.

It is impossible to make any contract foolproof in that there will always be risks in any deal, but doing the above will increase your odds.

What do you think?

 

 

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If you want to greatly increase your chances of being able to enforce your contract with your Chinese counter-party, you should do the following (you should do a lot more than this, both within and outside your contract, but I am limiting this post to just those things directly related to being able to enforce the contract and its terms)

  1. Have a written contract (see this, this and this);
  2. Have that written contract be in Chinese;
  3. Have that written contract set out clearly how disputes are to be resolved and, even more importantly, pick the right forum for those disputes;
  4. Have that written contract set out in excruciating detail what the Chinese company must do to be in compliance with the contract;
  5. Set out the liquidated damages the Chinese company must pay if it fails to comply with the contract;
  6. Make sure the Chinese company signs AND seals your contract. 

This post is going to focus on the signing/sealing requirement, because it matters and because American (that includes Canadian) and British companies seem to get this wrong way too often.

In many countries, including the United States, apparent authority is a pretty broad concept. Grossly simplified, it means that if an employee reasonably looks as though he or she has authority to enter into a specific contract on behalf of the company, the company will be bound to that contract. Here is an example. At my law firm, our legal assistants/paralegals are always ordering office supplies from Office Depot in fairly small increments — maybe USD$50 to $150 at a time. And our law firm always pays these Office Depot bills. If my law firm were to refuse to pay a $75 bill tomorrow by claiming that we had never authorized the Office Depot order, Office Depot could sue us and they would surely win. They would win because we have clearly let the outside world believe that our legal assistants and paralegals have authority to make such orders on our law firm’s behalf. But what if one of our legal assistants ordered $50,000 in computer equipment sent to his or her house? Would we have to pay? Almost certainly not. 

But that is the United States. China has a much more limited apparent authority concept and it can be so prone to dispute that you may better off pretending that it does not exist.  

For written contracts in China to be effective, one of the following must be true: 

  1. The company’s legal representative signed it. Chinese law provides that a company’s legal representative has apparent authority to bind the company. This means that even if that representative lacks the actual authority to bind the company (maybe because the board of directors or the shareholders never gave the representative the authority to contract with you), the legal representative’s signature will bind the company. There is, however an exception to this and that is when you know that the legal representative lacks the authority to bind the company.
  2. The contract is appropriately sealed.  An appropriate seal (oftentimes called a chop) is applied to the contract. It does not matter who applies the seal, so long as it is the right seal. This means it must be sealed either with a contract seal that sets forth the name of the company or, as is more commonly done, with the Company Seal. Each Chinese company has only one company seal (no copies).

Chinese companies are notorious for trying to get out of contracts by claiming they never actually signed them or that they were signed without the proper authority and so if your contract is big enough and important enough, you should consider doing all of the following to minimize even further the likelihood of the Chinese company seeking to get out of your contract: 

  1. A signature from the company’s legal representative. Of course, you must first confirm from the company’s business license who exactly is the company’s legal representative.
  2. A resolution from the company’s board explicitly approving the contract and authorizing the legal representative to sign it. 
  3. The affixation to the contract of the company seal or the company’s contract seal.

What do you think?