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 authorised 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 have the authority to sign on behalf of the company while the contract also holds a genuine company seal.
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:
Company Seal
The company seal is the most important tool for doing business in China. This round seal is used to enter into contracts on behalf of the company, to open bank accounts and to secure internal company documents (e.g. financial statements). Once the company has been approved, the company seals will be micro-engraved and registered with the local Public Security Bureau.
Legal Representative Seal
The legal representative’s seal belongs to the company’s legal representative. The legal representative is named on the business licence. There can be no more than one legal representative per company. This seal is mainly used to authorise financial transactions. The legal representative’s seal differs from the company seal in that it is square in shape and bears the legal representative’s initials. The legal representative’s seal is also registered with both the local Public Security Bureau and the company’s bank.
Invoice Seal
The invoice seal is mainly used for VAT invoices and receipts (fapiao). This oval-shaped seal verifies pro-forma invoices. If the invoice seal is not affixed to the VAT invoice, it cannot be used as part of a business expense claim.
Department Seal
The department seal (the company seal bearing the department name) and the personal department seal (the company seal bearing the department name and the initials of the department manager) are used by department managers as an additional safeguard. In this way, the risk associated with using the general company seal is minimised, as the name of the department is recorded alongside the company seal.
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?