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)
- Have a written contract (see this, this and this);
- Have that written contract be in Chinese;
- Have that written contract set out clearly how disputes are to be resolved and, even more importantly, pick the right forum for those disputes;
- Have that written contract set out in excruciating detail what the Chinese company must do to be in compliance with the contract;
- Set out the liquidated damages the Chinese company must pay if it fails to comply with the contract;
- 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:
- 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.
- 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:
- 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.
- A resolution from the company’s board explicitly approving the contract and authorizing the legal representative to sign it.
- The affixation to the contract of the company seal or the company’s contract seal.
What do you think?