The Supreme Court rendered the 108-Tai-Shang-448 Civil Decision of March 29, 2019 (hereinafter, the “Decision”), holding that the requirement under a contract that if any party to the contract defaults the other party can rescind the contract and claim damages from the other party aims to cause the parties to perform the contract, and it is not true that either party may arbitrarily rescind the contract by paying the default penalty.
According to the facts underlying this Decision, both parties entered into the contract at issue to stipulate that the Appellant shall purchase the Appellee’s land at issue for the price at issue and the transfer would be based on the area of the land after rezoning. The Appellant paid the price in full, while the Appellee delivered to the Appellant a check with a face value equivalent to the price at issue as a guarantee. The Appellee subsequently obtained the land at issue after rezoning. The Appellee issued a letter to indicate that the price payment would be returned with the compensation doubled and the contract would be rescinded pursuant to Article 9 of the contract at issue. However, the Appellant replied in a return letter that he disagreed with the rescission of the contract. The Appellant also brought an action, alleging that the Appellee, who had taken back the land at issue, refused to transfer the title of the land and deliver the land. Therefore, the Appellant requested, based on the legal relationship of sale, that the Appellee should handle the ownership transfer registration of the land at issue and deliver the land. The original trial court ruled against the Appellant. Dissatisfied, the Appellant filed this appeal.
It was first pointed out in this Decision that to interpret a contract, the true intent of the parties upon execution of the contract should be explored. To ascertain the true intent, not only should literal and theoretical exploration be made but also relevant facts upon and before the execution of the contract as well as the economic objectives and trading habits should be considered with experiential rules and the principle of good faith as the criteria for determination. And then, this Decision further pointed out that the purpose of a default penalty is to ensure the performance of a contract, and a rescission penalty is the price for reserving the rescission right. Since its purpose is to eliminate a contract, it is different by nature from a default penalty.
Based on the above legal opinion, the Decision pointed out that according to the full-text of the contract at issue in this matter, it was agreed that if the Appellant “fails to buy in default of this contract or to perform by delivering the price payment pursuant to the contract, the entire price payment will be forfeited by the seller with this contract rescinded.” It was also agreed that if the Appellee “fails to sell or to perform by delivering the sales object and in case of any circumstance which obviates the sale, the deposit and the price shall be doubled as a default penalty to the buyer.” It seemed that the parties agreed that in case of any party’s default, the other party could rescind the contract at issue, and it is not true that either party may arbitrarily terminate the contract by paying a default penalty.
It was further concluded in this Decision that the original trial court had failed to consider the facts upon and before the execution of the contract as well as the economic objectives and trading habits and interpreted the wording “default penalty” specifically indicated in the last part of the contractual provision as a “rescission penalty” in nature and concluded that the Appellee as a seller could arbitrarily rescind the contract at issue on the ground that there would be no sale. Since such determination unfavorable to the Appellant was legally inappropriate, the original decision was reversed and remanded.