Taiwan Joint Association of Electric
Appliance Dealers sent a written request for stopping the unconscionable trading practices
regarding the issuance of "reservation fee checks" and guarantee checks
Chinese Taipei
Case:
Taiwan Joint Association of Electric Appliance Dealers sent a
written request for stopping the unconscionable trading practices regarding the issuance
of "reservation fee checks" and guarantee checks
Key words:
electric appliances industry, negotiable instruments received in
advance, discounting, prohibition on endorsement and transfer, the assumption of risk,
financing, unconscionable trading practice
Reference:
The Fair Trade Commission Decision of November 26, 1997 (the 317th
Commission Meeting); Letter (86) Kung Erh Tzu No. 8412717-023
Industry:
Precision Machinery Manufacturing Industry (2210)
Relevant Laws:
Articles 19(vi) and
24 of the Fair Trade Law
Summary:
- According to a letter written by the Taiwan Joint Association of
Electric Appliances Dealers (the Association), Taiwan Electric Heating Equipment Co., Ltd.
(TEHE) collected from its distributors guarantee and reservation fee checks for seasonable
products like clothes dryers, air conditioners and dehumidifiers, and then sent these
negotiable instruments to the bank for discounting. However, the checks issued by TEHE
bounced and then caused a sequences of financial crisis in the electrical appliance
industry including: (1) the distributors' inability to acquire the desired products and
having to bear pressure from the bank for payment of their reservation fee and guarantee
checks. Over 700 distributors throughout Chinese Taipei faced a crisis in their
operations. (2) as the distributors of TEHE also distributed electric appliances produced
by other manufacturers, the latter were also adversely affected. Therefore, in order to
prevent similar events from occurring and causing a chain reaction a financial crisis in
the electric appliance industry, the Association requested the FTC in writing to prohibit
the electric appliance manufacturers to require their distributors to issue reservation
fee and guarantee checks in advance, which was to be unconscionable trading practices.
- Regarding reservation for purchase of seasonable products in the
electric appliance industry, before delivery the manufacturers or importers of such goods
would ask the distributors to provide reservation fee or guarantee checks based on the
whole or part of the earnest money. In order to investigate the legality of such trading
practices, the FTC conducted a field survey, held a public hearing where members of the
industry and trade associations and scholars were invited to discuss the issue, and came
to the conclusion that such trading practices had both positive and negative implications.
On the one hand, by collecting guarantee and reservation checks from the distributors, the
manufacturers or importers may prearrange their production process and reduce the
inventory cost of raw materials and finished products, the savings from which could then
be translated into more competitive sales prices. On the other hand, when the
manufacturers endorsed and transferred such negotiable instruments to the bank or a third
party, the distributors would be exposed to unpredictable risks. In addition, as in
practice most distributors sell products produced by different manufacturers, one
financial crisis befalling one specific manufacturer could spread to the rest of the whole
industry, which could result in substantial social cost.
- As there is no denying that such trading practices have its positive
effects on "freedom of contract," production efficiency and consumers' welfare,
the FTC did not agree to directly prohibit the manufacturers
or importers from collecting reservation fee and guarantee checks from the distributors
before the actual delivery of goods. To prevent the manufacturers or importers from doing
so by improper means, thus creating entry barriers for the less competitive or small-scale
manufacturers and imposing unconscionable restrictions on the distributors, the FTC
decided, as a general rule, that, if the manufacturers or importers, in their
distributorship contract or regulations governing the reservation for purchase, imposed
written or non-written unilateral substantive restrictions so as to force its distributors
to provide the reservation fee and guarantee checks, they would be considered as having
likely violated Articles 19(vi) or 24 of the Fair Trade Law. Such unilateral restrictions
may refer to the termination of warranty or liability, refusal to supply goods, provision
of too many price discounts and money rewards, or other substantive sanctions imposed on
uncooperative distributors.
- Moreover, for the purpose of risk avoidance, the distributors can
mark on the reservation fee and guarantee checks "prohibition on endorsement and
transfer." Such an act is one of the rights entitled to drawers pursuant to the
Negotiable Instruments Act. By so doing, the distributors can use the manufacturers'
default as a counterargument against the holder so as to avoid assuming unnecessary risks
should the manufacturers or importers fail to deliver goods or simply deliver insufficient
quantity of goods. So, the manufacturers cannot ban the distributors from marking
"prohibition on endorsement and transfer" for the sole purpose of facilitating
financing for themselves. Consequently, the risk of business operations, which are to be
borne by the manufacturers or importers, would not be transferred to the distributors. On
this understanding, the FTC concluded that, as a general rule, those manufacturers or
importers that by improper means forbid the distributors to mark "prohibition on
endorsement and transfer" on the reservation fee and guarantee checks they are to
issue would be considered as having likely violated Article 19(vi) or 24 of the Fair Trade
Law. The improper means refer to unilateral undue restrictions imposed by the
manufacturers in the distributorship contract or relevant regulations, according to which
uncooperative distributors will face the termination of warranty or liability, refusal to
supply goods or other substantive sanctions.
- In summary, in view of the overall economic benefits, the assumption
of risks, and the interests of the consumer, the FTC inform to the relevant members of the
industry and trade associations about the general rules stated in the above two
paragraphs, which will serve as the guideline governing the issuance and collection of
reservation fee and guarantee checks between the manufacturers and distributors of
electric appliances.
Summarized by Liu, Nai-jung
Supervised by Yang, Chia-chun
Appendix:
Taiwan Electric Heating Equipment Co., Ltd.'s Uniform Invoice Number: 12229557
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