The Complex Commercial Litigation Law Review: Taiwan

Overview

In Taiwan, the Civil Code provides the main regulatory regime for commercial contracts. Besides the general requirements to conclude a contract and the rights and obligations derived therefrom, the Civil Code also sets forth different chapters for different types of transactions, including sales, exchanges, current accounts, gifts, leases, loans, hires of services, hires of works, travel, publications, mandates, managers and commercial agents, brokerage, commission agencies, deposits, warehousing, carriages, forwarding agencies, partnerships, sleeping partnerships, bid societies, securities payable by assigned persons, securities payable to bearers, annuities for lifetime, compromises and settlements, guarantees and employment guarantees.

Generally speaking, except for those specifically prohibited by law, the terms and conditions in a contract can be freely negotiated and decided by the parties; as for terms and conditions not specified or agreed in a contract, depending on the type of transaction, the corresponding provisions in the Civil Code will apply.

When commercial disputes arise, litigation, mediation and arbitration (provided the parties have agreed to arbitration) are all common dispute resolution mechanisms in Taiwan and are easily accessible to anyone in need.

Contract formation

According to Article 153 of the Civil Code, a contract shall be constituted when the parties have both declared their intention, either expressly or impliedly. If the parties agree on all the essential elements of the contract but have expressed no intention regarding the non-essential elements, the contract shall be presumed to be constituted. In the absence of an agreement on the non-essential elements, the court shall decide them in accordance with the nature of the affair.

The definition of essential elements depends on the nature of the contract involved. For example, the object for sale and the price thereof are the essential elements of a sales contract; therefore, when the parties agreed on those two elements, a sales contract can be constituted. When a transaction involves earnest money, if a party receives such payment from the other party, a contract will be presumed to be constituted.

In most the cases, a contract can be constituted regardless of whether it is in the form of an oral or written agreement; however, certain contracts are required by law to be made in writing (e.g., sales contracts of real property, contracts for a lifetime annuity or an employment guarantee contracts). In practice, parties tend to enter into a contract in writing as it will be easier to prove its formation and all the agreed terms and conditions of the contract if a dispute arises.

With regard to conditions precedent or subsequent, the Civil Code provides two approaches: suspensive conditions and resolutory conditions. If a contract is subject to a suspensive condition, it becomes effective on fulfilment of the condition. If a contract is subject to a resolutory condition, it ceases to be effective on fulfilment of the condition.

The law further provides that:

  1. if the fulfilment of a condition is prevented by the improper means of a party to whose disadvantage the condition would operate, the condition will be deemed to have been fulfilled; and
  2. if the fulfilment of the condition is brought about by the improper means of a party to whose advantage the condition would operate, the condition will be deemed not to have been fulfilled.

In the event that a contract involves a third party, either a third-party obligor or beneficiary, the law provides that if a party undertakes to have a third party perform an obligation, that party shall be responsible for any damage that arises should the third party not perform the obligation. If a contract provides that an obligation shall be performed to a third party, the offeror may demand the debtor to perform the obligation to the third party, and the third party also has the right to demand performance directly from the debtor.

As long as the third party has not expressed his or her intent to take advantage of the contract, the parties may modify the contract or revoke it. If the third party expresses to either of the parties his or her intent not to take advantage of the contract, he or she is deemed to have never had any rights under the contract.

Contract interpretation

i Choice of law

When a contract involves a foreign element (e.g., a foreign party or a foreign place of performance), Article 20 of the Act Governing the Choice of Law in Civil Matters Involving Foreign Elements provides that the applicable law regarding the formation and effect of the contract is determined by the intention of the parties.

Where there is no express intention of the parties or their express intention is void under the applicable law determined by them, the formation and effect of the contract will be governed by the law that is most closely connected with the contract.

Where there is a characteristic obligation among the obligations in a contract, the law of the domicile of the party obliged under the characteristic obligation at the time he or she undertook the act is presumed to be the most closely connected law.

Where a contract concerns immovable property, the law of the place where the immovable property is located is presumed to be the most closely connected law.

ii Contract interpretation

Regarding contract interpretation, the general rule is that the real intention of the parties must be sought rather than the literal meaning of the words. In most cases, the text of the contract should represent the real intention of the parties, and the courts usually value such written evidence the most; however, if there are discrepancies or ambiguities, further interpretation is required.

