A China-centric written contract is an effective tool for doing businesses in or with China. A first step in creating this effective tool is to carefully follow the rules for execution. Chinese courts are bureaucratic and formalistic. Make use of that tendency so that you can prevail. Don’t blunt the edge of your instrument with sloppy execution procedures. A casual approach to execution is neither appropriate nor effective for China. A failure to follow China contract law formalities can lead to a Chinese court not enforcing your contract.
The basic rules for execution by the Chinese side are as follows:
1. The date of execution must be specified for each entity that signs. Do not rely on a single date at the top. Each party should enter a date indicating when that party signed.
2. The legal name of the signing entity and the legal, registered address of that entity must be stated, in the Chinese language, in the document. Many Chinese companies will only provide their common name or English-language name, or provide a business address rather than the registered address. Failing to request the proper information is a major mistake.
3. The individual who signs on behalf of the Chinese entity must have the authority to sign that contract on behalf of the Chinese entity. If the individual is the legal representative of the Chinese entity, his or her authority is clear. In other cases, however, that person’s authority must be demonstrated by the title given to the individual by the Chinese entity. If that title is sufficient to show authority, then the Chinese entity is bound to the contract, regardless of the individual’s actual status with the company. Care is getting this right is required. A person with the title “foreign acquisitions manager” clearly has authority to purchase from foreign buyers. But what if the title is “accounting department manager” or “research and development department manager”? It is not certain that these persons have any authority at all with respect to executing contracts.
4. The contract should be stamped with the official, registered company seal. Chinese entities often have seals in addition to the standard company seal. For example, many companies have seals specifically designated for executing contracts. Such seals are acceptable, provided they are registered and provided that they are individually numbered if the Chinese company has more than one, which is common. Chinese entities may have other seals such as technical verification seals, tax department seals and banking/financial seals. These additional seals should never be used for sealing contracts. Only the official company seal and registered contract seals should be used on a China contract. Every legitimate Chinese company has documentation of the registration of their official company seal or their registered contract seal(s). Just ask for a copy. If they do not provide that, it means they are planning to use an unofficial seal, with predictable results in the event of a dispute.
The area that causes the most confusion is the requirement of a seal. An unsealed contract is not invalid on its face but it can cause you all sorts of trouble. Chinese law on the issue of seals and contracts provides as follows:
- Article 10 of China’s Contract Law provides that contracts may be oral or written.
- Article 32 of the Contract Law provides that contracts must be executed by the company legal representative OR by a person with authority to execute the contract. It also provides that execution may be by signature OR by seal.
- Article 50 of the Contract Law provides that if a person with apparent authority executes a contract beyond that person’s actual authority, the contract is still valid with respect to a third party who had no knowledge of the scope of actual authority.
Thus, by the terms of the Contract Law, a contract that is not sealed is still a valid contract if it was executed by a person with apparent authority. So why is it so important to get your China contracts sealed? The purpose of a written contract with your Chinese counter-party is to provide you with an effective tool that you can use in a Chinese court to obtain swift and certain relief against a Chinese entity that has breached the terms of your contract.
The first thing Chinese courts usually do in any contract action is determine the authenticity of the contract. Where a contract is sealed with the official, registered company seal, the contract is prima facie valid. Chinese courts nearly always rule against a Chinese entity that argues that the seal is false or that the seal has been lost or similar if a registered company seal was used to seal the contract. This is the situation that you want to be in when you are a plaintiff in a Chinese court: the authenticity of your contract is clear and certain. Any contract that lacks any of the four elements I set out above is subject to challenge. Though you may prevail over that challenge, this will lead to considerable delay that can extend over many years. You also might not prevail and the uncertainty alone can be enough to give the Chinese company enough comfort to fight you hard and to force you into a less than favorable settlement.
But why is a seal “required” when China’s Contract Law clearly provides that a signature is sufficient. Again, this is matter of proving authenticity. It is the custom in China to have ALL contracts sealed. Every company in China, no matter what size and no matter what form of ownership is issued a registered company seal upon its formation. Government regulation requires state owned enterprises to seal all contacts. This practice is followed by all legitimate private companies.
For this reason, a document that has not been sealed is immediately suspect. Chinese courts have lots of experience in determining the authenticity of seals. They have virtually no experience in determining the authenticity of signatures. For this reason, it is virtually certain that if a Chinese defendant questions the validity of a contract that is signed but not sealed, the court will deem the contract invalid. I have never read or heard about a case in China where the validity of a non-sealed contract was upheld by a Chinese court in the face of a challenge from a defendant. Now just imagine how the Chinese courts will treat your “email contract,” your PO/Invoice contract or your oral contract.
What happens if the seal is not in fact the official, registered company seal? Litigation in this area has been common in China over the past fifteen years. The usual facts involve a Chinese or a foreign entity that enters into a contract with a Chinese company for the provision of goods or services. The entity provides the goods or services to the Chinese company, but the Chinese company then that has received the benefit refuses to pay because the written contract was not properly sealed. The following are standard seal defects:
- The wrong type of seal was used: perhaps a technical seal instead of a contact seal.
- The Chinese company has many unofficial seals and one of these unofficial seals was used rather than an official seal.
- The party who signed the contract for the Chinese company is an agent of the Chinese company, but not an employee, but the seal is an official seal.
- The primary contract is improperly sealed but its supporting receipts are properly sealed.
In all of these cases, the courts have held that for the defendant to prevail the defendant must prove that the plaintiff falsified the seal and sealed the document with such a false seal in to defraud the defendant. This burden has been impossible to meet in cases where the goods and services have already been delivered.
Even though plaintiffs have prevailed under these circumstances, this is not a reason to depart from the basic rule. Even though the plaintiff eventually prevailed under these circumstances, the defects in contract execution turned a routine, six month collection case into an expensive, multi-year ordeal. Note also that in all of these cases, the goods/services had already been provided. Finally, in all cases the contract or other documents were sealed in some way. I have not found any China court cases* where a bare signature was sufficient.
Chinese courts are hyper-technical when working with written documents. If there is any surface flaw, a party will object to the authenticity of the document and then force the party offering the document to prove its authenticity. Chinese lawyers will seek out all of these minor surface flaws and then object to authenticity even where that objection is clearly ridiculous. The courts in China then reward them for this behavior because this is a good way for them to clear the docket of commercial cases, which allows them to concentrate on their real job of doing criminal work. But if you follow the above rules the Chinese courts will almost certainly find your contract to be authentic and because of this, you will have leverage against your Chinese counter-party should something go wrong between the two of you. Most importantly, you will in most instances forestall an authenticity argument entirely. If you don’t follow the above rules, you will likely create create uncertainty and added costs.
* If you are now thinking that the way to avoid all of the above problems is to draft a contract calling for disputes to be resolved in a U.S. or some other foreign court, DON’T. China does not enforce U.S. court judgments so even if you prevail against your Chinese counter-party in a U.S. court, unless that Chinese company has assets in the United States, you probably will never collect a penny from that Chinese company. The same is true with respect to most other countries as well. Arbitration outside China has its own special risks as well.