Judgment
by The Administrative Court's in the Chang Lung-ch'ang Case
Chinese
Taipei
Case:
Judgment by The Administrative Court's in the Chang Lung-ch'ang Case
Key Words:
deception, concealment, misleading, administrative guidance, guidance of
banking industry
Reference:
Administrative Court, 1999 P'an Tzu No. 4265
Industry:
Banking (6512)
Relevant
Laws:
Articles 19,
and 24
of the Fair Trade Law
Summary:
- On October 29, 1996, the plaintiff
("L.C. Chang") applied for a loan at Changhwa Bank's branch ay Chung
Hsiao East Road ("Chung Hsiao Branch"). Chang was demanded by Chunh
Hsiao Branch to fill out the bank's standard loan agreement and execute it
before he could finish reading the whole agreement. Chang was further demanded
by Chung Hsiao Branch to leave blank the interest rate on the loan memorandum
and application form, which would be completed by the branch. It was not until
the following month when the plaintiff started to pay loan interest than he
realized that Chung Hsiao Branch had raise its interest rate and, as result,
he had to incur an additional NT$10,005 in interest payment each month. Chang
then filed a complaint with the Fair Trade Commission (the "Commission")
on the grounds that he had thereby suffered substantial injury and that the
bank had violated Articles 19(ii) and 24 of the Law
The Commission investigated the matter and informed Chang of the Commission's
findings by a letter referenced 86 Yi Tzu Letter No. 8511606-005 (23 January
1997). In brief, the Commission found that there was insufficient material
evidence to support the allegation by the plaintiff that Chung Hsiao Branch
had improperly incorporated an excessively high interest rate into its loan
agreement with Chang. Therefore, the Law is inapplicable in this case.
The plaintiff then filed a motion for review to the Commission. In its Decision
Tzu No. 058 dated May 30, 1997, the Commission revoked the original decision;
it also decided to further investigate. After further investigations, however,
the Commission informed Chang of its finding that Chung Hsiao Branch did not
violate Article 24 of the Law by deceiving or acting in a patently unfair
manner while processing his loan application (Kung Yi Tzu Letter No. 8606312
(28 October 1997). The Commission also found that Chung Hsiao branch did not
violate Article 19(ii) of the Law either. Notwithstanding its findings, the
Commission decided to place the banking industry under administrative guidance
at the 286th committee meeting on 23 April 1997. By so ruling, the Commission
intended to prevent similar disputes over the divergence between the applied
and approved interest rates from occurring, which could affect fair competition
among enterprises. Failing to comply with the Commission's administrative
guidance could be treated, on an ad hoc basis, as having violated Article
24 of the Law. The plaintiff brought this administrative action against the
Commission after his motion and appeal for review of the Commission's decision
were both denied.
- The principal allegations of plaintiff's action were as follows :
(1) the core issue in this case is how Chung Hsiao Branch treated the plaintiff
when Chang applied to change the guarantor for his loan. Chung Hsiao Branch,
as was alleged by the plaintiff, not only deceived and misled him, but also
concealed facts from him. Once the bank misled him into signing and executing
the agreement, it recalculated the entire loan, including the new addition
of the loan, as a new loan. As a result, Chang suffered additional losses
and damages. The Commission, however, confined its review only on the issue
of how interest rates for the loans were set by the bank. Instead of applying
the Fair Trade Law to regulate the bank, the Commission protected the bank
by issuing the "administrative guidance" to serve as the bank's
protective umbrella. Notwithstanding the introduction of the guidance, it
should not cover the "change-of-guarantor" dispute. The Commission
should not have evaded this issue and refused to elaborate upon it. According
to the Commission's own reviewing standards, an enterprise may not (1) cause
a consumer to misunderstand [the nature of a transaction] through misleading,
pressuring, or deceiving means or by abusing one's authority. The failure
to inform the consumer of facts that an ordinary trading counterpart would
deem important, which would lead the trading counterpart to misunderstand
the terms considered inappropriate in normal commercial practice, and could
thereby place the consumers in such an unfair position that the trading order
may be objectively influenced could also constitute a violation of Article
24 of the Law if damage has not actually been occasioned by the transaction.