There are provisions for certain, clear discrepancies. For example, if a quantity is expressed in both characters and figures, and there is an inconsistency between them, the expression in characters shall be the chosen interpretation if the court cannot ascertain the real intention of the parties. If a quantity is expressed in both characters and figures more than once, and there is an inconsistency between them, the lowest amount shall be the chosen interpretation if the court cannot ascertain the real intention of the parties.

Regarding ambiguity, any relevant factors may be introduced to the court to help it to determine the real intention of the parties, such as any specific customs or usages for the type of transaction the contract involves, the purpose of the transaction and how the parties negotiated the terms. Among other things, if the contract is a standard contract, the ambiguous terms or conditions therein shall be interpreted in favour of the consumer.

Dispute resolution

Under the Code of Civil Procedure, there is no minimum amount requirement to litigate a contract dispute; however, for disputes involving smaller amounts, the law provides different types of procedures:

  1. summary proceedings, where the price or claim value is not more than NT$500,000; and
  2. small claims proceedings, where the price or claim value is not more than NT$100,000.

Taiwan utilises a three-tiered judicial system, unless otherwise provided by law. For example:

  1. no appeal may be taken from the judgment of a court of second instance on an action arising from proprietary rights if the value of the claim in the appeal is not more than NT$1.5 million;
  2. no appeal from either a judgment or an appeal from a ruling may be taken from the decision made in the second instance under small claims proceedings; and
  3. for commercial cases, as defined under the Commercial Case Adjudication Act, a two-tiered system is adopted, and the judgment of a commercial case, unless otherwise prescribed, is appealable to the Supreme Court.

According to Article 2 of the Commercial Case Adjudication Act, commercial cases include commercial litigation cases and commercial non-litigation cases.

Commercial litigation cases refer to the following cases:

  1. cases where the responsible person of a company enters into disputes concerning civil rights and obligations with other companies as a result of business operations, and the price or value of the claim is equal to or more than NT$100 million;
  2. disputes concerning civil rights and obligations arising from any of the following events, and the price or value of the claim is equal to or more than NT$100 million:
    • securities fraud, presentation of false financial reports or financial business documents, failure to deliver a prospectus, provision of a false prospectus, making an illegal public acquisition, market manipulation, short-term trading, insider trading, irregular business transactions or making an illegal loan or guarantee, pursuant to the Securities and Exchange Act;
    • market manipulation, insider trading, fraudulent futures trading, provision of a false prospectus or failure to deliver a prospectus, pursuant to the Futures Trading Act;
    • participation in false or deceptive conduct or conduct that otherwise results in misplaced trust, provision of a false prospectus or failure to deliver a prospectus, pursuant to the Securities Investment Trust and Consulting Act;
    • provision of a false prospectus or investment prospectus or failure to provide a prospectus or investment prospectus in accordance with applicable regulations, pursuant to the Clauses of the Real Estate Securitisation Act; and
    • provision of a false prospectus or investment prospectus or failure to provide a prospectus or investment prospectus in accordance with applicable regulations, pursuant to the Financial Asset Securitisation Act;
  3. disputed cases concerning civil rights and obligations arising between shareholders of publicly traded companies exercising shareholder rights based on their shareholder status and the company or the responsible persons of the company, and complaint cases where institutions protecting securities investors and futures traders petition the court to remove the company's directors or supervisors, pursuant to the provisions of the Securities Investor and Futures Trader Protection Act;
  4. disputes over the effectiveness of the resolutions of the shareholders' or board of directors meetings of publicly traded companies;
  5. disputes over the effectiveness of the resolutions of the shareholders' or board of directors meetings of non-publicly traded companies that have control or affiliate relationships with publicly traded companies, and the capital value of the companies is equal to or more than NT$500 million;
  6. civil legal disputes arising from matters that are governed by the Company Act, the Securities and Exchange Act, the Futures Trading Act, the Banking Act, the Business Mergers and Acquisitions Act, the Financial Institutions Merger Act, the Financial Holding Company Act, the Clauses of the Real Estate Securitisation Act, the Financial Asset Securitisation Act, the Trust Law, the Act Governing Bills Finance Business or the Securities Investment Trust and Consulting Act, where the price or value of the claim is equal to or more than NT$100 million and where both parties agree in writing, that the case shall be adjudicated by the Commercial Court; and
  7. other commercial litigation cases that fall under the jurisdiction of the Commercial Court pursuant to other laws or as designated by the Judicial Yuan.

