Seal, Dismissed Manager and the Undisclosed Authority Cap
In March 2023, Huaxin Trading Co. (Huaxin) began negotiating with Liu, who had been Tianhe Equipment Co.'s (Tianhe) sales manager until his dismissal in January 2023. Tianhe never retrieved the company seal Liu kept, never notified existing customers of his departure, and continued to list Liu as sales manager on its website. Liu signed a RMB 3.4 million equipment contract with Huaxin, affixing Tianhe's seal and using a contract form bearing Tianhe's letterhead. Huaxin paid a 30 per cent deposit of RMB 1.02 million into Tianhe's corporate account; Tianhe accepted the payment and issued a receipt but later refused delivery, asserting that Liu's written authority had capped him at RMB 2 million and that the seal use was unapproved. Huaxin had previously dealt with Tianhe through Liu and had no notice of any cap. In June 2025 Huaxin sued for delivery or damages. Tianhe pleads (i) lack of authority and (ii) that any claim is time-barred.
1. Is the RMB 3.4 million contract binding on Tianhe? Explain the agency analysis and the relevance of Huaxin's good faith and Tianhe's conduct.
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Under Civil Code art. 170, an employee's act within the scope of employment binds the employer, and internal limits on authority are ineffective against a counterparty who neither knew nor ought to have known of them. Liu was no longer an employee in March 2023, so art. 170 alone is insufficient; the analysis shifts to apparent agency under art. 172. Apparent agency requires an appearance of authority, the counterparty's good faith and absence of negligence, and conduct by the principal that makes the appearance attributable to it. Here Tianhe left the company seal with Liu, failed to notify customers, and continued to present him as sales manager on its website. Huaxin had dealt with Liu before and paid the deposit into Tianhe's corporate account, which Tianhe accepted and receipted. Those facts create a strong appearance of authority. The RMB 2 million cap was internal and undisclosed; Huaxin's failure to demand a fresh power of attorney is not necessarily negligence given the prior course of dealing and the company seal. Tianhe's acceptance of the deposit also supports ratification under art. 171. The contract is therefore binding, and Tianhe cannot rely on the internal cap. Tianhe may have a separate claim against Liu for breach of duty, but that does not defeat Huaxin's rights.
2. Tianhe also pleads that the claim is time-barred. Is it? Apply the Civil Code limitation rules.
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Civil Code art. 188 imposes a three-year limitation period running from the time the creditor knew or ought to have known of the infringement of its right and of the obligor. The contract is binding, so Huaxin's right to delivery arose on the contractual delivery date, or, if Tianhe repudiated before that date, when Huaxin knew of the refusal. On the facts, Tianhe accepted the deposit and then refused delivery at some point in 2023; Huaxin therefore knew of the breach by 2023 at the latest. A suit filed in June 2025 falls within three years of that knowledge. If the contract had no delivery date, Huaxin could demand performance at any time after a reasonable grace period under Civil Code art. 511, and time would run from the expiry of that period; the result would still be within limitation. Tianhe bears the burden of proving that the limitation period has expired. Huaxin may also rely on any demand, negotiation or acknowledgment that interrupted the period under art. 195. The limitation defence should therefore fail.
3. The deposit was 30 per cent of the price. If Tianhe is liable, how should the RMB 1.02 million be treated, and what may Huaxin claim?
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Civil Code art. 586 provides that the deposit may not exceed 20 per cent of the principal contract amount; the excess does not have the effect of a deposit. Twenty per cent of RMB 3.4 million is RMB 680,000, so RMB 680,000 is a valid deposit and the remaining RMB 340,000 is an advance payment. If Tianhe breaches and Huaxin terminates, Huaxin may invoke the deposit penalty under art. 587: the party receiving the deposit must return it double, that is, RMB 1.36 million, and must also return the RMB 340,000 advance, giving RMB 1.7 million in total. Alternatively, Huaxin may claim specific performance and damages for delay. Under art. 588, if the contract also stipulates liquidated damages, Huaxin must choose between the deposit penalty and the liquidated-damages clause; it cannot recover both. The court should also ensure that the total recovery does not exceed the actual loss plus permissible liquidated damages, because the defaulting party may ask for adjustment under art. 585 where the agreed sum is excessively high.