Abstract
Taiwan, whose financial market is closely linked to the international market, was seriously affected by the Global Financial Crisis. Among the affected retail investors, those who invested in financial products such as structured notes might have been unaware of the real risk these products posed. Investors left holding worthless products in the wake of the 2008 crash were quick to seek legal redress for their losses, but these disputes were difficult to address by properly using the civil remedies then available in Taiwan. Few of the possible causes of actions listed in the Taiwanese Civil Code (“CC”) or in other special laws were well adapted to address disputes over structured notes. The most applicable remedy available in the then legislation might be Article 227-2 of the CC, which governs the rule of changed circumstances, but it was referred to only rarely in these disputes. In order to put an end to this type of structured-note controversy, the Financial Consumer Protect Act (“FCPA”) was passed in 2011. Nevertheless, there is room for the FCPA to be improved and refined.
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Notes
- 1.
Structured notes are hybrid financial products combining derivatives and debts securities, which link to other investment products in the market (see Chen 2011a, 211).
- 2.
Art. 225 stipulates:
(1) The debtor will be released from his obligation to perform if the performance becomes impossible by reason of a circumstance to which he is not imputed. (2) If the debtor is entitled to claim compensation for the injury against a third party in consequence of the impossibility of the performance under the preceding paragraph, the creditor may claim against the debtor for the transfer of the claim for the injury, or for the delivery of the compensation he has received.
Please note that all English translations of legal texts in this chapter are official translations from the “Law and Regulation Database of the Republic of China” maintained by the Ministry of Justice in Taiwan.
- 3.
Art. 266 stipulates:
(1) If none of the parties is imputed to the impossibility of one party’s performance, the other party shall be released from his obligation to perform the counter-prestation. (2) If the impossibility is only partial, the counter-prestation shall be reduced proportionately. In the case provided in the preceding paragraph, if the counter-prestation has been wholly or partially performed, it may be claimed for the reimbursement in accordance with the provisions concerning Unjust Enrichment .
- 4.
The full text of and conditions that apply to this article will be discussed in Sect. 16.2.2.3.
- 5.
The current ROC government moved to Taiwan after the end of WWII due to the defeat by the Chinese Communist Party in a civil war. Therefore, cases relating to contract enforcement during a time of social change were often brought to the court during and after the war (see Hou 2003, 108).
- 6.
Taiwan’s currency changed once after the end of WWII in an effort to control inflation. Most of the court cases related to this event dealt with the value difference between the New Taiwan Dollar and the original Taiwan Dollar.
- 7.
Art. 397 used to stipulate:
(1) The court shall, ex officio, make just determination and give judgment to increase, decrease, or make payment , or change other effect of any juristic act which has its effect become unjust after it is done due to change of circumstances upon cause not attributable to the parties concerned and beyond their expectation. (2) The above provision shall apply mutatis mutandis to legal relationship originated from non-juristic act.
Please note that this article was later modified in February 2003, and now no longer covers changed circumstances in terms of substantive law (as opposed to procedural law).
- 8.
The amendment was made in February 1968, when there was no official plan to amend the CC, so that the rule of changed circumstances was placed under the CCP as a temporary solution (see Lin 2000, 66).
- 9.
See the Legislative Comment on Art. 227-2.
- 10.
Zuigao Fayuan [Sup. Ct.], Civil Division, Tai-Shang No. 2470 (2009) (Taiwan).
- 11.
Zuigao Fayuan [Sup. Ct.], Civil Division, Tai-Shang No. 2299 (2009) (Taiwan).
- 12.
See also the following similar court decisions: Zuigao Fayuan [Sup. Ct.], Civil Division, Tai-Shang No. 760 (1995) (Taiwan); Gaodeng Fayuan [High Ct.], Civil Division, Jian-Shang No. 126 (2007) (Taiwan); Gaodeng Fayuan [High Ct.], Civil Division, Jian-Shang No. 99 (2007) (Taiwan); Gaodeng Fayuan [High Ct.], Civil Division, Jian-Shang-Geng (Yi) No. 32 (2009); Gaodeng Fayuan [High Ct.], Civil Division, Jian-Shang No. 59 (2009) (Taiwan).
- 13.
See Gaodeng Fayuan [High Ct.], Civil Division, Jian-Shang No. 53 (2008) (Taiwan).
- 14.
See also the following court decisions supporting this ruling: Zuigao Fayuan [Sup. Ct.], Civil Division, Tai-Shang No. 1771 (1958) (Taiwan); Zuigao Fayuan [Sup. Ct.], Civil Division, Tai-Shang No. 2630 (1997) (Taiwan).
- 15.
Art. 265 states:
A person who is bound to perform his part first may, if after the constitution of the contract the property of the other party have obviously decreased whereby the counter-prestation might become difficult to be performed, refuse to perform his part, until the other party has performed his part or furnished security for such performance.
- 16.
Art. 247-1 of the CC states:
If a contract has been constituted according to the provisions which were prepared by one of the parties for contracts of the same kind, the agreements which include the following agreements and are obviously unfair under that circumstance are void. (a) To release or to reduce the responsibility of the party who prepared the entries of the contract. (b) To increase the responsibility of the other party. (c) To make the other party waive his right or to restrict the exercise of his right. (d) Other matters gravely disadvantageous to the other party.
