The Central Trust and the Department of Commodities Affairs violated the Fair Trade Law for its unreasonable contract provisions on international procurement for bidders

Chinese Taipei


Case:

The Central Trust and the Department of Commodities Affairs violated the Fair Trade Law for its unreasonable contract provisions on international procurement for bidders

Key Word:

government tender and procurement practice, standard provisions, free on board (FOB), cost and freight (CFR), freight charges, letter of credit, Incoterms, international trade customs, principle of the division of price risk, abuse of contractual advantageous position, patently unfair acts, capable of affecting trading order

Reference:

Fair Trade Commission Decision of March 17, 1999 (the 384th Commission Meeting); Disposition (88) Kung Ch’u Tzu No. 038

Industry:

Government Agency (9111)

Relevant Law:

Article 21 and 41 of the Fair Trade Law

Summary:

  1. This case originated from a letter sent by a trading company alleging that Central Trust and the Department of Commodities Affairs (hereafter referred to as DCA), Taiwan Provinicial Government in their guidelines to the invitation to bid and the standard contract provisions, required the bidding companies to fill in product and freight prices to enable the purchaser to decide whether to award the bid based on FOB or CFR prices. When the purchaser chose to sign the contract based on the CFR price, it is stipulated in the Central Trust and the DCA procurement contacts that “ where the sea freight or air freight charges actually paid are more than those stipulated in the contract, the seller shall pay for such charges; where the charges are less than those stipulated in the contract, the difference shall be retained in the letter of credit and shall not be withdrawn by the seller.”

    However, in bidding, since both the Central Trust and the DCA had elected to sign the procurement contract using the CFR price, their act should be interpreted as that both had acknowledged the price quoted by the bidding company to be reasonable. The restrictions on the freight charges and the additional conditions imposed by the Central Trust and the DCA were obviously unfair to the seller. Investigation on the case was completed after the complainant and a shipping company submitted the relevant information and after a workshop attended by representatives from the industry, the government agencies, and the academia was held.

  2. The Central Trust and the DCA were commissioned by central government and provincial government agencies to invite bids for international procurement on behalf of the government agencies; both were qualified as an “ enterprise” defined by Article 2(iv) of the Fair Trade Law (FTL). Their guidelines to the invitation to bid and standard contract provisions included Incoterms trading conditions such as CFR, and required the use of the total amount as the basis for awarding the bid. Yet the bidding procedures required that the trading counterpart fill in both the product and freight prices, that the excess freight charges shall not be refunded, and that the seller had to make up the shortage of the freight charges.

  3. With respect to the obligation to make up the shortage of freight charges (i.e. “ where the sea freight or air freight charges actually paid are more than those stipulated in the contract, the seller shall pay for such additional charges”), it is in conformity with the international trade practice associated with CFR transactions where the seller is responsible for shipping and freight charges. With respect to the seller’s obligation to return the excessive freight payments (i.e. “ where the charges are less than those stipulated in the contract, the difference shall be retained in the letter of credit and shall not be withdrawn by the seller” ), it was contrary to the principle of CFR conditions which requires price risks be allocated between seller and purchaser. The provision has unevenly allocated the risks of freight charges between the purchasing agency and the winning bidder, and had deprived the seller of the reasonable profit margins obtainable from the differences of freight charges. Such action was not only inconsistent with international trade customs, but had also violated government tendering and procurement practices, where bids were awarded based on the lowest bidding price and payments were made based on the total amount.

  4. It is stipulated in Article 24 of the FTL that “ in addition to what is otherwise provided for in this Law, enterprises shall not engage in other deceptive or patently unfair acts that are capable of affecting trading order.” Prior to the implementation of the Government Procurement Law, where a government agency inviting tenders abuses its advantageous position in drafting “deceptive” or “ patently unfair” guidelines to the invitation to bid or procurement contracts, and where investigation conducted by the Fair Trade Commission (this Commission) shows that public interest rather than private interest of the parties or purely individual disputes are involved to the extent that it will affect trading order, the aforementioned Article of the FTL may still be applicable. This Commission in prior cases has already upheld such a view.

    The act by the Central Trust and the DCA in formulating the aforementioned provision constitutes a “patently unfair” act in the sense that they abused their advantageous position to force their trading counterpart to accept unfair trade conditions, which was “ capable of affecting trading order.” The action had violated Article 24 of the FTL. Therefore, in accordance with Article 41 of the FTL, the two enterprises were ordered to discontinue the aforementioned illegal act on the day following the receipt of the Disposition, and to forward the revised contract by mail to the Commission within 30 days after receipt of the Disposition.

 

Summarized by Luo, Mei-hsia

Supervised by Tzuo, T’ ian-liang


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