China Credit Insight 8: Company Seals

Most multi-national corporations are stringent on compliance, yet few foreigners are aware that a signature on a Chinese contract has less enforcing power than a seal on it. Is this serious?

A company seal in China represents an authorized promise of the company; moreover, it is the symbol of power of the company. In the Chinese culture, most acknowledge that “Accept the seal rather than the person”.

Contrary to what most people think, there is no specific Chinese law that defines the legal binding of a company seal. Instead, a few basic Chinese laws empower the use of a company seal. Also, it is firmly established in practice that affixing of a company seal on legal documents has the same legal effect as the signature of a natural person.

There are distinct types of seals for various purposes:

• Company Seal: can be used to sign all legal documents, and thus, is the most important and most powerful seal. Once a company is successfully registered with the local AIC, a qualified seal-maker, licensed by the Public security bureau (PSB), will be engaged to produce it. A company seal contains the full registered name of the company in Chinese, and must be registered in the AIC, PSB, and the company’s bank.
• Legal Representative Seal: is used by the company’s legal representative. It has to be registered with the AIC, and is generally used together with the company seal for many official documents, such as tax certificates or the application or amendment for the company’s business license.
• Contract Seal: is used by sales representatives when executing a contract with a customer. Normally the Head of Sales (or his or her assistant) possesses this seal. It grants less authority to its keeper than the company seal and is not a required seal.
• Finance Seal: is used for opening a bank account, issuing checks, authenticating financial documents such as tax filings and compliance documents, and for most bank related transactions. It is a mandatory seal, though the company seal can often be used in its place. Companies will often keep their finance and company seals separate to avoid exposure to misuse. This seal must be recorded with the AIC, PSB, and the company’s bank.
• Fapiao Seal: is used to stamp on invoices issued by the company. It is required as an evidence of a business expense for the tax authorities.
• Customs Seal: is used for customs declarations on import and export goods. It is mandatory for companies engaged in cross-border trade.
• Human Resources Seal: is used when signing a labor contract with its staff. It might also be required on employee or employment related documents, including internal memorandums involving employees.

Why do Chinese “prefer” a seal over a signature?
Every Chinese company has one “legal representative” (under the Chinese law), who is identified in its company’s business license. Any contract signed by a legal representative is a binding of the company, whether or not a seal is affixed.

To enforce a contract that is not sealed, you must prove that the signature on the contract really belongs to the Chinese company’s legal representative. It is, in general, easier to prove a seal then a signature. Because of this reason, if you can get a contract sealed, you should.

Hence, it is a double insurance to have a contract signed by the legal representative and affixed with the company seal. If a contract is signed by a company staff but not the legal representative, then the company seal will become the main enforcement factor.

Larger Chinese companies often do not have their legal representative signing their contracts. In this situation, you need to be particularly vigilant about securing your contract with a proper seal.

Any contract affixed with a Chinese company’s seal is a binding, regardless of who signed on behalf of the company and regardless of who used the seal. However, to enforce the contract you must prove that the seal used on the contract is actually the genuine seal of the company.

If you purchase products in China solely with purchase orders and invoices, then you do not have a signed or sealed contract. Disputing a transaction based on purchase orders and invoices is proven to be a challenge. Hence, it is critically important to have a written and properly signed and sealed contract.

On large transactions, it is recommended to have a Chinese lawyer to confirm with the appropriate government agency that the seal on the trading partner’s contract is indeed the company’s official seal.

This Credit Insight is an extract from the book Happy Customers Faster Cash, China Edition and on sale at Amazon.

More companies sell on credit to their customers in China. This book shares with you, using statistical data, the true picture of payment behavior in China. It also contains lots of cultural insights for you to better understand the business environment in China. A chapter is dedicated to discuss various aspects of China company credit reports.