If you want to increase your chances of being able to enforce your contract with your Chinese counter-party, you should do the following, at the very minimum:
1. Have a written contract.
2. Have that written contract be in Chinese.
3. Have that written contract clearly describe how disputes are to be resolved and 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 Western companies too often get this wrong.
In many countries, including the United States, apparent authority is a 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 by that contract. Here is an example. At my law firm, our legal assistants and paralegals are free to order office supplies in fairly small increments — maybe USD$50 to $300 at a time and our law firm always pays the bills from these orders. Now suppose my law firm were to refuse to pay a $75 bill tomorrow by claiming we never authorized the order. What would happen under U.S. law? The office supply store could sue us and it would surely win because my law firm essentially told them by our actions that our legal assistants and paralegals have authority to make such orders on our behalf. But what if one of our legal assistants ordered $50,000 in computer equipment sent to their house? Would we have to pay? Almost certainly not, because we never did anything that would lead a reasonable office supply store to believe that was okay.
But that is the United States.
China has a much more limited apparent authority concept that is so prone to dispute that you would be better off pretending 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 actual authority to bind the company (maybe because the board of directors or the shareholders never gave the representative 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 the legal representative lacks the authority to bind the company.
2. The contract is appropriately sealed/chopped. An appropriate seal (or 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 common, 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 some or even all of the following to minimize even further the likelihood of the Chinese company seeking to get out of your contract:
1. Get a signature from the Chinese company’s legal representative on your contract. Of course, you must first confirm from the company’s business license who exactly is the company’s legal representative.
2. Get a resolution from the Chinese company’s board explicitly approving your contract and authorizing the legal representative to sign it.
3. Get the Chinese company seal or the company’s contract seal on your contract.
And if you do not understand Chinese contract signing authorizations and seals, you probably should enlist the aide of someone who does.