China’s Legal System

A company from Dubai (“Dubai Co.”) got to know a trading company with an address in Shenzhen, China (“Shenzhen Co.”) through an online supplier directory and intended to buy a batch of goods from the Shenzhen Co. Before placing an order, the Dubai Co. browsed Shenzhen Co.’s website, visited its office in person, and took photos at its reception area for record. Thereafter, both parties entered into a formal purchase order (“PO”), on which the authorized person of Shenzhen Co. signed his name. After the order was placed, Shenzhen Co. posted some samples according to the PO and the samples passed the Dubai Co.’s examination. Then, the Dubai Co. transferred a deposit to the Shenzhen Co.’s bank account set up at HSBC in Hong Kong. Prior to the delivery of the goods, Dubai Co. made the payment for goods in full; however, upon receipt of the goods, the Dubai Co. discovered that all those goods were defective products. The Dubai Co. attempted negotiations with Shenzhen Co. many times without getting any positive results, so they were referred to a lawyer for assistance.

Lawyer’s findings:

The lawyer reviewed the invoice, PO, photographs; website and other materials supplied by the Dubai Co.., checked through the corporate information website of the local government, and conducted a site investigation. It was discovered that this so-called Shenzhen Co. was not legally registered in Shenzhen, and its office was rented only for temporary use and ultimately had been left unused and empty. From the HSBC bank account of Shenzhen Co., the lawyer inferred that the Shenzhen Co. should be a company registered in Hong Kong. Pursuant to Chinese corporate law, a Hong Kong company is not a Chinese company, and therefore should be considered as a “foreign company.” A Chinese lawyer is unqualified to represent Dubai Co. to file a lawsuit in Hong Kong, and it is also meaningless to file a lawsuit against a foreign company without any address or property within the territory of China. This Dubai Co. only had the following options: (1.) Employ a Hong Kong lawyer to file a lawsuit against said Hong Kong company in Hong Kong. The Hong Kong lawyer may search for the address and information of the directors of said company through the Corporate Register Office of Hong Kong. However, since it is very easy to register a company in Hong Kong, and it is very common that a Hong Kong company has no assets, filing a lawsuit is very likely to be nothing more than just a waste of money.  (2.) Report the case to the Hong Kong or Chinese police as a suspected fraud case. However the place where the criminal is located (Hong Kong), the place where the crime took place (Mainland China) and the place where the result of the criminal act was found (Dubai, where the goods were inspected and found to be defective goods) are in three different countries and jurisdictions. It is difficult to both solve the case and to conduct the prosecution, and, generally, the police will not invest a large amount of police force in this kind of cases. (3.) Employ a private investigation company to seek recovery through irregular ways. This way is gradually becoming known to people with the recent growth of private detective business in China. The detective business itself is in the grey zone of law, however, and the costs alone of such a defective company are usually quite high.

Tips:

To avoid being a victim in a similar case, it is necessary to learn and verify the real identity of a Chinese company or an alleged Chinese company before entering into any transactions with such a company.

1. In the mainland of China, all companies must register with the government and obtain relevant certificates and documents such as the business license before being permitted to do any legal business operations. Before entering into any contractor Purchase Order with a Chinese company, you should first request the Chinese company provide a copy of its business license, which should be written in Chinese and bear the Chinese name of the company and the name of its legal representative. In China, a company is only required to register a Chinese name as its legal company name and is not required to register any English name. Therefore, once any litigation happens, it is not possible to directly identify any company by its English name only. It is therefore very essential to have the Chinese name of the company by obtaining the business license of this Chinese company, and, if conditions permit, the foreign trader may entrust a Chinese lawyer to investigate the validity and credibility of a Chinese company based on the content on its business license (at the cost of approximately US$500-$1,000).

2. In Mainland China, the importance of the company seal is so high that many other countries cannot compare. The company seals must be filed with the public security organ. A document on which a company seal is affixed is deemed as a legal document approved by that company and generally will bind the company to undertake legal responsibilities for the content of such a document without the proof of any other evidence. In China, a person’s signature does not have a strong effect, and sometimes the signature of a director or even the legal representative of a company does not necessarily have a binding effect on the company without the company seal affixed. Therefore, you should first ensure that the contract or PO has both the Chinese name and English name of the Chinese company, and at the same time, the contract or PO bears the affixture of the company seal, together with the signature of the authorized representative. There are two types of company seals in China: the company seal of a domestic Chinese company is a circle, in which the Chinese name of the company and a five-pointed star co-exist, while the company seal of a foreign-invested Chinese company is an ellipse, in which the Chinese name of the company exists (in some cases, together with its English name), without any five-pointed star.

3. In Hong Kong, a company from the mainland of China is not permitted to open a general bank account with any Hong Kong bank. Therefore, if you discover on the contract or PO that a Chinese company provides a bank account at the HSBC in Hong Kong for the purpose of receiving payment, while its address is in the mainland of China, in most cases such a company is a Hong Kong company instead of a Chinese company (please note that some investors may set up a Hong Kong company and a Chinese company separately using the same English name, but these are still two different companies). In such a case, you must insist on obtaining the Chinese name and business license of the Chinese company, and make sure the company seal of the Chinese company is affixed to the contract/PO and that the Chinese name on the company seal is consistent with the name of the party concerned in the contract. If the above is provided, then the Hong Kong company will be considered as a party who receives payment on behalf of the Chinese company only, and all contractual obligations still rests with the Chinese company, therefore when any disputes arise, you may now sue the Chinese company in China.

By Lynn Li, Partner JunZeJun Law Offices

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