November 2022
Elizabeth Pai, Luke Hung, and Jiselle Ong
In a construction project, if the work is suspended for more than a period of time for reasons attributable to the owner, and the contractor terminates the contract on such a basis, what are the statutes of limitations for the contractor’s rights to claim relevant payments (including retention payment, the performance bond and the advance payment bond, and the damages) from the owner? Should the long 15-year statute of limitations for the right to claim general damages under Article 125 of the Civil Code applies, or should the 2-year statute of limitations for a undertaker’s right to remuneration under Article 127 of the Civil Code or the short 1-year statute of limitations for a undertaker ‘s right to claim damages under Article 514 of the Civil Code applies? Considering the current divergent views in practice, it is difficult for a contractor to determine whether to claim and bring an action against the owner swiftly in one or two years, to avoid the disadvantage of a lapsed statute of limitations, or if the lawsuit should not be filed until all possible approaches for negotiating a solution with the owner have been tried and failed. This article hereby summarizes the relevant practical opinions in Taiwan for the reference of contractors.
1. Request of paying the retention payment
The Supreme Court pointed out in an early opinion[1] that, in the case of a “real estate sales contract” (i.e., a contract for supplying real estate products), since it has mixed elements of the contract of hire of service and the contract of sales, the transfer of its property rights does not pertain to a simple contract of hire of service, and, thus, it does not meet the requirement of “the remuneration of technicians and undertakers and their advance payment” under the Article 127 of the Civil Code. Therefore, the short two-year statute of limitations should not apply to the right to claim contract value or remuneration (including the retention payment) of such sales contract, instead, which should be governed by the long 15-year statute of limitations under Article 125 of the Civil Code.
However, the Supreme Court has then gradually changed its position[2] and has held in most recent decisions that since a retention payment is, by nature, remuneration of the contract of hire of service, it should be governed by the statute of limitations for the right to claim such remuneration under Article 127 of the Civil Code, which is two years, beginning with the termination of the contract.
2. Request of returning the performance bond and the advance payment bond
The opinions on the application of the statute of limitations for the right to claim the return of the performance bond are more uniform. The Supreme Court and the Taiwan High Court have recently opined[3] that the right to claim the undertaker’s remuneration under the Civil Code is only applicable to the remuneration and disbursement under a contract of hire of service, and does not include the right to claim the return of a bond. Accordingly, the right to claim the return of a performance bond should be governed by the long 15-year statute of limitations pursuant to Article 125 of the Civil Code, and should commence upon termination of the contract. As for the right to claim the refund of the advance payment bond, based on the above principle and logic, it shall be reasonable for it to be also governed by the long 15-year statute of limitations.
3. Request of compensating the actual damages and lost profits
The Supreme Court held in the early-years viewpoint[4] that the rights to claim damages arising from the consensual termination of contract is different from the rights of an undertaker to claim damages under the “Contract of Hire of Service” Chapter of the Civil Code. And the scope of the statute of limitations of Article 514, Paragraph 2 of the Civil Code is limited to the rights of the latter: which includes the right to claim the “damages for the rescission of a contract by the proprietor” under Article 506, Paragraph 3, the right to claim the “damages for the rescission of a contract by the undertaker due to the failure of the proprietor to engage in a specific act” under Article 507, Paragraph 2, the right to claim the “damages for the proprietor’s arbitrary termination of the contract” under Article 511,etc., but, of course, do not include the right to claim damages under a consensual termination agreement. The Supreme Court has also stated that since the rights to claim damages for the consensual termination of contract and the rights of an undertaker to claim damages under the “Contract of Hire of Service” Chapter of the Civil Code cannot co-exist, there is no question of whether to apply the shorter statute of limitations of the latter first. A similar opinion was recently adopted by the Taiwan High Court.[5]
However, the Supreme Court has changed its attitude in recent years.[6] In a case where the owner terminated the contract after the suspension of work, resulting in damages sustained by the contractor, the Supreme Court held that even though the parties incorporated the provisions of Article 511 of the Civil Code into the contract, which acts a role of declaratory agreement, the contract provision still pertained to an undertaker’s right to claim damages and should be governed by the short one-year statute of limitations under Article 514, Paragraph 2 of the Civil Code, not the long 15-year statute of limitations. There are also several Taiwan High Court judgements stating[7] that, based on the nature of the contract of hire of work and the need of legal certainty , Chapter of Obligations of the Civil Code has stipulated in Paragraph 2 of Article 514 the prioritized application of the short one-year statute of limitation to circumstances where, for example, a contractor claims compensation for its actual damage and lost profits from the owner pursuant to the contract as a result of “expenditures incurred during the work suspension/abeyance (such as the management fees and wages),” “expected reasonable profits,” etc. after the contract is terminated. To wit, even though the parties have specified the right of the undertaker to claim damages from the owner as a contractual obligation, based on the legal principle, the provision shall still apply the one-year statute of limitations under the Chapter of Contract of Hire of Service of the Civil Code, and the calculation of which shall commence from the termination of the contract.
In conclusion, on the basis of the foregoing reasons, the contractors should be noted that the various rights to claim payments from the owner after the contract terminated by the contractor due to the work suspension may have statutes of limitations of 1 year, 2 years, and, in some cases, 15 years. In particular, in such case, if the contractor seeks compensation from the owner for actual damages and lost profits, the contractor shall be called for attention to the short one-year statute of limitations and file a claim as well as initiate litigation in a timely manner in order to avoid the loss of rights and interests due to the lapse of the statute of limitations.
[1] The 89-Tai-Shang-Zi-2591 Judgement of the Supreme Court
[2] The 106-Tai-Shang-Zi -2455 Judgement, the 99-Tai-Shang-Zi-1867 Judgement, and the 98-Tai-Shang-Zi-1854 Judgement of the Supreme Court.
[3] The 102-Tai-Shang-Zi-795 Judgement of the Supreme Court, the 104-Jian-Shang-Yi-Zi-3 Judgement of the Taichung Branch of the Taiwan High Court
[4] The 98-Tai-Shang-Zi-2481 Judgement of the Supreme Court
[5] The 110-Jian-Shang-Yi-Zi-2 Judgement of the Kaohsiung Branch of the Taiwan High Court
[6] The 106-Tai-Shang-Zi-2516 Judgement of the Supreme Court
[7] The 106-Jian-Shang-Zi-36 Judgement of the Taiwan High Court and the 98-Chung-Shang-Zi-45 Judgement of the Tainan Branch of the Taiwan High Court
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