Potential risks related to “Fake Contract”

In 2008, Company A purchased a set of equipment from Company B, but it failed to pay the rest 50% payment on time. After Company B’s requests for several times, Company A agreed to make the payment by a bank acceptance. However, when Company A applied the bank acceptance, the bank said that the bank acceptance would be issued upon the contract and invoice within 1 year. Company A asked Company B to sign a “fake contract” for the rest 50% payment, and issue the corresponding invoice. Company B was eager to collect the rest payment, so it did as Company required, unexpectedly, when Company A made the payment, it asked Company B to deliver the goods under the “fake contract”.

In practice, this kind of cases is not rare. In fact, the risks related to a “fake contract” include many aspects, for example, in this case, Company B was required to execute the “fake contract”, although Company B can defense by claiming that the contract is invalid, however, for such a lawsuit, Company B has to undertake expenses and the court may not support its claim, it would not be a good deal. And the other risks include:
Firstly, the party may be punished for the violation of the regulations on the management of invoice. According to “Measures for the Management of Invoices” and its implementing rules, the invoice shall be issued when business income is confirmed after the occurrence of transaction.

Therefore, the actual transaction and invoice should be one to one relationship, otherwise the invoice may be deemed as a falsified invoice, and the party may be subject to administrative penalty or even criminal punishment. In this case, in order to obtain the bank acceptance, both companies made a “fake contract”, and it is obviously that there is no actual transaction, which violates the one to one relationship.

Secondly, such action may mess up the financial management of the parties. In order to avoid the examination of the administrative authorities for the falsified invoice, these companies have to fake the relevant documents related to the “fake contract”, which will mess up the financial management. Especially, when the disputes related to the “fake contract” happen, the burden of proof would be a big problem.

In addition, in practice, some parties tried to be exempted from the actual execution of the “fake contract” by signing a “supplementary agreement”, however, such “supplementary agreement” can neither keep the parties from the punishment of the authorities, nor be deemed as a valid one which can protect the parties.

All in all, the “fake contract” shall not be a good way to demand payment, and we recommend that every company shall take this action seriously to avoid further loss.