The Supreme Court rendered the 108-Tai-Shang-1006 Decision of January 22, 2020 (hereinafter, the “Decision”), holding that if the parties have agreed on the important points of the formal agreement, if the contents of the mutual agreement between the parties are sufficient to suggest the contents of this formal agreement, and if the parties have agreed to enter into this formal agreement in the future, this then constitutes a valid preliminary agreement.
According to the facts underlying this decision, the Appellee planned to sublease the building leased from Company A, not a party to the lawsuit, to the Appellant to operate a hotel. Pursuant to the memorandum of understanding between the parties (hereinafter, the “MOU at Issue”), the parties shall be obligated to negotiate and execute a formal lease agreement (hereinafter, the “Formal Agreement”). The MOU at Issue would become invalid beyond the agreed-upon period unless otherwise agreed or due to operation delay of the Appellee. The Appellant agreed to issue a check to the Appellee pursuant to the MOU at Issue and agreed that if the Appellee violates the MOU at Issue, the Appellant may claim a default penalty. The Appellee changed the agreed-upon terms in the MOU at Issue, added the terms not found in the MOU at Issue, had an operational delay and failed to execute the Formal Agreement within the required period in the course of the negotiation for the Formal Agreement. The Appellant asserted that pursuant to the above agreement, the MOU at Issue did not become invalid, and the Appellant may claim a default penalty from the Appellee. 。
According to the Agreement, a preliminary agreement refers to an agreement entered into on a specific agreement to be executed in the future (i.e., the Formal Agreement). If the parties have agreed to the important points of the Formal Agreement, if the contents of their agreement are deterministically sufficient to suggest the contents of the Formal Agreement, and if the parties have agreed to execute the Formal Agreement in the future, this would constitute a valid preliminary agreement. As for other immaterial points for which the parties have not reached an agreement, it may be stipulated in the preliminary agreement that negotiation will continue and the Formal Agreement will be executed, and this does not affect the validity of the preliminary agreement.
Moreover, according to this Decision, the contents of the MOU at Issue show that Article 1 stipulates the leasing object at issue, Article 2 provides for the first leasing period, after which the Appellant shall enjoy the right of first refusal, and the second leasing period if the lease is renewed; and Article 3 stipulates the rents. This shows that the scope of the mutual agreement between the parties covered essential points of a lease agreement and was sufficient to suggest the contents of the Formal Agreement. In addition, the MOU at Issue provided that no modification to the contents of the MOU shall be valid unless made in writing with the agreement between the parties. As for the matters concerning the renewal of the lease after the second leasing period expires, since they were not yet determined with the rents to be negotiated, the parties further stipulated the intent to conduct further negotiation, and this would not affect the validity of such valid preliminary agreement. The original trial court was at fault when it failed to note that the preliminary agreement was not required to be strictly deterministic to the contents of the Formal Agreement and overlooked the matters which had been agreed under the MOU at Issue between the parties, which means the MOU at Issue between the parties was only temporary with the rents and leasing period to be further agreed on. In addition, the MOU at Issue required the parties to enter into the Formal Agreement by a specified date, and both parties were obligated to enter into the Formal Agreement based on their mutual agreement, except for causes that would automatically render the MOU at Issue invalid such as circumstances where the Formal Agreement was not executed due to the “Appellee’s operational delay.” Therefore, the failure of the parties to enter into the Formal Agreement was attributable to the Appellee’s further challenges of matters which had been agreed between the parties. Hence, this calls into question whether there was no attributable cause and there was no operational delay under the MOU at Issue. The original trial court, which had elected to render a decision unfavorable to the Appellant, was likely to be rash. Therefore, the gist of the appeal was well-grounded.