The Taiwan Paper Industry Association alleged that clauses providing for stock out penalties in procurement contracts drafted by the Ministry of National Defense Welfare Department and PXstore Ltd. violate the Fair Trade Law
Case:
The Taiwan Paper Industry Association alleged that clauses providing for stock out penalties in procurement contracts drafted by the Ministry of National Defense Welfare Department and PXstore Ltd. violate the Fair Trade Law
Key Words:
stock out penalty, improper constraint
Reference:
Fair Trade Commission Decision of January 11, 2001 (the 480th Commissioners' Meeting); Disposition (89) Kung Yi Tzu No. 8909287-008
Industry:
Retail Industry (5314)
Relevant Law:
Article 24 of the Fair Trade Law
Summary:
1. The Taiwan Paper Industry Association ("the complainant") reported in a letter to the Fair Trade Commission (the Commission): Contracts signed between the Ministry of National Defense Welfare Department (the "MND Welfare Department") and PXstore Ltd. ("PXstore") and their suppliers do not require Party A (the MND Welfare Department and PXstore) to specify a fixed or minimum monthly or annual amount to be purchased. Yet, Article 10, Paragraph 11 of the contracts set forth the penalties for the breach of contract as follows: If party B (the supplier) fails to receive the shipping order, or receives the shipping order but fails to deliver the goods, or fails to deliver all or a portion of the goods within the time limit specified in the shipping order (unless Party A's supplier is held accountable) it shall be deemed a "no delivery" subject to penalties specified in the contract. Under the terms of the contract, in the event of a "no delivery," Party B (the supplier) will be held liable for a penalty to Party A equal to 10 percent of the value of the shipment in question. In addition, due to a fire broke out at a major domestic toilet paper manufacturing plant and the rising international price of wood pulp, which were widely covered by the media, they raised consumer anxieties with regard to the local toilet paper market and sparked panic purchasing and hoarding. Furthermore, large-scale orders from retail outlets operated by the MND Welfare Department and PXstore around the country created a situation where it was impossible for suppliers to satisfy the unusual surge in demand and resulted in a surge of "no delivery" fines. An official letter sent out after meetings with the Ministry of Economic Affairs' Industrial Development Bureau succeeded in securing the return of the fines but the complainant maintained that the contract provision regarding the imposition of fines clearly indicated the unfairness and inequality of the trade contracts and are a violation of the provisions of the Fair Trade Law. The complainant then sent letters to the Commission and the Industrial Development Bureau seeking redress and requesting an inquiry into the matter. 2. Following an investigation, the followings were the finding of the Commission. Supply and procurement contracts between enterprises are primarily be governed by the Civil Code of Chinese Taipei. Questions concerning the extent of rights and obligations of the involved parties, the method of concluding the contract, the execution of the contract provisions, the allocation of rights and obligations among the involved parties and the termination of the contract and related problems following the termination should all be determined in accordance with the relevant provisions of the Civil Code, unless otherwise provided in related statutes. If the provisions of the contract do not violate related statutes or upset public order and prevailing custom, the contract should be considered an effective agreement between the involved parties outlining all of their rights and obligations under the contract. The issue concerning the "Content and Deadline for Large-Scale Distribution Industry Management Practice" had been decided upon by the Commission in its 173rd Commissioners' Meeting on 25 January 1995. It was then published as a public announcement and a guideline, and mailed to the competent authorities in each area as well as to related companies, trade associations and business groups. With regard to stock out penalty clauses, distribution companies should consider the relevant provisions in the Fair Trade Law and FTC action that has been taken to rectify the situation, i.e. "Calculation of stock out penalties may not be continuously compounded," and "Periods when suppliers are short of stock shall not be used to improperly increase the amount of an order for the purpose of increasing the value of the stock out penalty." 3. With regard to the calculation of stock out penalties, the respondent in this case did not seek to compound stock out penalties. Also, following a fire at Yuen Foong Yu Paper Manufacturing Co., Ltd. in early 2000, the respondent implemented "procurement controls (adjustments)" and did not attempt to improperly increase orders the paper company could not possibly fill to invoke the "no delivery" breach of contract penalty clause for the purpose of raising the penalty amount. Although the respondent did, in fact, increase its orders with the paper company during this period when domestic demand for household use paper products markedly outstripped production, it did so to meet the panic purchases from the consumers and to balance the shortfall in supply. The respondent furthermore sold its stock at fair market prices during this period and there is no evidence of price gouging. It would be difficult to support the charges of "improper" increases in the amount of orders, profiteering, or disruption of the trading order on the part of the respondent in this case. Based on these findings, this case is determined by the resolutions of the Commission's "Content and Deadline of Large-Scale Distribution Industry Management Practice" with regard to "stock out penalties." Thus there is no substantive evidence that will support the charge that the respondent violated the relevant provisions of the Fair Trade Law in this case. 4. After consideration, the competent industrial authorities had issued an official resolution settling the dispute. Moreover, a review by the Commission determined that under normal circumstances within the "supplier's permissible production capacity" and "prior to the occurrence of a production shortfall and panic buying," the dispute between the complainant and the respondent over non-delivery penalties would not occur. Further, Article 3, Paragraph 4, Sub-paragraph 1 of the supply contract between the two parties provides for a supplementary "Application for Extension of Delivery Deadline or Procurement Controls," providing the two parties with a foundation for the resolution of disputes through negotiation. 5. In summary, after consideration and deliberation of the available evidence in this case, the 480th Commissioners' Meeting of the Commission resolved that there was little evidence to support the charge that the respondent violated the related provisions of the Fair Trade Law. Summarized by Cheng, Chia-Lin; Supervised by Lin, Gin-Lang