Company Chops in Commercial Contracts – Complications behind Convenience

A. Background of the case

In that case, the plaintiff claimed that it entered into a loan agreement with the defendant (via a Mr Chen, one of the directors of the defendant) at the request of Mr Chen on behalf of the defendant as contained and/or evidenced by a Chinese document (the Loan Agreement), which was purportedly executed by the defendant with its company chops and Mr Chen’s signature.  Pursuant to the Loan Agreement, the plaintiff advanced a US$300,000 loan to the defendant with interest, where US$100,000 and interest remained unpaid. The plaintiff therefore commenced legal proceedings against the defendant to recover US$100,000 plus interest on the basis of the Loan Agreement and/or unjust enrichment, and pleaded the following matters:

(i) Mr Chen had actual / apparent authority to enter into the Loan Agreement on behalf of the defendant, taking into account also the indoor management rule and section 117 of the CO; and

(ii) Even if Mr Chen had no actual / apparent authority, the defendant was unjustly enriched.

The defendant is a limited company incorporated in Hong Kong engaged in the business of wholesale and retail of apparel.  The defendant’s defence was that:

a. Mr Chen did not have the actual / apparent authority as suggested by the plaintiff, even after having taken into account the indoor management rule and section 117 of the CO;

b. even if Mr Chen had apparent authority, it was irrational and/or reckless for the plaintiff to rely on the apparent authority; and

c. there was no receipt of the loan by the defendant.

The defendant also counterclaimed against the plaintiff for the US$200,000 paid to the plaintiff on the ground of unjust enrichment, as it was made by Mr Chen in the absence of authority from the defendant and/or by mistake.

B. Issues

The key issues that the Court had to decide on were: 

(i) whether Mr Chen had actual / apparent authority to enter into the Loan Agreement;

(ii) if Mr Chen had apparent authority, whether it was irrational / reckless for the plaintiff to rely on it;

(iii) whether the indoor management rule and/or section 117 of the CO could be invoked by the plaintiff;

(iv) whether the defendant was unjustly enriched; and

(v) whether the plaintiff was unjustly enriched in receiving US$200,000.

(i) Whether Mr Chen had actual / apparent authority to enter into the Loan Agreement

The Court swiftly concluded that Mr Chen had no actual authority to enter into the Loan Agreement as a matter of fact, having considered the articles of association of the defendant and the absence of board resolutions authorising Mr Chen to do so. 

As to whether Mr Chen had apparent authority, the Court referred to the case of Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479, which set out the requirements for establishing apparent authority:

(1) That a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor;

(2) That such representation was made by a person or persons who had “actual” authority to manage the business of the company either generally or in respect of those matters to which the contract relates, and in principle, such a person making such representation can be the agent himself although practically, this should be “very rare and unusual” and it is hard to conceive any such circumstances;

(3) That the contractor was induced by such representation to enter into the contract, that is, that he in fact relied upon it; and

(4) That under its memorandum or articles of association, the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent.

In pleading that Mr Chen should have apparent authority, the plaintiff relied on a number of factors, including the signing of the Loan Agreement by Mr Chen as “經手人”, “For and on behalf of [the defendant]”, with the following company chops of the defendant stamped on it:

• a rectangular chop “For and on behalf of [the Defendant]… Authorised Signature(s)” (the Authorised Signature Chop); and
• a round chop bearing the defendant’s Chinese and English names (the Name Chop).

Legal principles

The Court referred to the case [2015] 1 HKLRD 479 and set out the applicable principles as follows:

• The mere use of the company chop, per se, does not constitute any representation for the purpose of apparent authority.
• On the other hand, the permission to use the company chop is only a relevant but non-conclusive factor to be considered.  
• The representation constituted by the permission to use the company chop is that the apparent agent has authority to act for the defendant in situations only where the use of the company’s rubber chop would suffice.
• Even if there is such a representation, the court should still ask whether the outsider is induced by such a representation.

Application

The Court concluded that Mr Chen had no apparent authority to enter into the Loan Agreement either because on the available evidence:

• Nothing supports the view that Mr Chen was authorised to use the Authorised Signature Chop;
• Whilst Mr Chen was permitted to use the Name Chop, the Loan Agreement was not an agreement which such a chop would be sufficient for the following reasons, amongst others:

• the loan amount was significant;
• Mr Chen had never appeared as responsible or empowered to borrow on behalf of the defendant;
• it was unusual for the defendant (which is engaged in the business of wholesale and retail of apparel) to request a loan from a customer; and
• the loan was the first between the plaintiff and purportedly the defendant.

(ii) If Mr Chen had apparent authority, whether it was irrational / reckless for the plaintiff to rely on it

For completeness, the Court also stated that even if Mr Chen had apparent authority, it would be irrational / reckless for the plaintiff to rely on it in view of the plaintiff’s failure to conduct company search in the context of a borrowing which was not in the usual course of dealings between the parties. The plaintiff should have conducted a company search against the defendant to see if there were any other directors and/or sought formal board resolution from the defendant.

(iii) Whether the indoor management rule and/or section 117 of the CO could be invoked by the plaintiff

In relation to the indoor management rule under common law², the Court took this opportunity to reiterate that such rule operates only where the person purporting to act on behalf of the company is acting within the scope of his actual or apparent authority.

As to section 117 of the CO³, upon considering the legislative intent, the Court clarified that it would only apply to the board of directors (as opposed to a single director), so that a proper balance can be struck between protecting outsiders dealing with the company on one hand and the company’s position against the mercy of a single director and at the expense of the interests of the shareholders on the other hand.  

Therefore, neither the indoor management rule nor section 117 of the CO could assist the plaintiff as Mr Chen did not have any apparent authority from the defendant.

(iv) Whether the defendant was unjustly enriched

On the facts, as it was Mr Chen who directed the plaintiff to make the payment into the defendant’s account and withdrew money from the same account and that there was no basis for the plaintiff to reasonably believe that he was lending money to the defendant (given the lack of actual and apparent authority and in any event the irrationality and recklessness in relying on any apparent authority), the Court accepted that Mr Chen simply took the defendant’s account as a conduit and that the real borrower of the loan under the Loan Agreement was Mr Chen instead of the defendant.  Hence, the plaintiff’s cause of action of unjust enrichment failed.  

(v) Whether the plaintiff was unjustly enriched in receiving US$200,000

Given that the defendant succeeded in its defence, the defendant itself has never received the loan and it was Mr Chen who caused the defendant to pay US$200,000 to the plaintiff without any proper basis. The Court therefore held that the plaintiff was unjustly enriched in receiving US$200,000 and was liable to pay that sum plus interest to the defendant.

C. Concluding remarks

This case serves as a good reminder that parties should be wary when entering into agreements with persons purporting to act on behalf of corporate entities by merely holding and using a company chop.  It would appear that in the context of commercial dealings, situations where the use of the company’s rubber chop only would suffice would be limited.  Parties are therefore strongly recommended to conduct proper company searches against counterparties and obtain relevant board resolutions (and shareholder resolutions, if appropriate) to protect themselves against the risks of counterparties acting without authority.