Understanding Chinese Civil Litigation: A Guide for Foreign Businesses

Understanding Chinese Civil Litigation: A Guide for Foreign Businesses For foreign entities operating in or trading with China, the legal landscape can often appear opaque. However, recent judicial decisions from the 2025 Annual Cases of Chinese Courts demonstrate a maturing legal system that increasingly emphasizes international standards, strict contract interpretation, and robust protection of intellectual property rights.

To succeed, foreign businesses must grasp the Understanding Chinese Civil Litigation principles that now govern commercial disputes. This article provides an in-depth analysis of critical legal factors—ranging from the application of the United Nations Convention on Contracts for the International Sale of Goods (CISG) to the nuances of corporate veil piercing and trademark dilution—drawing directly from recent authoritative court judgments.

Understanding Chinese Civil Litigation in International Trade: The Primacy of CISG

• e.g.
• China and Germany
• China and the US

A fundamental aspect of Understanding Chinese Civil Litigation for exporters and importers is recognizing how Chinese courts apply international treaties. When a dispute arises between parties from contracting states of the CISG , Chinese courts consistently prioritize the Convention over domestic law unless the parties have explicitly excluded it.

Determining the Applicable Law and Interest Rates

In the case of German Medical Technology Co. , Ltd. v. Ningbo Co. , the court addressed a dispute over undelivered masks. The plaintiff was a German company, and the defendant was Chinese. The court ruled that since both China and Germany are contracting states to the CISG, and the parties did not exclude its application, the CISG applied automatically.

This is a critical point: mere silence does not trigger domestic Chinese contract law; the international treaty prevails [Source 2184, Case 17]. Furthermore, this case highlighted a sophisticated approach to calculating damages. While CISG Article 84(1) requires the seller to pay interest on refunded prices, it does not specify the interest rate.

The Chinese court looked to the CISG Advisory Council Opinions for guidance, adopting a rate that compensated the foreign buyer for the cost of borrowing—specifically, the Loan Prime Rate (LPR) plus a margin—rather than a statutory Chinese rate that might not reflect the foreign entity's actual loss [Source 2184, Case 17].

This demonstrates a judicial willingness to integrate international soft law to achieve equitable results.

Fundamental Breach and Contract Termination

Understanding Chinese Civil Litigation also requires navigating the high bar for "fundamental breach" under the CISG. In Z Company v. Xingtai Bicycle Co. , the court analyzed a dispute where the seller delivered goods but allegedly failed to meet quality standards in previous transactions, leading to a breakdown in a subsequent order.

The court emphasized that under the CISG, a fundamental breach requires a deprivation of what the party is entitled to expect under the contract. Here, the court carefully parsed the email correspondence and "Proforma Invoices" to determine that the seller's failure to ship goods after receiving a deposit constituted a fundamental breach, entitling the foreign buyer to terminate the contract and demand double the return of the deposit under Chinese law principles where the CISG was silent on specific remedies like deposit penalties [Source 2184, Case 20].

Similarly, in U Company v. Cangzhou Manufacturing, the court ruled that delivering welded steel pipes instead of the agreed seamless steel pipes constituted a fundamental breach because it defeated the buyer's purpose. Crucially, the court rejected the defense that the goods had passed China’s statutory export inspection.

The judgment clarified that administrative compliance does not equal contractual compliance; the contract's quality specifications are paramount [Source 2184, Case 10].

Corporate Liability and Piercing the Corporate Veil

For foreign investors and partners, Understanding Chinese Civil Litigation involves knowing when a shareholder can be held personally liable for company debts. Chinese courts are rigorous in applying the "corporate veil piercing" doctrine, particularly regarding one-person limited liability companies (LLCs) and commingling of assets.

The Burden of Proof in One-Person LLCs

s Company Law places a heavy burden on shareholders of one-person LLCs to prove their personal property is independent of the company

Chinas property. In the case of Wei v. Xu, a creditor sought to hold a shareholder liable for the company's debts. The court ruled that because the shareholder could not prove his personal assets were separate from the company's—due to a lack of independent annual financial audits—he was jointly and severally liable for the company's debt.

The court emphasized that a one-person company must have a strict financial firewall; without it, the law presumes confusion to protect creditors [Source 2184, Case 21].

