Company law Foreign enterprises
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Foreign Company Branch Civil Liability in China: Company Law Case Analysis

Written by Zhang&Partners · Guangzhou, China

Chinese Company Law and Civil Code infographic: legal provisions on foreign company branches, representative offices, and civil liability attribution in China
The Company Law and Civil Code framework—key provisions on foreign company branches and their civil liability—explains when a foreign parent company must answer for the obligations of its China representative office.
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As China continues to deepen its opening-up, an increasing number of foreign companies have established representative offices, liaison offices, and other branches in China to facilitate their business operations. A fundamental legal question arises: do such branches have the independent capacity to bear civil liability? Is the foreign company civilly liable for the business activities conducted by its branches in China? And if so, what are the constituent elements?

This article examines a representative foreign-related sale of goods dispute and systematically addresses these questions with reference to the relevant provisions of the Company Law of the People's Republic of China and the Civil Code of the People's Republic of China.

1. Summary of the Case

Case Name: Hengsheng Company v. UK Dock Company Qingdao Representative Office and UK Dock Company — Sale of Goods Dispute

Case Source: Wuxi Intermediate People's Court of Jiangsu Province, (2018) Su 02 Min Chu No. 281 Civil Judgment

Key Facts:

Between 2015 and 2017, the China Representative Office of UK Dock Company (the defendant) placed multiple orders with Hengsheng Company (the plaintiff) for rubber fender products. According to a reconciliation letter submitted by Hengsheng Company, as of February 28, 2018, the China Representative Office of UK Dock Company owed Hengsheng Company a total of RMB 1,318,922.40 in payment for goods. The China Representative Office of UK Dock Company affixed its seal to the reconciliation letter under the "Information Confirmed as Correct" section.

All purchase orders under this dispute were signed and sealed in person in Qingdao or Wuxi. The China Representative Office of UK Dock Company did not make payments strictly in accordance with the timeframes stipulated in the contracts. However, owing to the volume of transactions between the parties, it was no longer possible to ascertain which specific orders remained unsettled; only the total outstanding amount could be confirmed. Prior to the commencement of the litigation, the China Representative Office of UK Dock Company still owed Hengsheng Company RMB 1,312,704.80 in payment for goods.

Hengsheng Company brought an action before the court, seeking an order that UK Dock Company and its China Representative Office jointly pay the outstanding amount under the purchase orders and compensate for the corresponding losses arising from the overdue payment.

2. The Court's Decision

(1) Governing Law

Since the defendant, UK Dock Company, is a UK-incorporated enterprise, the case qualified as a foreign-related commercial matter, giving rise to a governing law issue. Article 41 of the Law of the People's Republic of China on the Application of Laws to Foreign-Related Civil Relationships provides: "The parties may, by agreement, choose the law applicable to the contract. Where the parties have not made a choice, the law of the place of habitual residence of the party whose performance of the obligation best reflects the characteristics of the contract, or other law having the closest connection with the contract, shall apply."

In this case, the parties had not chosen the law applicable to the contract, nor had they reached a supplementary agreement after the dispute arose. Based on the fact that the purchase orders were both signed and performed in Qingdao or Wuxi within Chinese territory, Chinese law was the law having the closest connection with the contract, and therefore Chinese law should apply.

(2) Substantive Ruling

The court held that a representative office established by a foreign enterprise in China is a representative body of that foreign enterprise and represents the foreign enterprise externally. All business activities conducted by a foreign enterprise's representative office within Chinese territory give rise to legal liability borne by the foreign enterprise it represents.

In this case, the acts of the China Representative Office of UK Dock Company — ordering goods from Hengsheng Company and affixing its seal to the reconciliation letter — were all acts performed on behalf of UK Dock Company. Accordingly, the debt owed by the China Representative Office to Hengsheng Company should be the direct civil liability of UK Dock Company.

The court therefore ruled that: UK Dock Company shall pay Hengsheng Company the outstanding amount and compensate for overdue payment losses; Hengsheng Company's claim that the China Representative Office bear repayment liability was without legal basis and was dismissed.

3. Legal Analysis

(1) The Issue of a Branch's Legal Personality

Article 247 of the Company Law of the People's Republic of China expressly provides: "A branch established by a foreign company within the territory of the People's Republic of China shall not have the status of a Chinese legal person. The foreign company shall bear civil liability for the business activities conducted by its branch within the territory of the People's Republic of China."

