Custody of the Company Chop against What the Articles Say
Physical custody of the company seal creates binding external apparent authority regardless of internal constitutional restrictions on corporate officers.
PRC Civil Code Article 61
Meaning
Legal provisions governing corporate representation under Chinese law establish that the civil acts of a legal representative are attributed directly to the legal person they represent. These rules, codified in PRC Civil Code Article 61, dictate how corporations assume responsibility for the actions of their designated leaders. The article ensures that third parties can rely on the actions of the legal representative unless those parties had prior knowledge of restrictions on their authority.
Representative Authority
Designated individuals holding the position of legal representative have the power to bind the company to contracts and financial obligations without specific board approval for each act. This authority is a central feature of corporate governance in China, making the selection of the legal representative a critical decision for joint ventures and foreign-owned enterprises. The law presumes that the signature of this individual represents the will of the corporation.
Internal Limitation
Corporate bylaws or board resolutions that restrict the authority of the legal representative are ineffective against bona fide third parties. If a representative enters into an unauthorized contract, the company cannot invalidate the agreement unless it proves that the counterparty knew of the internal limitations. This provision protects the security of transactions and the stability of the commercial market.
Liability Attribution
Consequences of unauthorized actions by the legal representative are handled through internal recourse after the company has fulfilled its obligations to the third party. The corporation must first honor the contract and then seek damages from the representative for violating internal protocols or exceeding their board-mandated authority. This secondary action ensures that the burden of internal corporate governance failures falls on the company rather than the market, which is why foreign investors in Chinese subsidiaries implement strict controls over corporate chops and digital signatures.
Maintaining control of these physical and digital instruments is the primary practical method for mitigating unauthorized representative risk.