An important difference in business practices between China and many western countries is the value that courts and officials give to the stamp (in China often referred to as the “chop” or seal). We introduce the rules and practice, and some suggestions on how to manage your risk.
For many western companies, the signature of its legal representative is the ultimate mark of authority. Not so in China. Since a representative’s signature is rarely registered, the value of the company stamp is far greater. Every company in China, after it is established, will make and register its company stamp with the local authorities (in this case the Public Security Bureau). Towards third parties, this company stamp represents the company, therefore documents bearing this stamp will generally be legal and binding upon that company – whether that document bears a signature or not!
The company stamp is not the only stamp that can represent the company. For specialized functions, companies may decide to carve and register other stamps. Common examples are the contract stamp (for stamping contracts), the finance stamp (for making payments, accessing bank accounts) and the customs stamp (to make customs declarations). These are particularly important for larger companies where different people carry the final authority to deal with different matters. As long as they are registered, these stamps serve a similar function as the company stamp: to represent the company in relations with external parties.
Individuals can have stamps as well. A Chinese company’s legal representative, for example, should have registered his stamp to be used on documents or papers (including checks) that he executes in his official capacity. Usually the stamp of
a legal representative will be a print of his name rather than a print of his signature, though some authorities will accept the latter as well. In any case, the bearing of the legal representative’s stamp presumes the agreement of the legal representative.
Stamp Keeping - Internal vs. External liabilities
The stamp can be a useful tool for companies as it marks authority when the company official representatives are not available: third parties may presume that a document is legally executed if it bears the relevant stamp. On the other hand, except where that third party knows or should have known that the person using the stamp is not authorized to do so (including if it is specified in the company’s registered Articles of Association), the stamping of a document also creates a direct liability onto the company or individual represented by that stamp. If the document is stamped, then the company is bound by its terms.
Therefore a company can and should create a system of internal guidelines to control the use of stamps and assign consequences for misuse or abuse. For example, internal rules (or his contract) can prohibit a sales manager from signing contracts valued above a certain limit; if he goes beyond this limit without prior approval from, say, the general manager, than he will bear the liability for anydamages towards the company he misrepresented. If the contract becomes subject to dispute, the company would still be liable towards the third party, but that company could in its turn claim against the sale manager.
The same goes for the use of an individual’s stamp, and in particular that of the legal representative. Another person may be authorized to use this stamp on the representative’s behalf, and a third party may presume such authorization from the legal representative. If the user of the stamp is acting beyond such authorization, it is again an internal matter.
However in many situations, even if a company could claim against an employee for abuse of authorization, the harm is already done. For this reason, it is extremely important to design a system which not only manages the authorization levels for use of the stamps, but also manages the physical control of such stamps. Stamps should be kept safe at all times to minimize the risk of misuse or abuse.
Stamp Keeping – Valuable Lessons
Moreover, since the stamps are often needed in the course of doing business, the company needs to find the right balance between convenient access and restricting use. This is especially the case when the legal representative is away. A lesson that many companies have learned the hard way: Never Leave Important Stamps in the Hands of People That You Do Not Trust!
In one recent case. a Client established a wholly foreign-owned manufacturing company in Zhuhai, appointing a local employee as general manager and placing all stamps in his possession. After a year of operation the company found that the employee had used the chop to sign unapproved contracts with third parties. When the company terminated the employment contract with this general manager, they found that he had used the company stamp to renegotiate his own contract entitling himself to larger compensation should the contract be terminated early for any reason. While this is an extreme example it does illustrate just how powerful the stamp can be in China.
If a stamp needs to be available for emergency purposes while the usual keeper it is out of town, it is a good idea to leave it with your accountant, law firm, or even a trusted friend or colleague. This arrangement can be made even stronger with signed orders that the stamp may only be used for matters specifically mentioned or separately confirmed, and any use must be recorded in a ledger. In this way a company may share it’s liability with third parties, and still have the benefit of being able to act if and when necessary. In the above mentioned case, when the newly-appointed foreign manager is now out of town the stamps are kept in our safe, and usage is controlled under a detailed retainer agreement.
The stamp is of extreme significance in China and therefore anyone interested in doing business here should devise guidelines for use and provide adequate safeguards to protect themselves from such risk.