When the Chung Hsiao Branch processed the change of guarantors, it achieved
its intended object by employing these illegal means. The Commission should
have punished Chung Hsiao Branch by imposing administrative sanctions in accordance
with Articles 1 and 24 of the Fair Trade Law.
(2) According to Article 5(2) of The Law Governing the Standards of Central
Laws and Regulations, any administrative regulation that could affect the
rights and obligations of the citizens must be enacted in the form of a law.
Despite this requirement, the Commission drafted the "administrative
guidance" without deriving any authorization to do so from the Law. The
Commission's "guidance" guided the bank in name but shielded the
bank's illegal acts in reality. This is a flagrant violation of Article 1
of the Law, which provides for the maintenance of the trading order and consumer
rights and interests. Should this violation go uncorrected, consumer rights
and interests would be greatly affected.
(3) The prerequisite for the application of the "administrative guidance"
is that it must ensure that the fundamental rights and interests of the public
would be protected because that is a responsibility that no contemporary nation
could evade. Administrative guidance, on the other hand, is an administrative
act by unauthorized agencies and, therefore, may not be in conflict with the
existing laws. The Commission is an authorized agency that may rely on the
existing Fair Trade Law without the need to apply the ancillary "administrative
guidance", which was introduced solely to benefit the banking industry.
This was a violation of the rule-of-law principle. It had also violated Interpretation
No. 469 made by the Judicial Yuan's Grand Justice Committee, which stated:
"The application of the law should not be interpreted narrowly so as
to prevent citizens from enjoying the rights to which they are entitled under
the law." The Commission's "administrative guidance" contravenes
this interpretation. Moreover, given that the administrative guidance is not
law in nature, how can it not be applied retroactively? This is especially
so when the fact that this case occurred after the Fair Trade Law had taken
effect is taken into consideration.
(4) With regard to the violation of the Law by the way the interest rate was
determined, the Commission in its 86 Su Chueh Tzu Decision No. 58 had declared
that "interest rate is an important element of a loan contract, and when
the borrower affixes his seal to the Agreement or the loan memorandum, the
borrower is bound thereby. Accordingly, if the financial institution could
unilaterally fill in the interest rate, the borrower obviously will be placed
in an unfavorable bargaining position relative to his contracting counterpart.
It is likely that the Law is applicable in this case. In the Decision, the
Commission was ordered to "make a new disposition in accordance with
the applicable law." Under Article 24 of the Law on Administrative Appeal,
such a decision has binding force. The Commission should be abide by the decision
and, under Article 24 of the Law, impose administrative sanctions on Chung
Hsiao Branch for illegally "requiring the complainant to execute the
loan memorandum and agreement in advance and then unilaterally filling in
the interest rate."
(5) Demonstrating its prejudice in favor of Chung Hsiao Branch, the Commission
asserted that "the only disputed issue in this case is the difference
between the applied and the approved interest rates." This assertion,
however, is completely at odds with the issues in the case because (1) The
real issue in this case is not a "renewed loan" but the change of
guarantor. Under law, the guarantor's rights and obligations should never
have been modified in the first place. (2) The law obliges lenders to disclose
interest rates in the event of an increase in principle. Mutual consents to
the increase should be reached via voluntary negotiation rather than through
deceptive, concealing, and misleading means. The plaintiff is under no obligation
to change the guarantor; and by so doing, the plaintiff indeed solved the
bank's problem by providing it a guarantor. Having gotten what it needed,
the bank should not have used illegal means to injure the complainant.
