Taiwan Supreme Court Civil Judgment 106-Tai-Shang-Zi No. 81, rendered on August 29, 2018, states that “stipulated penalties are punitive in nature.  The Regulation Governing the Administration of Culturally Creative Products was not expressly provided in Article 15, paragraph 6 of the Agreement in dispute, nor was it attached to the Agreement.  As such, unless appellee proves that the parties intended the stipulated penalty (subsequently prescribed in the Regulation Governing the Administration of Culturally Creative Products) to be part of the contract, such penalty –then not yet in effect- cannot be imputed to the contract based on “mandates of the position” or administrative directives.              

Specifically, this case involves a copyright licensing agreement whereby the licensee continued to exploit the work after the license had expired.  The issue is that the agreement merely provides that the agreement shall be handled pursuant to relevant laws and regulations such as the Administrative Procurement Act and the Civil Code (see endnote 1).  A Museum Regulation Governing the Administration of Culturally Creative Products was issued after the signing of the agreement in dispute, which calls for stipulated penalty (see endnote 2).  In this situation, is the breaching party required to pay such penalty?"

With respect to the issue in contention, each of the three courts offered its differing opinion.  The court of the first instance (Taiwan Shilin District Court civil judgment 102-Zhi-Zi No. 9) held that the establishment of a stipulated penalty is equivalent to a special provision in the Civil Code; as such, unless there is clear and convincing legislative rationale, such clauses cannot be arbitrarily imposed to expand the power of the administrative agencies’ authority to formulate a de facto special provision to the Civil Code.  Therefore, the “National Palace Museum Regulation Governing the Administration of Culturally Creative Products” in question had exceeded the scope of the parent law (the law of which the agency derives its power to create regulations), and thus should be invalid.  Consequently, the licensee does not need to pay such penalties.

The court of the second instance (Intellectual Property Court civil judgment 103-Min-Zhu-Shang No. 21) held that the “National Palace Museum Regulation Governing the Administration of Culturally Creative Products” was a statutory order falling under “relevant laws and regulations” as provided for in the agreement in dispute.  Therefore, it is part of the agreement and the licensee should pay such stipulated penalty as called for in the regulation.

The Taiwan Supreme Court held that since stipulated penalty, in its nature, was a sanction against the breaching party, the assent should be more express and clear.  Further, when the agreement was signed, the regulation in question was not yet in effect; as such, its retroactivity is in doubt.  The parties further did not attach the proposed regulation as part of the agreement.  As such, unless one proves that the parties mutually assented to the stipulated penalty, or that the new regulation –upon issuance- should be included as part of the contract, such stipulated penalty clause cannot be impliedly imputed to a contract.  “Mandates of the position” and/or administrative directives alone cannot cause such penalties to be imputed upon the parties’ agreement.

Taken together, one can see that even if a contract allows for “issues unaccounted” to be governed by relevant laws and/or regulations, there may still be dispute where such relevant laws and/or regulations calls for the imputation of a stipulated penalty clause.  For example, the court of the first instance highlighted the possibility that the administrative agency may have exceeded its authority in issuing such a regulation.  Or that the Taiwan Supreme Court pointed out that the contract, signed after the issuance of the regulation in question, cannot impute a stipulated penalty clause without additional evidence to prove that the parties assented to such penalty.  If such assent is not proven, it may be difficult to impute such stipulated penalty to a contract relying solely on relevant laws and/or regulations.

Given that the Taiwan Supreme Court indicated that such stipulated penalty require more express assent, if a claimant wishes to recover for stipulated penalty, it is better to expressly provide for such damages in the written agreement.  This way, it can be proven that the parties so assented.  This avoids disputes over whether relevant laws and/or regulations can be imputed to the contract to create such a stipulated penalty clause.

*Endnote 1: Article 15, paragraph 6 of the Subject agreement provides: “issues unaccounted” in this Agreement shall be handled in accordance with relevant laws and regulations such as the Government Procurement Act and the Civil Code.”

*Endnote 2: Article 12 of the "National Palace Museum Regulations Governing the Administration of Culturally Creative Products" provides: "Where the applicant uses the Museum's collections or images without prior application or the Museum's consent, in addition to other legal remedies, the Museum may claim against the applicant for a compensation payment equivalent to 10 times the royalties or 50 times the total value of the items seized."

(Author: Grace Shih; currently an associate of Formosan Brothers Attorneys-at-Law.)

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