In China, each company is required to hold company seals in order to do business. Chinese company seals replace signatures, which are more common in western countries. In this article, we explain the role of company seals, the different types of company seals and best practices on avoiding any risk regarding forgotten company seals.
The company seal, often called the “chop”, represents an unlimited power of attorney vested in the holder of the corporate seal(s). Once the company seal is affixed to a document, the company is legally bound and effective. This means that the company cannot claim that whomever signed it, was not authorized to do so or that the contract needs to be considered invalid.
The person who is in charge of holding the seal needs to be considered as the temporary custodian of the seal. The rights and obligations will ultimately be borne by the company and not the holder or custodian of the company seal.
As the rules with regard to company seals are different in every district, the Chinese courts value the company seals more than the signature of the representative of the company. In principle, the Chinese courts will not invalidate the contract pursuant to the fact that the signatory did not had the authority to sign on behalf of the company while the contract also holds a genuine company seal.
Types of seals
Most Chinese companies have diverse types of chops that are used in the day-to-day operations. The most common types of seals in China are the following:
The company seal is the most important tool for doing business in China. This round-shaped seal is used to conclude contracts on behalf of the company, to open bank accounts and to secure internal company files (e.g. financial statements). After approval of the company, the company seals will be micro-ficed and registered with the local Public Security Bureau.
Legal Representative Seal
The legal representative seal belongs to the company’s legal representative. The legal representative is identified on the business license. There can be no more than one legal representative per company. This seal is mostly used for approval of financial transactions. The legal representative seal differs from the company seal due to its square-shaped seal and its remark of the initials of the legal representative. The legal representative seal is furthermore registered with both the local Public Security Bureau and the company’s bank.
The invoice seal is mostly used for VAT invoices and receipts (fapiao). This oval-shaped seal verifies pro-forma invoices. When the invoice seal is not affixed on the VAT invoice, it cannot be used as part of the business expense claim.
The department seal (the company seal with the department name) and the personal department seal (the company seal with the department name and the initials of the department manager) are used by department managers as additional safeguard mechanism. In this manner, the risk of using the general company seal is limited as the name of the department will be recorded next to the company seal.
Authenticity of company seals
As company seals are decisive in the binding obligations of the company and any invalid signature of the representative of the company will be considered as a minor detail in China, it is important to be certain that the company chop used is the authentic one.
As best practices, the only way that you can be certain is to do an in-person due diligence. You can send your Chinese attorney to visit the headquarter of your Chinese counterparty and inspect the company seal there and compare it with the one that is used on the contract executed by the company.
Another way is to check with the local Public Security Bureau that the company seal which is used on your contract is the actual seal of the company. As the governmental institutions usually are not eager to be helpful, this method does take time and involves high costs.
Although the company seal imposes certain obligations on a Chinese company towards third parties, the company chop is not everything. In the end, any company seal can be faked. It is therefore important for companies that are dealing with corporate chops to also check whether the Chinese company actual exists. Are you dealing with the actual company and not with some rogue third party? Does the company exist, using the name that the counterparty has given to you?