(6) Although the Commission found, on the basis of impeachable evidence, that
the Chung Hsiao Branch illegally asked Chang to execute the loan agreement
without providing the interest rate, the Commission attempted to absolve Chung
Hsiao Branch from any legal responsibility by stating that there was no concrete
evidence indicating that the Chung Hsiao Branch had acted illegally. Is this
not self-contradictory? Moreover, if nothing illegal occurred, why did the
Commission find it necessary to refrain from enforcing the Law against the
bank because "issuing a disposition would involve excessively high social
and administrative costs in this matter?"
(7) The Commission also argued that several arrangements adopted by banking
industry had long violated the Law; tremendous social and administrative costs
would be incurred by attempting to us the Law to correct them. If a ridiculous
argument like this is allowed to stand, other government agencies could simply
follow suit by creating temporary "administrative guidance" regimes
for various businesses, and our society will be plunged into a chaotic status.
What will the "social costs" be then?
(8) Although the Commission did not specify clearly what it means by "social
costs," it seems to be quite likely that the Commission was concerned
about that if administrative sanction was imposed in this case, it could trigger
a series of similar cases. To be sure, banks did violate the Law; most consumers,
however, realize that loan applications are complex matters and would usually
eek professional aid from a notary to process the applications for them. On
the other hand, most banks do not employ the kind of unethical and illegal
tactics Chung Hsiao Branch adopted in this case. Given that most consumers
do not handle their own loan applications and that most banks follow good
business practices, the probability that similar cases would arise is indeed
quite low.
(9)"Administrative costs": This clearly refers to the additional
costs that the Commission would have to incur if consumers file complaints
based on this case.
(10) Interpretation No. 469 states that "the law does not simply invest
government agencies with the power to regulate public affairs. Rather, the
law exists to protect the legal interests of the people including their lives,
person, and property. Furthermore, if the law clearly prescribes the matters
that a government agency must fulfill, the civil servants in that agency have
no discretion over the scope of their obligation to any given individual."
Moreover, "it is not a prerequisite that the plaintiff must have requested
the civil servant to fulfill the alleged duty under law and the civil servant
nonetheless had failed to act accordingly before the plaintiff could lawfully
file a claim against the civil servant for dereliction of duty."
Based on those ten arguments, the plaintiff asked the court to order the Commission
to enforce the law and to impose an administrative fine on Chung Hsiao Branch
so as to maintain public interest and protect the rights and interests of
the complainant.
- In reply, the Commission asserted that:
Article 24 of the Fair Trade Law clearly provides that "In addition to
what is otherwise provided for in this Law, an enterprise shall not engage
in other deceptive or obviously unfair acts that are capable of affecting
trading order." Article 41 of the same Law provides that the Commission
may impose an administrative disposition on offending enterprises. Although
this case occurred before the Fair Trade Law was amended on 3 February 1999,
the Commission was authorized under either version of Article 41 to choose
to impose one of the following legally binding administrative dispositions:
"cessation of the conduct within the specified time period," "rectification
of the conduct within a specified period," or to impose a "fine."
Moreover, based on the policy considerations including the administrative
and social costs associated with the disposition and the objectives that could
be accomplished by the disposition, the Commission could also choose not to
issue a disposition. In other words, the word "may" in Article 41
of the Fair Trade Law indicates that the Commission has the power to choose
whether or not to issue dispositions.
From a regulatory point of view, dispositions issued on the basis of this
article should be regarded as "discretionary dispositions," not
"binding dispositions." According to the law, the Commission not
only has the discretionary power to choose (the selection of one of the administrative
disposition with legal force listed in the Article such as ordering cessation
with a specified period or imposing an administrative fine), it also has the
discretionary power to make policy decisions (i.e. whether or not to impose
administrative dispositions). When the Commission detects illegal acts by
an enterprise, it places the enterprise under "administrative guidance"
if the illegal acts are prevalent throughout the industry and the Commission
believes that overall guidance and correction is necessary. If the enterprise
fails to rectify its illegal acts within the prescribed period, the Commission
may issue a disposition. There is nothing improper in this discretionary approach.
