The Supreme Court rendered the 105-Tai-Shang-169 Civil Decision of January 27, 2016 (hereinafter, the “Decision”), holding that when parties agree that one of the parties shall pay a certain amount to the other party upon rescission of the contract, such amount is the consideration for the rescission right and is different in nature from a default penalty.
According to the facts underlying this Decision, the Appellee in this matter asserted as follows. His Company A, which had sought to develop residential units, purchased a land from the Appellant for the purpose of water and soil conservation with the land price paid in full. However, the Appellant failed to remove the registration of the mortgage over the land pursuant to the contract. As a result, the land was subject to compulsory enforcement by the mortgagee and was obtained by a third party through an auction. The Appellee requested the Appellant to refund the land payment along with damages in the same amount.
According to the Decision, a default penalty is the pre-determined penalty or damages payable by the obligor in the event of nonperformance of a contract between the parties in order to ensure the performance of the obligation. If the parties agree that one of the parties shall pay a certain amount to the other party upon rescission of the contract, the target is the extinguishment of the contract with such amount as the consideration for the rescission, and this is different in nature from a default penalty
It was further held that since Article 10 of the contract at issue in this case specifically stipulated if the Appellant would not sell or would not perform the contract, the payment as collected shall be refunded along with damages equivalent to the same amount so that the contract with the Appellee could be rescinded, this was a provision that reserves the right to rescind the contract. The Appellee may request a refund of the payment and damages equivalent to the same amount only when the Appellant rescinds the contract. Since the original decision erroneously and unlawfully held that the Appellee was allowed to make the request on such basis, the original decision was reversed and remanded.