Complaint against Taiwan United Petroleum Co., Ltd. for obviously unfair practices in violation of the law sufficient to affect trading order, such as the use of exorbitant penalties for breach of contract in agreements with privately-run filling stations and failure to provide them with the right to terminate their contracts, as well as the use of improper methods such as the imposition of substantial performance bonds to restrict the right of other parties to terminate contracts during the period of performance

Chinese Taipei

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1. This case resulted from a complaint by China Petroleum Corporation regarding a series of oil supply “agreements” entered into by Taiwan United Petroleum Co., Ltd. (Taiwan United) with privately operated gas stations starting from 1999 to facilitate its entry into the oil market. Included within the agreements was the use of condition precedents that regulated in advance the conditions of future gasoline supply transactions between the two parties. These privately-run filling stations were required to provide a draft of NT$3 million as a performance bond. These agreements did not provide an option to terminate the contract following the liberalization of the domestic oil market, and companies were also subject to exorbitant penalties for breach of contract in order to prevent privately-run gas stations from terminating their contracts.

2. The Petroleum Management Law was promulgated and took effect on 11 October 2001. Furthermore, a public notice from the Ministry of Economic Affairs Energy Commission on 26 December 2001 opened the market of Taiwan to petroleum product imports. The Fair Trade Commission (FTC), in an effort to maintain fair market competition and lower the entry barriers for companies entering the market, convened a public hearing on 20 December regarding the new Petroleum Management Law and the rights of filling station operators regarding contract termination and the application of the Fair Trade Law. During the 529th Commissioners' Meeting on 27 December 2001, the FTC passed a resolution regarding the conclusions reached at the aforementioned public hearing, setting the date of the declaration by the Energy Commission as the starting date for the liberalization of the oil market. With respect to the reasonable time period for new oil suppliers to enter the market, it was fixed at approximately 55 business days following confirmation by representatives of each competent authority attending the hearing. According to the resolution reached at this hearing, if no new oil suppliers were able to enter the market and provide their products before 1 March 2002 due to procedural delay by administrative agencies, then such oil suppliers were to adjust the deadlines for the exercise of rights to terminate contracts by filling stations (i.e., the original period of two months provided in the contract shall be extended), in order to cope with the realistic demands from gas stations for the choices of oil suppliers. Furthermore, prior to the entry of new oil suppliers into the market, existing suppliers were to provide an oil supply contract during the interim period (referring to the period between the final date of the two-month period specified above until the date when the new company can begin supplying oil) thus providing greater comparison and choice for filling stations selecting new suppliers, in order to avoid inappropriate cutting off of supplies. At the same time, new oil suppliers were required to specify in their contracts with gas stations that within the specified time period those gas station would have the right to terminate the said contract without being liable for compensation of franchising fees, in conformance with principles of fairness. Through investigation the FTC found the followings:

(1) Taiwan United had 99 filling-station shareholders. Each shareholder, besides payment for the shares it subscribed, was required to sign an agreement and provide an NT$3 million performance bond. Article 2 of said agreement (establishing enterprise identity), as well as Article 3 (exclusive dealing restrictions), Article 4 (yearly wholesale volume), Article 5 (NT$3 million performance bond) and Article 6 (verification of effectiveness) were all standards for transactions between the two parties, which went so far as to restrict the ability of gas station operators to change suppliers, forcing them to only trade with that particular company. Thus the agreement constituted an oil supply contract. However from the liberalization of the domestic petroleum market until 31 March 2002, 11 gas station operators separately expressed interest in terminating their contracts with Taiwan United by documented certified letter as per the 529th Commissioners' Meeting. Taiwan United maintained, however, that the agreement in question did not constitute an oil supply contract and was therefore not subject to the Commission's resolution, and refused to return the NT$3 million performance bonds.

(2) According to the standards of the Company Law, a shareholder's responsibility to a company is limited to payment in full of the shares they have subscribed, as expressly stated in Article 154; thus any obligation beyond the payment of those monies is not an inherent obligation. Therefore, the contents of those agreements as well as the real intentions of the parties to the agreements had to be taken into account before the nature of the agreements can be ascertained. Insofar as the conditions in the agreements involve the supply of petroleum and related transaction terms, it is in fact oil supply contracts. Application of the Commission's resolution may not be evaded based on the fact that one of the parties to such an agreement is also a shareholder of the other party. Furthermore, according to clauses in this agreement, the shareholder filling stations “remained obligated” to sign oil supply agreements with Taiwan United, or otherwise their NT$3 million performance bond would be forfeited as liquidated damages for breach of contract. Obviously, these clauses had the effect of substantially restricting the right of gas station operators to choose their suppliers following the liberalization of the market.

3. The FTC found that the abovementioned actions by Taiwan United had restricted 99 privately-run gas station operators prior to the liberalization of the oil market through the signing of contracts that were in the nature of oil supply contracts. Those agreements did not provide the right of termination, and improper methods, such as the imposition of an exorbitant performance bond, were used to restrict the right of their trading counterparts to terminate their contracts during the period of performance, thus hindering other potential or incumbent suppliers from entering the market, as well as infringing the right of filling station operators to make their own transaction decisions. Taiwan United was therefore subject to a disposition pursuant to the fore part of Article 41 of the Fair Trade Law, and was ordered to cease its illegal practices.

Appendix:

Taiwan United Petroleum Co., Ltd.'s Uniform Invoice Number: 70682020

Summarized by Yang, Chia-Hui; Supervised by Lin, Kin-Lan