Consequently, it should be noted herewith that if after consideration the
Commission believes that immediately issuing a disposition in a case involving
violation of Article 24 of the Fair Trade Law does not benefit the maintenance
of competitive order, or may even destroy a profession, or is not in the public's
interest, the Commission may handle the matter in the most appropriate fashion
based on all considered factors so as to advance the maintenance of the competitive
order and the safeguarding of consumer interests.
The Fair Trade Law is in nature an economic law. The legislative intent of
the Fair Trade Law is to encourage economic stability and prosperity. The
means of attaining this administrative goal are not limited to the issuance
of dispositions alone. By referring to American and Japanese laws, we find
that both countries use a variety of administrative means to maintain trading
order. Administrative guidance is intended to realize specific objectives
(for example, the correction of unfair acts that distort the trading order).
Based on the powers granted by the Fair Trade Law and the circumstances of
particular cases, the Commission will consider a given industry's business
environment, historical background, administrative costs, social costs, and
the extent of its impact on the trading order before selecting the most appropriate
administrative measures. With assistance from the counterpart (an industry
group or an individual enterprise) and related agencies, the Commission can
impose administrative guidance-a measure that is both necessary and appropriate.
Consequently, administrative guidance is not only a practical correction measure
in competition law adopted internationally, it also is a generally recognized
theory of competition law. Likewise, it is grounded in the provisions and
the interpretation of Chinese Taipei's Fair Trade Law. The Law of Administrative
Procedure, amendments to which were promulgated by Presidential Order on 3
February 1999, also affirms the institution of "administrative guidance"
and may serve as a reference.
In order to prevent problems created by the discrepancies between the applied
and approved interest rates, the Commission decided that upon signing and
executing the loan agreement or memorandum by its customers, financial institutions
should clearly indicate the interest rate. The original memorandum or agreement
should be executed or a statement that [the copy] "matches the original
completely" should be included and then given to the borrower as proof.
The Commission fixed July 31, 1997 as the deadline for such a rectification
and stipulated that beginning on August 1, 1997, banks that fails to comply
would be found in violation of Article 24 of the Fair Trade Law on a case-by-case
basis. This instance of administrative guidance addressed long-term practices
in the entire financial industry by imposing reasonable guidance and correction
measures. In framing these measures, the Commission had taken into consideration
of the prevalence of these acts in the industry and had reviewed a number
of possible solutions in terms of their effects, social and administrative
costs, the impact on industry, and consumer protection issues to find the
middle ground. There was nothing inappropriate about the measures taken.
With regard to the complaints filed by the plaintiff, they show clearly that
the complainant has misunderstood the Fair Trade Law. The plaintiff also misconstrued
Article 24 of the Appeals Law ad Interpretation No.469 when he argued that
the Commission should impose administrative penalties on the related parties.
The plaintiff further alleged that the issue in this case was the change in
guarantor, not the extension of a new loan. However, the Commission does not
have the authority to rule on the issues of guarantor changes or the lending
practices except to impose administrative guidance.
- When the plaintiff applied for a loan at Chung Hsiao Branch, he was requested
by the bank to fill out the bank's standard agreement and execute it before
he had finished reading the agreement. The interest rate was left blank on
the loan memorandum and the loan agreement for the branch to fill out on his
behalf. The following month, the plaintiff discovered that Chung Hsiao Branch
had increased its interest rate and, as a result, he had to pay an additional
NT$ 10,005 interest each month. The plaintiff complained that Chung Hsiao
Branch had thereby injured his rights and interests in violation of Articles
19(ii) and 24 of the Fair Trade Law. Chang then complained to the Commission,
which, after investigation, sent its findings to Chang in 86 Yi Tzu Letter
No. 8511606-005 dated 23 January 1997. The Commission found that:
There was no evidence that Chung Hsiao Branch had set an unfairly high interest
rate. Consequently, the Fair Trade Law did not apply. The issue of whether
the bank committed forgery when it filled in the new interest rate on the
loan agreement is an issue of criminal law, which should be decided through
other legal proceedings. The discrepancy in interest rates is a civil matter;
redress should be sought by brining a civil law suit.
