Lessons from Tencent vs. Laoganma: 3 Tips for Verifying the Identity of the Other Party When Signing a Contract

Recently, the plot surrounding the contractual dispute between Tencent Inc., one of China’s tech giants, and Laoganma, a leading food company famous for its chili sauce products, has gone back and forth many times.

Two weeks ago, Tencent sued Laoganma asking the court to freeze 16.24 million yuan of bank deposits or equivalent property in Laoganma’s name. Laoganma followed up to issue a statement asserting that Tencent had been cheated in the relevant contractual exchange and subsequently on July 1st, the Shuanglong branch of Guiyang Public Security Bureau issued a notice stating that according to the preliminary investigation of the Bureau, three suspects forged the seal of Laoganma company and pretended to be the manager of the marketing department of the company to sign a cooperation agreement with Tencent, the three suspects in question have since been detained.

However, just after the Court announced that the hearing for this contractual dispute shall be arranged within 7 days from last Friday (10th July), Tencent’s official Weibo suddenly posted that Tencent had applied to the court to withdraw the property preservation application and the lawsuit in this case, and had reported the contract fraud to Guiyang Public Security Bureau. Tencent has also since apologized to Laoganma and both parties have agreed to actively explore and start a series of formal cooperation upon in-depth communication and clarification of the misunderstanding.

The whole process can be said to be inexplicable and full of twists and turns. However, from this news, companies should heed the warning signs and understand the importance of verifying the identity of the other party when signing a contract. In regard to this point, we hereby issue the following 3 tips in order to avoid issues in your commercial activity:

  • Verifying authorization procedures

The soon to be implemented Article 165 of the Civil Code, stipulates the contents and forms of the written authorization letter, that is, ” Where a civil juristic act is entrusted to an agent in written form, the power of attorney shall clearly state the agent’s name, the entrusted matters and the scope and duration of the power of agency, and be signed or sealed by the principal.” Therefore, it is important to verify the written forms of the authorization letter in order to prove that the signer is authorized to have the power of execution of a contract, and the specific details mentioned in the Civil Code need to be given particular attention. In addition, the presence of a chopped copy of the business license would be of assistance for assessing such personnel’s identity, as in normal practice, a company’s business license together with the official company seal are generally well kept.

  • Normal practice to check the identity of the other party

The modern information systems provide an abundance of channels to check the identity of the opposite party of the contract. Free resources such as the National Enterprise Credit Information Publicity System, or fee based websites such as Qichacha are both available in order to examine the basic information of the contract counterparty and check whether or not it is consistent with the official seal name.

  • Attention to the collection and retention of relevant evidence proving the authority of the person signing the contract

The normal judicial practice and theory of civil laws suggest when defining apparent agency, it should be taken into consideration whether the signer has the objective appearance of agency rights and if the other side has been deemed to have acted in good faith without fault. To avoid the dilemma of a contractual dispute caused by “apparent agency”, when signing a contract, the party is advised to pay attention to the collection and retention of materials that can prove that the person from other side has the authority or may convince others to believe that he/she has the authority. Other than retaining the aforementioned authorization letter, other feasible means also include retaining any visual evidence, going to the office of the other party to signing the contract on site.

The above listed tips are based on simple cases in combination with relevant laws and regulations. In actual normal practice, due to the particularity and complexity of each case, different strategies need to be formed based on a case by case basis. We at D’Andrea and Partners Legal Counsel have a team of experts to advise you on updating your contract management. Do get in touch at info@dandreapartners.com for any queries or assistance in regard to signing contracts.