This provision is consistent with Article 74 of the Civil Code of the People's Republic of China, which provides:

  • A legal person may establish branches in accordance with the law;
  • Where a branch conducts civil activities in its own name, the civil liability arising therefrom shall be borne by the legal person; alternatively, such liability may first be satisfied out of the property managed by the branch, and to the extent such property is insufficient, the legal person shall bear the remaining liability.

It follows that a branch of a foreign company in China — regardless of whether it is denominated a "representative office," "liaison office," or "agency" — does not possess independent legal personality and cannot independently bear civil liability. This is fundamentally different from a foreign-invested enterprise duly established in China (e.g., a wholly foreign-owned enterprise or a Sino-foreign joint venture): the latter is an independent Chinese legal person that bears civil liability independently with all of its assets.

(2) The Foreign Company's Supplementary Identification Obligations

Article 246 of the Company Law of the People's Republic of China requires a foreign company's branch to:

  • Clearly indicate the nationality and the form of liability of the foreign company in its name; and
  • Keep a copy of the foreign company's articles of association at the branch's premises.

These requirements are intended to safeguard the right to information of parties transacting with the branch, enabling them to clearly ascertain, prior to contracting, the identity of the foreign company that the branch represents and the manner in which liability is borne.

(3) Defining "Business Activities"

An important prerequisite for a foreign company's civil liability for its branch in China is that the civil liability in question arises from "business activities" conducted by the branch.

"Business activities" refer to profit-oriented, repeated, and continuous commercial acts carried out by the foreign company's branch in accordance with the business scope prescribed in the foreign company's articles of association. Two elements must be simultaneously satisfied: first, the acts must be profit-oriented; second, the acts must be continuous in nature. An isolated act, even if profit-oriented, does not constitute a business activity.

Furthermore, "civil liability" in this context encompasses not only contractual liability but also tort liability. That is, where a branch causes damage to another in the course of its business activities, the foreign company shall bear the corresponding tort compensation liability.

(4) The Legal Logic Applied in This Case

In this case:

  • The China Representative Office of UK Dock Company placed multiple orders with Hengsheng Company for rubber fender products — these acts bore a clear profit-making purpose and were continuous in nature, thus qualifying as business activities;
  • The Representative Office's affixation of its seal to confirm the reconciliation letter further corroborated the fact that it was acting on behalf of UK Dock Company in conducting business activities;
  • The debt arising from such business activities (the unpaid purchase price) should, by operation of law, be borne by the foreign company that established the Representative Office — UK Dock Company.

4. Practical Recommendations for Foreign Enterprises

Based on the foregoing legal framework and judicial practice, foreign enterprises that have established or are contemplating establishing branches in China are advised to take note of the following:

  • Clarify the legal nature of the branch: Understand that a branch in China does not possess independent legal personality and cannot be treated as a separate "firewall." The foreign company is ultimately liable for the debts of its branch.
  • Standardize the branch's name: Ensure that the branch's name accurately reflects the nationality and form of liability of the foreign company, and keep a copy of the foreign company's articles of association at the branch's premises.
  • Strengthen internal management: Establish robust internal authorization and approval mechanisms, clearly defining the branch's contracting authority, monetary thresholds, and business scope, so as to mitigate the legal risks arising from the branch exceeding its authorized remit.
  • Pay close attention to contract management: When entering into contracts in the name of the branch, it is advisable to expressly state in the contract the full name of the foreign company that the branch represents and its form of liability, so as to avoid any misunderstanding by the counterparty as to the contracting entity.
  • Weigh the choice of establishment form: If the plan is to conduct long-term, large-scale business operations in China, consideration may be given to establishing a foreign-invested enterprise with independent legal personality (e.g., a limited liability company) rather than merely a representative office or liaison office, in order to achieve risk segregation.

5. Conclusion

The attribution of civil liability for the acts of foreign company branches in China is a foundational legal issue in international commercial dealings. Under current Chinese law, a branch does not possess the status of a Chinese legal person, and the civil liability arising from its business activities shall be borne by the foreign company that established it. This rule reflects the fundamental logic of the legal person system — he who establishes bears the benefit and the burden — and provides clear legal expectations and rights protection for both Chinese and foreign commercial entities transacting with foreign company branches.

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This article is general information only, not legal advice for your matter. For professional assistance, consult a PRC-licensed lawyer at Zhang&Partners.