The plaintiff rejected these findings, and the Commission decided to "withdraw
the initial disposition, and issue an appropriate disposition after a full
investigation" (response to the Chang's letter of complaint Kung Su Chueh
Tzu No. 58 dated 30 May 1997). After the Commission reinvestigated, it submitted
its findings to the 311th Meeting of the Commissioners, which replied to the
plaintiff in Kung Yi Tzu Letter No. 8606312 dated 28 October 1997. In brief,
the Commission found that:
Chung Hsiao Branch did in fact ask the plaintiff to execute the loan memorandum
and the loan application without specifying the interest rate. The bank then
set a higher rate when it approved the loan. However, the bank determined
the new rate by considering a number of factors including the cost of capital
at that time, the rate of return on assets, currency market rates, deposit
growth, asset demand, and its policy on anticipated and actual loans as well
as the basic lending rate at that time. Moreover, members of the public can
check prevailing interest rates at any time. Thus the main issue is the discrepancy
between the applied and approved interest rates. It is unlikely that Chung
Hsiao Branch deceived or was obviously unfair to the plaintiff in such a way
as to constitute a violation of Article 24 of the Fair Trade Law when it extended
the loan to him.
The plaintiff also claimed that Chung Hsiao Branch violated the provisions
against unfair treatment in Article 19(ii) of the Fair Trade Law. This Article,
however, is enacted to regulate discriminatory treatment by enterprises. Thus
it is inapplicable to this case. The plaintiff also alleged that Changhwa
Bank's execution and completion of the agreement on behalf of the plaintiff
violates the interpretations issued respectively by the Central Bank and the
Ministry of Justice as well as legal precedents. Since these are issues pertaining
to banking procedure, the plaintiff should seek redress through other legal
proceedings. In order to prevent similar disputes that might affect fair competition
between enterprises, the Commission placed the banking industry under administrative
guidance at the 286th Commissioner's meeting on 23 April 1997. It includes:
(1)When financial institutions set up loan receipts or loan agreements, they
shall clearly indicate the interest rate when the borrower executes the receipt
or agreement.
(2) In principle, two original copies of the loan memorandum and the loan
agreement should be executed, and each party shall retain one copy. Based
on procedural considerations, the lender may give the borrower a copy to retain
on which the lender has clearly indicated "This copy accords completely
with the original.
(3) The period of guidance and correction ends on July 31, 1987.
(4) Based on the principle of non-retroactivity, the guidance and correction
does not apply to the loan agreements or memorandums executed before the implementation
of this plan. Beginning on 1 August 1997, lenders that fail to comply with
this decision will be in violation of Article 24 of the Fair Trade Law.
Therefore, the Commission's determinations that Chung Hsiao Bank did not violate
Articles 24 and 19(ii) of the Fair Trade Law are not wholly ungrounded. The
"deceptive ... acts that are capable of affecting trading order"
described in Article 24 refers to deceptive or other illegal acts by an enterprise
that cause the trading counterpart to misunderstand and to trade with that
enterprise, or cause a competitor to lose the opportunity to conduct fair
trades. If this enterprise causes the trading counterpart to misunderstand
by deceiving, misleading, or concealing important terms in the agreement and
demanding that the counterpart sign the agreement without reading its contents,
then those acts would constitute deception capable of affecting the trading
order. In his complaint, the plaintiff claims that the main issue is that
during the process of changing the guarantor, Chung Hsiao Branch first convinced
the complainant to execute the agreement and then recalculated the entire
loan. This caused the complainant to suffer significant losses, and the Commission
should have reviewed this matter in accordance with Articles 24 and 41 of
the Fair Trade Law.