Liability for Illegal Profit Distribution and Capital Withdrawal

Foreign businesses must also be wary of irregular capital movements. In Zhang v. Chen, a shareholder received large transfers from the company while it was insolvent. The shareholder claimed these were legitimate business dealings but failed to provide sufficient evidence. The court treated this as an illegal distribution of profit (or de facto withdrawal of capital) and ordered the shareholder to be supplementarily liable for the company's debts up to the amount withdrawn [Source 2184, Case 40].

This illustrates that Understanding Chinese Civil Litigation means ensuring all capital flows between shareholders and their Chinese entities are meticulously documented and compliant with statutory audit requirements.

Intellectual Property Protection for Foreign Brands

A major concern for foreign businesses is the protection of their IP. Recent cases show that Chinese courts are increasingly proactive in protecting well-known trademarks against dilution and "free-riding," even across different product classes.

Cross-Class Protection for Well-Known Trademarks

• famous f
• jewelry

In the landmark Cartier International v. Foshan Ceramics case, the court protected the "Cartier" brand against a ceramics company using the name. The court held that using a well-known trademark on dissimilar goods (ceramics vs. jewelry) dilutes the distinctiveness of the famous mark and improperly leverages its reputation.

The court ordered the defendant to stop using the name and pay damages, signaling strong protection for global brands against dilution in the Chinese market [Source 2184, Case 33].

Protecting Translations and Transliterations

Understanding Chinese Civil Litigation in IP also extends to how Chinese consumers perceive foreign brands. In Michelin Group v. Shanghai Mi Zhi Lian, the court protected Michelin's trademark. The defendant used "Mi Zhi Lian" (米芝莲), the Cantonese transliteration of Michelin commonly used in Hong Kong, for a milk tea chain.

Although "Michelin" is usually translated as "Mi Qi Lin" (米其林) in mainland China, the court recognized that "Mi Zhi Lian" corresponds to Michelin in the eyes of Chinese consumers due to the fame of the Michelin Guide. The court ruled this use constituted trademark infringement because it created a stable link to the famous tire and guide brand, misleading consumers [Source 2184, Case 30].

This confirms that foreign brands can protect not just their official Chinese names but also widely recognized variations.

The Limits of Protection: The "Toutiao" Case

However, protection is not limitless. In Bytedance (Toutiao) v. Today Oil Strip, the court ruled that a local breakfast shop using a similar logo style and the name "Today Oil Strip" (Jinri Youtiao) did not infringe on the "Today Headlines" (Jinri Toutiao) trademark. The court reasoned that the markets (digital news vs.

fried dough) were so distinct that confusion was unlikely, and the term "Toutiao" (Headline) lacked the inherent distinctiveness to prevent a humorous, non-competing use in the food industry [Source 2184, Case 34]. This nuance is vital for Understanding Chinese Civil Litigation: while famous marks are protected, courts will still analyze the actual likelihood of confusion and the distinctiveness of the mark.

Jurisdiction and Arbitration Clauses

Foreign businesses often prefer arbitration, but drafting valid clauses requires precision.

Validity of Arbitration Clauses

In Beijing Cruiser v. Foreign Company, the dispute centered on an email order that referenced a sales term sheet containing an arbitration clause. The clause called for arbitration in Toronto under UNCITRAL rules but did not specify an arbitration institution. Under Chinese law, an arbitration agreement must specify a commission.

However, the court applied Canadian law (the law of the seat of arbitration) to determine the clause's validity, as agreed in the terms. Under Canadian law, the clause was valid. This case illustrates that Understanding Chinese Civil Litigation involves knowing conflict of law rules: Chinese courts will respect the choice of foreign law to validate arbitration clauses that might otherwise be invalid under Chinese domestic law [Source 2184, Case 6].

Conclusion

Understanding Chinese Civil Litigation is no longer about navigating a system based solely on local protectionism. The 2025 case records reveal a judiciary that rigorously applies international conventions like the CISG, demands strict corporate financial compliance to maintain limited liability, and offers sophisticated protection for foreign intellectual property.

Foreign businesses must prioritize clear contractual terms, precise translation of brands, and meticulous financial separation between entities to thrive in this legal environment.