The Supreme Court rendered the 106-Tai-Shang-81 Civil Decision of August 29, 2018 (hereinafter, the “Decision”), holding that unless both parties to an agreement have agreed to a punitive compensation not specifically stipulated in the agreement, it should not be concluded merely based on an ex officio order or pursuant to administrative regulations that such punitive compensation is part of the agreement because both parties have indicated a meeting of minds.
According to the facts underlying this Decision, the parties had entered into an image database agreement. After the agreement expired, the Defendant was in default since it still continued to license 15 customers, and the Defendant was requested to pay a punitive compensation equivalent to 10 times the royalty pursuant to the Regulations for Cultural and Creative Products. The original trial court held in its decision that Article 15, Paragraph 6 of the agreement at issue stipulates: “Matters not stipulated in this Agreement shall be governed by relevant laws and regulations such as the Government Procurement Law and the Civil Code.” However, since the Regulations for Cultural and Creative Products were regulations and directives promulgated pursuant to the authorization under Article 21 of the Law for the Development of the Cultural and Creative Industries, they were certainly part of the agreement at issue. Since the compensation equivalent to 10 times the royalty was too high, a decision was rendered to reduce it to three times. Dissatisfied, the Defendant appealed.
According to this Decision, although a default penalty is not preconditioned by a written stipulation, still a meeting of minds between the parties is required for it to be binding to both parties. Especially in case of a punitive penalty, which is a sanction against breach of contract, that there is a meeting of minds should be more clearly indicated. The Regulations for Cultural and Creative Products were neither expressly indicated in Article 15, Paragraph 6 of the agreement at issue nor included as an attachment to the agreement at issue. Unless the Plaintiff could substantiate that the parties indeed had agreed to include as part of the agreement such regulations, which had not carried the effect of a regulation or directive at that time, and which had been promulgated ex officio by the Plaintiff for its implementation of the law, or that the Defendant had agreed to the punitive compensation, it is certainly difficult to conclude that both parties had had a meeting of minds and that the ex officio directive or administrative regulations, which did not ipso facto carry the effect of an external law or regulation, were a part of the agreement. It was further concluded in this Decision that the original trial court had no solid basis to support its inference that the Defendant should have been aware, based on “trading common sense,” that because both parties had had development cooperation relationship since 2002, the Regulations for Cultural and Creative Products were part of the legal basis for the agreement at issue. Therefore, this portion of the original decision was reversed and remanded.