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Who has the Company Chop? Be Aware of the Legal Implications
1 February 2015

Whether using the company chop on a contract will effectively make it binding was considered by the High Court of Hong Kong in its recent decision of TS Office System Limited v Wing Kee Produce Limited, delivered on 14 December 2014.

Background

The claim arose when the defendant’s supervisor, who found out that its receptionist had used the defendant’s company chop to enter into three long-term supply contracts to buy printer toner, returned the first batch of toner cartridges to the toner supply company the day after they were received. The toner supply company refused to accept the toner back, and reported the matter to the police.

The toner supply company sued for the price of the first batch of cartridges for the rather small sum of HK$12,898 in the Small Claims Tribunal, and won. The defendant appealed to the High Court.

The Contracts

The evidence accepted by the Small Claims Tribunal was that the receptionist had completed order forms, and applied the defendant’s chop in between the words “accepted and order confirmed by”, and the words “authorized chop”. She then faxed the forms to the toner supply company. The goods were delivered a short time later, and the clerk applied the defendant’s rubber chop on the sales confirmations, invoices, and delivery note.

The evidence was that it was part of the receptionist’s job to order stationery, and the defendant had given the receptionist permission to use the company’s rubber chop in the conduct of the defendant’s business.

With this background, the toner supply company no doubt felt justified in wanting the contract to be enforced and for it to get paid for the delivered goods.

The defendant argued that the receptionist was only a clerk, who purchased toner under instructions from senior staff, and in ordering and accepting the toner from the plaintiff, had acted outside of the defendant’s internal procedures that govern buying office supplies. She had not been authorized by the defendant for this transaction.

Issues

The Court accepted that there was no actual authority for the receptionist to enter into the contract, and applied the law when a party (here the toner supply company) can enforce a contract against a company (here the defendant) that was entered into by an agent (here the receptionist) who does not have the authority to do so. The court noted the requirements that :-

– a representation that the agent had authority to enter on behalf of the company into a ontract of the kind sought to be enforced, was made to the contractor;

– this representation was made by a person who had ‘actual’ authority to manage the business of the company either generally or for those matters relating to the contract;

– the contractor had relied on the representation to enter into the contract; and

– under its memorandum or articles of association, the company had capacity to enter into the same type of contract, or to delegate authority to enter into a contract of that kind to the agent.

Company Chop

The key representation that was made here was the use of the company chop. The court noted that the rubber chop, which is not the same as the common seal, does not have legal significance under the Companies Ordinance, but can be a representation of authority to enter into a contract. In fact, the court here found that the defendant’s permission for the receptionist to use the defendant’s rubber chop was a representation to the toner supply company that she could act for the defendant in situations where the use of the defendant’s rubber chop would do.

The Deciding Point

Here, the company was free to enter into the contracts and they did not require a signature (or to be in writing) to be valid and enforceable. The other requirements also seemed to be in place so that the representation in the use of the chop seemed to place the defendant in a difficult position.

However, in the present case, the court noted that for matters involving representation, the toner supply company could not rely on it if such reliance was irrational. The key here was the dollar value of the contracts – in total, the contracts were for the supply of toner over an extended time frame with a total value of HK$230,952. The court found that it was reckless hence irrational for the toner supply company to rely on the receptionist with the representation of a rubber chop, to enter into contract for this large amount of money.

On this basis, the claim made by the toner supply company failed. The result was particularly bad as the toner supply company was ordered to pay the appeal costs of the defendant.

Things to Note

The defendant was particularly courageous in appealing to the High Court over such a small sum. The legal costs would have been significant compared to the amount they were ordered to pay by the Small Claims Tribunal.

Companies must be mindful about how they allow their chops to be used, and the directions given to staff. They should also put in place clear written lines of authority for staff involved in purchasing for the company. In the present case, had the defendant not been able to show the court that the receptionist was not allowed to enter into this contract, the result may well have been very different.

Companies entering into contracts to provide goods or services should ensure that staff are alert to factors that seem out of place or for significant orders made by inappropriate or junior staff, and that they do not rely on representations that simply ‘can’t be right’.

If you have any queries regarding the above eNews or on any dispute resolution or litigation matters, experienced lawyers in our Litigation department will be happy to assist you.

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