The Commission found that when Chung Hsiao Branch made the loan, it did in
fact require the complainant to execute the loan memorandum and the agreement
in advance and then filled in the interest rate. According to Chung Hsiao
Branch's letter of reply to the complainant of 13 December 1996 attached to
this case file, the original borrower Cheng Wan-fu borrowed NT$3,750,000 from
the Chung Hsiao Branch in the form of a long-term, secured housing loan. The
interest on this loan was 6 percent. Cheng Wan-fu sold the property to the
complainant on 10 March 1989. According to regulation, the parties had change
the debtor to protect their mutual interests. On 1 April 1992, the complainant
applied to increase the loan to NT$4,800,000. The loan was made with an interest
rate of 9.85% after an assessment of the complainant's creditworthiness and
market funds. Consequently, there is indeed room for discussion if Chung Hsiao
Bank illegitimately concealed significant adjustments to the interest rate
and the calculation of the loan. Did these acts constitute other deceptive
acts capable of affecting the trading order as defined in Article 24 of the
Fair Trade Law. Does Article 41 of the Law apply? As was explained in Complaint
Decision Tzu No. 058, the interest rate is an important component in any loan
agreement. Moreover, when the borrower executes a loan agreement, the borrower
is immediately abide by that agreement. If the financial institution requests
the borrower to execute the agreement or memorandum in advance and afterwards
set the interest rate unilaterally, it obviously puts the borrower in an unfavorable
trading position and there is room to apply Article 24 of the Fair Trade Law.
It is also wrong that the Commission failed to issue another disposition pursuant
to its own decision on Chang's appeal. The Commission's decision to place
the banking industry under administrative guidance and its determination that
Chung Hsiao Branch did not violate Article 24 of the Fair Trade Law failed
to consider the fact that Chung Hsiao Bank concealed important information
regarding the interest rate and its calculation from Chang. Chang then censured
the Commission's failure apply Articles 24 and 41.
After review, this Court finds that this criticism is not unsubstantiated.
Although the complaint and the appeal decisions both found that this matter
did not constitute a violation under Article 24 of the Law, the Commission
placed the banking industry under administrative guidance the 286th meeting
of the Commissioners on 23 April 1997 in order to prevent similar disputes
over interest rates from occurring. Commencing on 1 August 1997, financial
institutions that failed to conform to the conditions imposed by administrative
guidance, were to be deemed in violation of Article 24 of the Fair Trade Law
on a case-by-case basis. The Commission then rejected Chang's appeal.
This Court finds that the imposition of administrative guidance was based
on the Commission's powers as a competent authority of the Central Government
and was intended to correct the practice of not explicitly noting interest
rates on loan applications and memorandums. The Commission also ruled that
beginning on 1 August 1997, financial institutions that violated these regulations
would be treated as having violated Article 24 of the Law on a case-by-case
basis.
The Court also finds that these measures constitute a supplementary interpretation
of Article 24 of the Fair Trade Law. " Administrative guidance"
may be seen as the realization of a certain administrative object by means
of counseling and making recommendations so as to encourage certain person
to perform certain acts. In Interpretation No. 287, the Judicial Yuan ruled
that when administrative agencies interpret administrative law, they are exposing
the original intent of the regulation and that the interpretation shall be
applicable from the day on which the law takes force. This interpretive regulation
took force on July 1, 1996. If a given financial institution fails to conduct
its business accordingly and is found to be in violation of Article 24 of
the Law, such a determination would be inconsistent with the Judicial Yuan's
interpretation. However, the interpretive regulations imposed by the Commission
were not an administrative disposition favoring Chang. Rather, it is a separate
administrative action. The original disposition determined that Chung Hsiao
Branch Bank did not violate Article 24 of the Law. This disposition was not
voided or altered when the Commission imposed administrative guidance on the
banking industry, However, the decision on the complaint and appeal were in
error because they did not correct or void this illegal disposition. Therefore,
the decisions on the appeal, the second appeal as well as the original disposition
are hereby voided. The Commission shall render a new disposition according
to this instruction.
Summarized by Ch'iu Shu-fen
Supervised by Hsu Chao-ying
Appendix:
Chang Hwa Bank's Uniform Invioce No.: 51811609
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