By Hung Ou Yang and Chan-Chi Chang
Enterprises often use consignment agreements for the purpose of restraining resale prices. However, Article 19 of the Taiwan Fair Trade Act provides that "an enterprise shall not impose restraints on resale prices of the goods it supplied to its trading counterparty at which the trading counterparty make resale of the goods to a third party or the third party make further resale of the goods" unless there is a justifiable reason for such price restraint. Would consignment agreements be exempted from Article 19 of the Taiwan Fair Trade Act? Taiwanese Fair Trade Commission("FTC") in charge of executing the Taiwan Fair Trade Act issued FTC Interpretation No. 13 ("Interpretation No. 13"), pointing out that: "if it is indeed a consignment agreement and the sales price is agreed thereupon, the profit that would be earned by the consignee is not the difference between the purchase price and the sales price, then there will be no issue of resale". That being said, such consignment agreement will be exempted from Article 19 of the Taiwan Trade Act because no resale is involved. Therefore, correctly using a consignment contract can effectively avoid violations of Article 19 of the Taiwan Fair Trade Act.
Notably, in the Interpretation No. 13, FTC further clarified that: "whether the contract at issue is a consignment agreement cannot be assessed only from the form of the contract, but from the substance of it.” In practice, although a contract is titled consignment agreement, the enterprise still may be sanctioned for price controls because the substance of the contract leads to a conclusion that it is not a true consignment agreement. Through analyzing the following cases, we will illustrate the key points that need to be noted relating to the substance of the contract.
Contact Lens Case (89 FTC Decision No. 010, 89 Taipei High Administrative Court Litigation No. 2052 (2000) Judgment, and 92 Supreme Administrative Court Adjudication No. 825 (2003) Judgment)
First, you have to check how the invoices in the transactions are made out. The key is that the invoices issued to the consumers shall be in the name of the supplier for applying consignment agreement when consumers actually purchase goods from retailers. The Respondent, who was sanctioned for resale price maintenance in this case argued that the business arrangement at issue was a consignment agreement upon which commissions were agreed and also constituted the profits of the consignee. However, the FTC and the court did not agree with such an argument. The court defines consignment agreement as "a contract wherein the consignee sells the goods to others at the supplier's risks and calculation so as to collect commissions from the supplier.”The court further distinguished a consignment agreement from a normal sales contract for stating the reasons why the Respondent shall be sanctioned: "in this case, the chain store who transacts with the Respondent in the form of consignment in fact issues invoices to consumers directly in the name of the parent company or business owner of the chain store absent signifying 'consignment', namely not issued in the name of the Respondent; besides, the Respondent issued sales invoices to the chain store who acts as a buyer without signifying 'consignment' either. Formally, the ownership of the goods has been transferred to the chain store. As a result, the transactions between the Respondent and the chain store involve transfer of ownership and resale even though the Respondent called it a 'consignment sale'. Here, although the Respondent signed with some of the distributors in the form of consignment agreements, essentially such transactions shall be considered as sales contracts.”
Pharmacy Counter Case (FTC Decision No. 106024 and 106 Taipei High Administrative Court Litigation No. 795 (2017) Judgment)
Secondly, you have to check whether the retailers actually bear a risk that they are not supposed to bear under a consignment agreement. For example, would the retailers have to make the payment to the supplier for the goods in advance? Further, can the retailers return the goods to the suppliers regardless of whether the goods have defects or not? Respondent who was sanctioned in this case argued that the contracts signed with the pharmacy relating to sales of drugs are consignment agreements. But based on the terms and conditions of the contracts wherein the pharmacies have to pay for the goods in advance and not allowed to return or exchange the goods except for product defects or shipping damages, the court found that: "obviously the Plaintiff (the Respondent) and the pharmacy have a sales contract relating to the goods traded; the pharmacy purchased the goods from the Plaintiff pursuant to the contract and sold the goods to consumers in the name of the pharmacy which can be proven by the copies of the invoices now contained in the court's files. Given the facts that the pharmacy bears the risk of failure to perform the contract and the guaranty for the defect of the goods, obviously it is not selling the goods on behalf of the Plaintiff".
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Apparently, the courts concluded that the substance of the transaction between the parties dictates how the laws will apply. To summarize, the key points to be considered for determining the substance of transaction, referring to 92 Supreme Administrative Court Adjudication No. 825 (2003) Judgment, include whether the ownership of the goods is transferred, the name of the person who makes the deal, the payment method of the sales price, the risk of failure to perform the contract, the guaranty for the goods defects, and the method of calculation for the remuneration. Therefore, if an enterprise would like to use a consignment agreement for its business arrangement, the above issues must be properly considered in advance, better off with assistance of experienced lawyers. Otherwise, there might be a legal risk of violating Article 19 of the Taiwan Fair Trade Act.
AUTHOR: Hung Ou Yang
Managing Partner
Taipei
+886-2-2707-9976
[email protected]
AUTHOR: Chan-Chi Chang
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Taipei
[email protected]
Copyright Brain Trust International Law Firm
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
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