The Chinese Company Chop Goes Digital

A China company chop is an official seal or stamp that legally binds the company to what it has agreed to in the document on which its company chop has been stamped. Under Chinese law, a company chop is strong legal evidence of the agreement of the company whose chop is on the document. The company chop (a.k.a company seal or company stamp) essentially replaces a signature on contracts and other important documents. The company chop binds the entire company, usually no matter who (if anyone) actually puts their signature on the document.

Interestingly, over the past few years China has been moving toward implementing electronic chops, which are the digital equivalent of a company chop and have the same legal validity as a physical chop. An update to China’s Electronic Signature Law released in April 2015 clarified the legal validity of electronic signatures, including electronic chops, which are as legally binding as a physical chop or handwritten signature if the creation data of the electronic chop is exclusively owned and controlled by the signatory at the time of signing. But not until fairly recently did our China lawyers regularly start seeing Chinese company chops in real life.

This parallels the framework of legitimacy for physical chops, and as with physical chops, there is potential for fraud, and counterparties should undertake thorough due diligence, especially when contracting with any new organization.

Technically, an electronic chop offers users (and their counterparties) greater security, thanks to encryption and authentication processes, but counterparties who don’t bother to confirm the legitimacy of the creation data open themselves up to fraud.

To a certain extent, China company chops are overrated as a proof of legitimacy. Oftentimes the bigger issues are (1) whether the company with which you are doing business even exists, (2) whether you are actually doing business with the company you think you are doing business with, and (3) whether the company has sufficient funds to support the business you wish to do with it. These are often the critical issues, and they require real work to resolve. Finally, any company chop can be expertly faked. So even if you know what the genuine chop looks like, you  cannot know whether the one you are looking at is actually that company chop or a fake of that company chop.

Though the image of an electronic chop can be easily reproduced, and at a glance may appear to confer legitimacy on a document, an advanced electronic signature in the European Commission’s definition is additionally:

  • uniquely linked to and capable of identifying the signatory;
  • created in a way that allows the signatory to retain control; and
  • linked to the document in a way that any subsequent change of the data is detectable.

What matters, then, is the protection of the creation data, and the implementation of processes that protect the security of that data.

Chinese law stipulates that an electronic chop and its creation data be exclusively associated with an individual who represents his or her organization, and bears responsibility for its actions. This means that the signatory must be the user of the electronic chop, i.e. that a colleague is not legally permitted to apply the chop on the signatory’s behalf.

Setting aside instances of outright fraud, electronic (and physical) chops are most often misused for reasons of convenience, e.g. when the legal representative authorized to use the chop is unavailable. Deployment of the chop, however, confirms to an organization’s counterparty that the organization understands and recognizes the content of the contract, and the intentions of the signing parties.

In cases involving misuse of electronic chops, the courts have generally found that the organization that has misused the chop, and/or its legal representative, are liable for such misuse, usually through improper storage of the creation data, or because internal controls were inadequate to prevent the chop’s use by unauthorized persons.

Article 28 of China’s Electronic Signature Law is very plain: “Where an electronic signatory or the party relying on the electronic signature suffers losses due to engaging in civil activities on the basis of the electronic signature verified by an electronic verification service, and if the electronic verification service fails to prove that it is free from fault, the service shall bear the responsibility for compensation.”

The law goes on to note that fines and civil and criminal responsibility are additional possible consequences of failing to secure an electronic chop and use it properly.

Any company that will be utilizing electronic chops should have in place processes and systems that secure their electronic chops, and ensure that only authorized signatories are permitted to deploy them.

And as a counterparty on a document that will bear electronic chops, you should conduct thorough due diligence to confirm that the company you believe you are doing business with is legitimate, and that the signatory to the contract(s) not only is empowered to sign, but also is who he/she claims to be.

The only way to be as certain as possible about the authenticity of a China company chop is to do a great deal of due diligence, either in person or via a trusted agent. An even better way to determine the validity of a Chinese company chop is to have an attorney confirm with the Chinese government that the company chop that will be used on your contract is the Chinese company’s real company chop.

Of course, fraud is by no means the exclusive province of Chinese companies. Last year we wrote about Elizabeth Holmes and Theranos as an example of the potential consequences of a failure to conduct due diligence. For those who are interested – or happy to have a terrific common-sense reminder – my colleague Fred Rocafort wrote an excellent primer on basic due diligence procedures here.