One of the key considerations for businesses expanding internationally is the legal capacity of their branches and representative offices. This article explores whether such entities have the authority to sign contracts and how this affects business operations across borders.
What are branches and representative offices?
According to Article 44 of the 2020 Enterprise Law, the definitions of branches, representative offices, and business locations are as follows:
- Branch: A dependent unit of the enterprise with the task of performing all or part of the enterprise’s functions, including representative functions. The branch’s business activities must align with those of the enterprise.
- Representative office: A dependent unit of the enterprise, tasked with representing the enterprise’s interests and protecting those interests. A representative office does not engage in business activities.
Branches and representative offices do not have legal person status
Pursuant to Clause 1 and 2, Article 44 of the 2020 Enterprise Law, a branch and a representative office are defined as follows:
– Branch of an enterprise is a dependent unit of the enterprise, having the task of performing all or several of the functions of the enterprise, including the function of authorized representation.
– Representative office of an enterprise is a dependent unit of the enterprise, having the task of representing under authorization the interests of the enterprise and protecting such interests. The representative office may not perform the business function of the enterprise.
Meanwhile, according to Clause 1, Article 74 of the Civil Code 2015, an organization shall be recognized as a legal person when it meet 4 conditions as follows:
- Being established in accordance with this Code and other relevant laws;
- Having an organizational structure as prescribed in Article 83 of this Code;
- Possessing property independent from that of individuals and other organizations, and bearing its liability with its own property;
- Independently entering into legal relations in its own name.
Branches and representative offices are both dependent units of the enterprise, all activities of them depend on the enterprise and through authorization. Therefore, branches and representatives offices do not participate in legal relations in an independent capacity, so they are not legal persons.
Shall branches and representative offices sign a contract?
Generally, branches and representative offices will have the authority to sign contracts with the company’s partners in the company’s capacity.
Article 385 of the 2015 Civil Code, a contract is an agreement between the parties on the establishment, change or termination of civil rights and obligations.
So, even though not having legal person status, branches and representative offices shall still sign a contract and become a party in a contractual relationship.
Clause 5, Article 84 of the 2015 Civil Code stipulates that: “The heads of branches and representative offices shall perform tasks under authorization of their legal person within the scope and duration of authorization.”
Accordingly, the heads do not automatically have the right to represent the branch or representative office in signing a contract. This right only arises when the enterprise’s legal representative authorizes the heads of branches or representative offices.
The enterprise’s legal representative decides the scope of authorization. And in any circumstances, the company has the right to cancel the authorization to the head of the branch or representative office.
When a branch or representative office signs some contracts or performs some work that requires the company’s permission, the head of the branch or representative office must present a written authorization from the company.
Thus, branches and representative offices have the full right to sign contracts if this signing is within the scope of authorization by the company.
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