Commercial non-litigation cases refer to the following cases:

  1. adjudications of buy-back share prices for publicly traded companies;
  2. petitions to select a temporary administrator, appoint an inspector and dismiss personnel pursuant to the Company Act for publicly traded companies; and
  3. other commercial non-litigation cases under the jurisdiction of the Commercial Court, pursuant to legal regulations or as designated by the Judicial Yuan.

Commercial cases fall exclusively under the jurisdiction of the Commercial Court. Regarding other contract dispute cases, the parties may, by agreement, designate a court of first instance to exercise jurisdiction, provided that the agreement relates to a particular legal relation.

Arbitration is one of the most common dispute resolution mechanisms in Taiwan. Parties to a dispute arising at present or in the future may enter into an arbitration agreement designating a single arbitrator or an arbitral tribunal comprising an odd number of arbitrators to determine the dispute, provided that the dispute is limited to disputes that may be settled in such manner according to the law.

The arbitration agreement must be in writing. Written documents, documentary instruments, correspondence, facsimiles, telegrams and any other similar types of communications between the parties evincing a prima facie arbitration agreement shall be deemed to establish an arbitration agreement.

An arbitral award is binding on the parties and has the same force as a final judgment of a court. According to the Arbitration Law, an arbitral award may not be enforceable unless a competent court has, on application of a concerned party, granted an enforcement order; however, the arbitral award may be enforced without having an enforcement order granted by a competent court if the contending parties so agree in writing and the arbitral award concerns (1) payment of a specified sum of money or a certain amount of fungible items or valuable securities or (2) delivery of a specified movable property.

With regard to the enforceability of a foreign arbitral award, although Taiwan is not a signatory to the New York Convention, a foreign arbitral award can be enforced after an application for recognition has been granted by the court. The court shall review:

  1. whether the recognition or enforcement of the arbitral award is contrary to public order or good morality in Taiwan;
  2. whether the dispute is arbitrable under Taiwanese law;
  3. whether the country where the arbitral award is made or of which the laws govern the arbitral award recognises Taiwanese arbitral awards; and
  4. any other arguments raised by the respondent to the application (e.g., the validity of the arbitration agreement and the due process argument).

Breach of contract claims

The Civil Code provides the general breach of contract claims. The legal consequences may vary in accordance with the type of breach.

Regarding contract performance, the fundamental principle is that the debtor shall be responsible for his or her acts, whether intentional or negligent. If a default arises (e.g., delay of performance upon the expiration of a definite period fixed for the performance of an obligation), the debtor is responsible from the moment the period expires, and the creditor is entitled to claim compensation for any injury arising therefrom. As long as the default continues, the debtor is also responsible for any injury arising from circumstances of force majeure, unless he or she can prove that the injury would have been sustained even if he or she had performed in due time.

If the performance after the default is of no interest to the creditor, he or she may refuse the performance and claim compensation for the injury arising from the non-performance. In addition, when the debtor is in default, the creditor may fix a reasonable period and notify him or her to perform within that period. If the debtor in default does not perform within that period, the creditor may rescind the contract.

In the event that a debtor incompletely performs his or her obligation owing to a circumstance imputed to the debtor, depending on the actual circumstances, the creditor may execute his or her right in reference to either the default provisions or impossibility provisions. In addition to the injury arising from the incomplete performance, the creditor may claim compensation for other injuries (e.g., damage to his or her inherent interests arising therefrom).

To the extent that the performance becomes impossible, if the debtor is not imputed to the reason for the impossibility, he or she will be released from his or her obligation to perform, and if the debtor is entitled to claim compensation for the injury against a third party arising from the impossibility of the performance, the creditor may claim against the debtor for the transfer of the claim for the injury or for the delivery of the compensation the debtor has received.

