The court shall investigate if the nature of a default penalty under a contract is predetermined damages or punitive damages and shall not reduce them merely based on the number of performance phases(Taiwan)

Frank Sun

The Supreme Court rendered the 106-Tai-Shang-220 Civil Decision of August 10, 2017 (hereinafter, the “Decision”), holding that the court shall investigate if the nature of a default penalty under a contract is predetermined damages or punitive damages and shall not reduce them merely based on the number of performance phases.


According to the facts underlying this Decision, A filed a counterclaim in the litigation, alleging that the parties had executed the Agreement on the Commissioning of Private Management of Public Roadside Parking Lots by Hualien County Government (hereinafter, the “Agreement at Issue”), under which B commissioned A to manage roadside parking lots.   However, the Agreement at Issue was terminated for reasons not attributable to A.  A requested the return of the performance bond and claimed damages for B’s handover of insufficient number of parking spaces.   It was held in the original decision that in view of the fact that the performance bond carried the nature of a default penalty, of the contents of the Agreement at Issue and of A’s payment of seven installments of royalties, the performance bond was reduced on a pro rata basis, and B was supposed to refund the performance bond in the amount of NT$1.9 million.  A’s request for refunding the principal and interest of the remaining performance bond in an amount in excess of NT$7.98 million was found to be groundless.   Dissatisfied, the A filed this appeal.


According to the Decision, Article 252 of the Civil Code specifically stipulates that if an agreed-upon default penalty is too high, the court may ex officio reduce it to an appropriate amount. Whether the default penalty agreed between the parties is too high and obviously unfair can be examined under the principle of good faith and based on general objective facts, social economic conditions, actual damage incurred by the party and the benefits the creditor could have otherwise enjoyed if the debtor performed the debt as scheduled in order to reflect the reality and to be legally fair. Particularly when a punitive damage is agreed between the parties, if the debtor fails to perform, the creditor can request not only payment of the default penalty by the debtor but also performance of the obligation or claim damages for nonperformance.  Since the creditor’s damage has been compensated to a certain extent, proper consideration should certainly be given to that aspect.  However, whether a default penalty is predetermined damages or punitive damages by nature and how B was actually injured should be investigated and determined by the court.  It was not appropriate to elect to reduce the default penalty based on the number of phases which had been performed under the Agreement at Issue.  Moreover, the original decision also failed to take into account the covenant under the Agreement at Issue not to seek damages for the default of handing over insufficient parking spaces as well as imbalance of rights which existed since the liability of one party was released while the other party’s exercise of rights was constrained.  In addition, the original decision was rash when it concluded that A had not been injured as a result of B’s failure to hand over sufficient parking spaces to A pursuant to the agreement since such royalties had been subtracted on a rata basis by B or that A’s profit was not reduced and its operation was not affected since the period in which fees for the parking spaces not handed over could not be collected only lasted three months.  Since it was necessary to further investigate facts, the original decision was reversed and remanded.