This article has been prepared by our partners from 1421 Consulting Group.
Many things in China, like signing a contract as the owner of a business, happen differently than in any other country. For example, an employee within a Chinese company can sign official documents using the company “signature”. This is due to the fact that Chinese use a stamp to sign documents. When registering a WFOE, the owner receives such a Chinese company stamp among others. Other stamps are the legal representative stamp, financial stamp and contract stamp. Even though signatures are used to sign documents, only the stamp makes a document legally binding.
So how does the Chinese company stamp or chop compare to a signature? Due to some simple characteristic differences there is a large difference in how a legal representative should operate with a stamp. A signature is generally interconnected to a person. A stamp is a piece of “machinery” handled by a person. The power lies with the operator of that piece of “machinery”. From the janitor right up to the CEO, all are able to operate a stamp. This is an important detail WFOE and joint venture owners overlook. Many of them leave the Chinese company stamp in the hands of an employee. When a CEO needs to be abroad for the majority of the year, it is convenient that documents can be stamped by an employee locally present. This seems logical; however this comes with a compliance risk. How much can you trust the employee handling the stamp? He or she is perhaps not responsible for the WFOE and therefore not liable. In the end, the company’s legal representative always bears the responsibility.
So should you keep the stamp under your own control? That is a decision only a Legal representative can make. As consultants, we strongly advise companies to make sure the stamp is used solely on purposes you want it to be used. If you do not have full insight, then we advise you to check documents on a regular basis. For brand new WFOE owners this is not a surprise, but this detail is one many people tend to forget when starting a business in China. Also we strongly advise WFOE’s to have a stamp register book where employees sign off using the stamp. This register should always correspond with the documents signed.
Chinese organizations could demand stamped agreements when they sign a contract with a foreign party, even if the foreign party does not have an entity in China. For such reasons, we advise Western companies doing business with China to always have a stamp ready for signing contracts, even if it is not your WFOE or Rep Office.
Another important compliance issue regarding the use of stamps comes from the opposite signing party. Sometimes, if an organization has foul intent, they sign contracts with fake stamps. A Chinese company stamp should always be chopped in red ink, and should be circular. If the chopped seal is illegible, it becomes legally invalid. Furthermore, the name on the chop should always be the Chinese name of the company, not the English one. If you find a blue, English and/or rectangular stamp on your agreement, then something is probably not right. Finally you have to confirm that the document is signed by a person within the company legally allowed to stamp or sign such documents.
Checking a Chinese company stamp on being valid is a costly but common process among Chinese local entrepreneurs. They visit the local authorities where the company is registered to see if a stamp is registered to a company. Some stamps are not registered but still legal. When a stamp is not registered, you need to compare the stamp to other signed deals by the counterpart.
Many Western firms believe this to be expensive wasting of time. Chinese counter such claims by stating that being cheated is more expensive and an even larger waste of time. Many of the stories Westerns tell when they fail doing business in China ends with finger pointing to the Chinese. We believe that many of those mistakes could have been prevented. Making sure you are compliant could reduce certain mistakes and increases your chances for success. In China your counterpart does not cheat you, you let yourself become cheated.
This article has been prepared by 1421 Consulting Group, a management consultancy firm active in Beijing and Shenzhen and have supported many foreign SMEs with doing business in China. To visit the original article and get in contact with 1421 Consulting Group, please visit the article at http://www.1421.consulting/2016/01/chinese-company-stamp-vs-signature/