On the other hand, if the debtor is imputed to the reason for the impossibility, the creditor may claim compensation for any injury arising therefrom and rescind the contract.

In the event that one part of the performance becomes impossible and the remaining part, if performed, will be of no interest to the creditor, the creditor may refuse the performance of the remaining part and claim compensation for the injury arising from complete non-performance.

In any event, if the creditor's personality has been injured because of the debtor's non-performance, the creditor may claim reasonable monetary compensation, even if the injury is not a purely pecuniary loss.

In addition to default on the debtor's side, the law provides regulations regarding default on the creditor's side. If the creditor refuses or fails to accept the performance tendered to him or her, he or she is responsible for the default from the moment the performance has been tendered. During the default of the creditor, the debtor is responsible only for his or her intentional or grossly negligent acts, and the debtor is not responsible for interest during the default of the creditor.

If the debtor has to return the profits produced by an object or reimburse them, he or she is only responsible for the profits that he or she has actually acquired during the default of the creditor. The debtor may claim compensation for the necessary expenses incurred from the tendering as well as from the safekeeping of the object of the prestation.

If the debtor is under an obligation to deliver a real property, he or she may, after the creditor is in default, abandon possession, provided he or she notifies the creditor in advance, unless such notice is impossible.

Defences to enforcement

i Statute of limitations

A claim is extinguished by prescription if it is not exercised within 15 years, unless otherwise provided by law. A shorter period may apply, depending on the type of contract concluded and the basis of the claim. For example, under the contract of hire of work, the right of the proprietor to demand the repair of a defect, the return of expenses made for the repair of a defect, a reduction of the remuneration, injury or rescission of the contract is extinguished by prescription if it is not exercised within one year of the discovery of the defect, and the right of the undertaker to demand for the injury or to rescind the contract is extinguished by prescription if it is not exercised within one year of the occurrence of the events on which the demand is based.

After the completion of a prescription, the debtor is entitled to refuse to perform his or her obligation.

ii Change of circumstances

If there is an unpredictable change of circumstances that is not predictable, after the constitution of the contract and if the performance of the original obligation arising therefrom will become obviously unfair, the party may apply to the court to increase or reduce his or her payment or to alter the original obligation.

iii Right of simultaneous performance

A party to a mutual contract may refuse to perform his or her part until the counter-prestation has been performed by the other party, unless he or she is bound to perform first. If one party has partially performed his or her part, the other party cannot refuse his or her counter-prestation if the circumstances are such that a refusal to perform would be against good faith.

iv Unstable counter-plea

A person who is bound to perform his or her part first may refuse to perform his or her part until the other party has performed his or her part or furnished security for such performance if, after the constitution of the contract, the property of the other party has obviously decreased and the counter-prestation may become difficult to perform.

v Offset

If two persons are bound by reciprocal obligations, the objects of which are of the same kind and are both due, a party may offset his or her own obligation against the other party's, unless the nature of the obligations or the agreement of the parties does not permit this.

vi Non-imputable

The debtor will be released from his or her obligation to perform if the performance becomes impossible because of a circumstance to which he or she is not imputed; however, if none of the parties is imputed to the impossibility of one party's performance, the other party will be released from his or her obligation to perform the counter-prestation.

The debtor is not being responsible for the default if the prestation has not been made owing to circumstances to which he or she is not imputed.

vii Against public policy

A juridical act that is against public policy or morals is void. If the right or obligation under a contract is against public policy or morals, the contract can be found void and cannot be enforced.

viii Good faith defence

A right cannot be exercised for the main purpose of violating public interest or damaging the other party. A right shall be exercised and a duty shall be performed in accordance with good faith. If the exercise of a right under a contract is found to be against public interest or good faith, the right cannot be enforced.

Fraud, misrepresentation and other claims

According to the Civil Code, an expression of intent that is procured by fraud or duress may be revoked by the expresser. If the fraud was done by a third party, the expression may be revoked only if the other party knew or might have known about the affair. The revocation of an expression of intent owing to fraud is not a valid defence against the bona fide third party.

