If you decide you'd rather the war continue until your realm is wiped out rather than join the empire system and give up some territory which you no longer even control then great. That's your call. Very gusty it is too.
But it's exactly that: your decision. Your nobles have been fighting the empire, they are the ones refusing peace terms.
So please don't then complain if Cathay gets wiped out.
And no, I doubt the peace terms are "fair". But people who lose a war never get treated fairly. And by BM standards being left with two duchies isn't bad considering the number of realms in similar situations which were wiped out without any chance of survival.
