China Contract Chops: Tencent vs. Lao Gan Ma and China Due Diligence

China Due Diligence

It is officially 2021, but don’t fool yourself that some things change just because the calendar does. At China Law Blog we often post about fraud or attempted fraud that takes place in China; companies doing business there, or with Chinese counter-parties, should consider due diligence an evergreen topic, the importance of which cannot be emphasized enough.

In June 2020, China Judgments Online published an order entered by Shenzhen Nanshan District Court, which – upon petition by Tencent – would freeze about 16 million yuan (US$2.3 million) worth of assets of Lao Gan Ma, the maker of a popular Chinese chili sauce.  The underlying case is a contract dispute between Tencent and Lao Gan Ma, where Tencent accused Lao Gan Ma of breaching a “joint marketing cooperation agreement” with Tencent by failing to pay for the advertising services Tencent had provided.

This story took a sharp turn the next day when Lao Gan Ma announced that it had never signed such an agreement with Tencent and that it had reported this to the police earlier in June when they first received this order. A day later, the police said that it had arrested three people who had posed as marketing managers for Lao Gan Ma and forged Lao Gan Ma’s company chop and signed the agreement with Tencent. According to the police, the trio’s purpose was to obtain Tencent online game gift codes which they would then re-sell for economic gain. Apparently, Tencent had been conned.

Tencent took all of this with good humor. In addition to referring itself as “a silly penguin who ate fake chili sauce,” Tencent also encouraged netizens to provide any leads for similar frauds, with the bounty being 1000 jars of Lao Gan Ma chili sauce. On July 10, Tencent and Lao Gan Ma made a joint announcement, stating that Tencent had withdrawn its asset seizure request and had apologized to Lao Gan Ma.

The joint statement drew a stop to the series of events around this scam, though one has to wonder how Tencent could have fallen for this scam. But even big companies with sophisticated back office functions can be duped and this type of scam is nothing new as we have discussed before.

A few things we can learn from this.

First, company chops are still important for contracts with Chinese companies. Tencent would not have believed they had signed an agreement with Lao Gan Ma without the chop, even though the chop turned out to have been forged. A contract bearing a company’s chop is presumed to have been authorized by the company and a company with its company chop on a contract cannot later claim that the contract was not binding because whoever signed it was not authorized to do so.

 

1. How to Spot a Fake Chop

It is often difficult to tell whether a chop is real or fake. That said, the following are some good ways to at least spot the most obvious errors:

1. Is the font, shape or other stylish element commonly used for Chinese company chops? Most Chinese companies use a round red chop with simplified Chinese characters. Some chops have the company’s registration/uniform social credit number or an English name on them as well.

2. Does the chip on paper look like a rubber stamp with ink or a print from a computer file? You want it to look like a rubber stamp!

3. Check the company’s chops filed with the local public safety bureau. Company chops are normally recorded with the government when a company is formed.

Still, it is very difficult to be 100% certain of any chop because they can be so easily forged — just ask Tencent.

 

2. Chinese Company Due Diligence

Even if the chop is authentic, it is still important to conduct due diligence on the company with which you will be doing business before you sign anything. When conducting business due diligence, the following are usually the bare minimum of what you should do:

1. Ask for the company’s Chinese name and conduct an online Chinese language search of the company to make sure it really exists and to learn more about it. You can find basic information about Chinese companies from various online government (such as the National Enterprise Credit Information Publicity System ) and private company databases.

2. Check the history of the Chinese company with which you might do business. Most fake companies do not bother to create a business history. If a company does not have a history you can verify, walk away.

3. Find out what the company owns by way of property and IP.

4. Find out the company’s litigation history and whether and how often it is in trouble with the government.

If at all possible, visit the Chinese company’s office or factory or have someone you truly trust do this. Does it look like the pictures on the internet? Does it look like it has the number of employees or manufacturing capacity it claims to have? What are the employees doing? If possible, visit multiple times. A good fraudster can put on a show, but they are unlikely to be able to do it the same way each time.

Unfortunately, no due diligence can protect you against bad people who are determined to do bad things to you. That said, the bottom line is before you commit to a deal, you should learn as much as you can and as much as makes economic sense about your China business partners.

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