The right of revocation must be exercised within one year of the date the fraud was discovered or the duress ceased. It cannot be exercised after 10 years from the expression of intent.

The party alleging the existence of fraud or duress bears the burden of proof. In practice, the court has opined that in respect of fraud, an untrue statement must have been made and the party making the expression (e.g., an acceptance of an offer to a contract) must have been deceived by the untrue statement. In respect of duress, an expresser can revoke his or her expression if he or she made the expression owing to a fear that his or her safety is endangered by anyone's illegal threat, regardless of whether it is a verbal statement or physical act.

In addition, fraud or duress can usually constitute a tort; therefore, a contracting party who enters into a contract by fraud or duress can not only revoke his or her expression but also claim for damages based on tort.

A party who, in the absence of his or her own negligence, believed in the constitution of the contract can claim for damages in the event that the other party, in the preparation or negotiation of the contract, has:

  1. hidden in bad faith or dishonestly explained the gravely relevant matter of the contract when the other party enquired;
  2. intentionally or grossly negligently divulged the other party's secret, which the other party has explicitly expressed to be kept secret; or
  3. any other matter obviously against good faith.

The above applies even where a contract may not eventually be constituted. Such claim shall be extinguished by prescription if not exercised within two years.

If a juridical act whereby a person profiting from the difficulty, recklessness or inexperience of another causes to be delivered or promised pecuniary payment to such an extent that the transaction is obviously unfair under those circumstances, the court may revoke the juridical act or reduce the payment upon the application of any interested person. The application must be made within one year of the date of the juridical act.

Remedies

According to the Civil Code, in terms of remedies, the general rule is that a person who is bound to compensate for an injury shall restore the injured party to the status quo before the injury, unless otherwise provided by the law or the contract. If the restoration of the status quo ante shall be paid in money, interest shall be added from the time of the injury. Alternatively, the creditor may claim the necessary expenses for restoration instead of the restoration.

If the person who is bound to restore the status quo ante does not perform his or her obligation within a reasonable period fixed by the creditor, the latter may claim monetary compensation for the injury sustained. If it is impossible or obviously and greatly difficult to restore the status quo ante, the injury sustained shall be pecuniarily compensated.

The compensation is limited to the injury actually suffered and the interest that has been lost. The interest that could have been usually expected is deemed to be the interest that has been lost, in accordance with the ordinary course of things, the decided projects, equipment or other particular circumstances.

The Civil Code allows the parties to a contract to agree on a penalty to be paid by the debtor in case the debtor does not perform his or her obligation. Unless otherwise agreed upon by the parties, the penalty shall be deemed to be the total amount of damages arising from the non-performance.

If it is agreed that the penalty shall be paid when the debtor does not perform the obligation at the agreed time or in the agreed way, the penalty shall be deemed to be the total amount of damages arising from this non-performance. The creditor may also claim for the performance of the obligation.

If the parties specifically agree that the penalty is punitive damages, the creditor may claim for the performance or the damages arising from the non-performance, as well as the punitive damages.

An agreed penalty may not always be enforced in the full amount. The law authorises the court to reduce the penalty to a reasonable amount, should the agreed amount be disproportionately high. In practice, one of the primary factors the court will examine when determining whether to reduce a penalty is the actual damage caused by the non-performance.

Conclusions

On 15 January 2020, Taiwan promulgated the Commercial Case Adjudication Act. The Intellectual Property and Commercial Organisation Act was also amended to merge the Commercial Court with the original Intellectual Property Court, and the resulting amalgamation was named the Intellectual Property and Commercial Court on 1 July 2021. This brought Taiwan's judicial resolution mechanism on intellectual property and commercial events to a new milestone, with the hope that major civil commercial disputes can be handled in a prompt, appropriate and professional trial procedure.

However, because the Intellectual Property and Commercial Court has only recently been established and there are currently few cases that are handled and decided by the Court, it is still unclear how this change will affect the practice of commercial litigation in Taiwan.

Footnotes

1 Edward Liu is a partner and Hao-Jou Fan and Tien-Jung Wu are associates at Chen & Lin Attorneys-at-Law.

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