25 November 2020
The Supreme Court rendered the 108-Tai-Shang-2543 Decision of May 7, 2020 (hereinafter, the “Decision”), holding that with respect to the provision that “the contractor shall be compensated for the damage incurred due to the termination of the contract” under Article 511 of the Civil Code, since a contract for work is still valid before it is terminated, the proprietor is required to compensate the damage caused by the termination of the contract, including the compensation for the portion of work which has been completed by the contractor and the expected gains from the unfinished portions.
According to the facts underlying this Decision, Appellant Company A entered into a procurement contract on a turnkey civil design and construction project (hereinafter, the “Contract at Issue”) with the Northern Region Construction Office of Appellant Company B, Company A’s opposing party, for NT$138,390,000. Under the Contract at Issue, Company A was in charge of the construction project (hereinafter, the “Project at Issue”) with the scope of the project covering the detailed design, construction and license application for the building and civil design of a substation as well as communication to resolve protests staged by local residents in the location of the substation and obtaining an approval of the water and soil conservation plan for the project from the county government. However, Company B called a negotiation meeting concerning amendments to the Contract at Issue all of a sudden and informed Company A that the project would be postponed due to financial difficulties and changed into a land preparation, drainage and fencing project. After Company A indicated its disagreement to the amendments, Company B issued a letter to inform Company A that due to the change of its operating policy, the contract was terminated in accordance with Article 24 of the Contract at Issue. Appellant Company A asserted that since the Contract at Issue was unilaterally terminated by Company B, not only should the portions of the project which had been constructed by Company A be priced based on the contract unit prices of the qualified quantity actually completed but also reasonable profits due to Company A should be paid based on the percentage of tax and miscellaneous expenses. However, Company B only paid NT$2.5 million to Company A without any payment for the micro tremor measurement fee and the cost of handling residents’ protests in the completed items under the Contract at Issue as well as reasonable profits that should be earned. Company A sought payment from Company B in accordance with Article 24, Paragraph 1 of the Contract at Issue and Articles 511 and 216 of the Civil Code.
According to the Decision, Article 511 of the Civil Code provides that before a contract for work is completed, the proprietor may terminate the contract at any time, provided that the contractor should be compensated for the damage incurred due to the termination of the contract. Since the contract for work is still valid before it is terminated, the damage that the proprietor should compensate due to the termination of the contract certainly includes the compensation for the portions of the project which have been completed by the contractor and the expected gains from the unfinished portions, provided that the cost that the contractor does not have to defray as a result of the termination should be deducted.
It was further indicated in the Decision that the Contract at Issue was terminated by Company B in accordance with Article 24, Paragraph 1 of the Contract at Issue due to a change of its operating policy, and that project payment of NT$2.5 million was made to Company A. According to Company B’s acceptance certificate for the part of the project actually performed before the termination of the contract, the tender instructions for the Project at Issue, and the bill of quantities, the payment of the above compensation includes the items of tax and miscellaneous expenses, which consist of insurance premiums, management fees, taxes other than business taxes, and profits. Therefore, the profits were included already. Article 24, Paragraph 1 of the Contract at Issue provides: “The portion of the project which has been completed by Party B (namely, Company A) shall be priced by Party A (namely, Company B) based on the unit prices for qualified quantities actually completed, and the reasonable profits due to Party B shall be paid based on the percentage of the tax and miscellaneous expenses.” Although this refers to all of the profits that Company A can generate under the Contract at Issue and is not limited to the profits for the portions that have actually been performed at the time of termination, still Company B contended that the calculation of the due profits as claimed by Company A did not deduct the compensation which had been received, and thus the profits were repetitively claimed. This calls into question whether such contention is baseless, and this matter certainly warrants further exploration. The original trial court was rash when it failed to explore this matter in detail and to explain the reasons for its inner conviction and elected to calculate the profits due to Company A by the percentage of the tax and miscellaneous percentage of the full project amount stipulated under the Contract at Issue, subtracted by the tax and miscellaneous expenses and business taxes. In addition, since the “tax and miscellaneous expenses” under the Contract at Issue include insurance premiums, management fees and tax expenses other than business taxes, they are not entirely expected profits of the bid winning contractor. Company B contended that the principle of profit-loss counteraction should apply to the calculation of Company A’s reasonable profits after the termination of the Contract at Issue for the cost savings achieved by Company A. There is still room to consider if such contention is absolutely unacceptable. The original trial court was also questionable when it elected to render a decision unfavorable to Company B based on the method for calculating the reasonable profits that should be paid to Company A upon termination of the Contract at Issue in accordance with Article 24, Paragraph 1 of the Contract at Issue. The gist of Company B’s appeal, which criticized the inappropriateness of this aspect of the original decision, is not groundless.
For further information, please contact:
Jenny Chen, Lee Tsai & Partners
lawtec@leetsai.com