- 17.
Art. 245-1 of the CC provides:
(1) Even though the contract is not constituted, one of the parties is responsible for the injury caused to the other party who without his own negligence believed in the constitution of the contract when he, in order to prepare or negotiate for the contract, has done either of the following: (a) Hidden in bad faith or dishonestly explained the gravely relevant matter of the contract when the other party inquired. (b) Intentionally or gross negligently spilt out the other party’s secret known or held by himself which the other party has explicitly expressed to be kept in secret. (c) Any other matter obviously against good faith. (2) The claim for the injury in the preceding paragraph shall be extinguished by prescription if not exercised within 2 years.
- 18.
Art. 3 stipulates:
(1) The term “financial services enterprise” as used in this Act includes banking enterprises, securities enterprises, futures enterprises, insurance enterprises, electronic stored value card enterprises, and enterprises in other financial services as may be publicly announced by the competent authority. (2) The terms “banking enterprises,” “securities enterprises,” “futures enterprises,” and “insurance enterprises” as used in the preceding paragraph shall take the definitions set out in Article 2, paragraph 3 of the Organic Act Governing the Establishment of the Financial Supervisory Commission; provided, however, that securities exchanges, over-the-counter securities exchanges, central securities depositories, futures exchanges, and enterprises in other financial services as may be publicly announced by the competent authority are not included within the meaning of these terms. (3) The term “electronic stored value card enterprises” as used in paragraph 1 means issuers as defined in Article 3, subparagraph 2 of the Act Governing Issuance of Electronic Stored Value Cards.
- 19.
Art. 4 provides:
(1) The term “financial consumer” as used in this Act means parties that receive financial products or services provided by a financial services enterprise; provided, however, that it does not include the following: 1. qualified institutional investors; or 2. natural persons or juristic persons with a prescribed level of financial capacity or professional expertise. (2) The meanings of the terms ‘qualified institutional investors’ and ‘prescribed level of financial capacity or professional expertise’ as used in the preceding paragraph shall be prescribed by the competent authority.
- 20.
Art. 8 states:
(1) A financial services enterprise, in publishing or broadcasting advertisements or carrying out solicitation or promotional activities, shall not engage in falsehood, deception, concealment, or other conduct sufficient to mislead another party, and shall verify the truthfulness of the content of its advertisements. The obligation it bears to financial consumers shall not be less than that indicated in the content of the aforementioned advertisements or in the materials or explanations provided to financial consumers in the aforementioned solicitation or promotional activities. (2) Regulations governing the methods, content, and other requirements pertaining to the advertisements and solicitation or promotional activities of the preceding paragraph shall be prescribed by the competent authority. (3) A financial services enterprise shall not take advantage of education and awareness programs to introduce individual financial products or services.
- 21.
Art. 9 stipulates:
(1) Before a financial services enterprise enters into a contract with a financial consumer for the provision of financial products or services, it shall fully understand the information pertaining to the financial consumer in order to ascertain the suitability of those products or services to the financial consumer. (2) Regulations governing what “information pertaining to the financial consumer” must be fully understood and what matters relating to “suitability” must be taken into account, as mentioned in the preceding paragraph, and other matters requiring compliance, shall be prescribed by the competent authority.
- 22.
Art. 10 provides:
(1) Before a financial services enterprise enters into a contract with a financial consumer for the provision of financial products or services, it shall fully explain the important aspects of the financial products or services, and of the contract, to the financial consumer, and shall also fully disclose the associated risks…. (3) The explanations and disclosures that the financial services enterprise provides to the financial consumer, as mentioned in paragraph 1, shall be in text or use another method that is fully understandable to the financial consumer; and the content thereof shall include, without limitation, aspects of material significance to the interests of the financial consumer, such as transaction costs, and possible gains and risks. Regulations governing related requirements shall be prescribed by the competent authority.
- 23.
Paragraph 3 of Art. 7 states:
A financial services enterprise, in providing financial products or services, shall exercise the due care of a good administrator; for any financial product or service it provides that has the nature of a trust or mandate arrangement, the financial services enterprise shall also bear such fiduciary duty as may be required by applicable legal provisions or contractual stipulations.
- 24.
Art. 11 stipulates:
A financial services enterprise which, by violating any provision in either of the two preceding articles, causes harm to a financial consumer shall bear liability for damages ; provided, however, that this shall not apply if the financial services enterprise can prove that occurrence of the harm was not due to: its failure to fully understand the suitability of a product or service to the financial consumer; its failure to provide an explanation, or provision of an explanation that was untrue or incorrect; or its failure to fully disclose risks.
- 25.
Id.
- 26.
Please note that “a certain amount” is determined according to product types. For example, the threshold amount is 1 million NTD for investment-linked products or services, while the amount for non-investment-linked ones is 0.1 million NTD (Financial Supervisory Commission 2012).
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Acknowledgement
I thank Prof. Wen-Yeu Wang of National Taiwan University and Prof. Yen-Lin Agnes Chiu of Fu Jen Catholic University, Taiwan for their comments and suggestions. I also thank Yen-nung Wu for outstanding research assistance. I acknowledge research funding from the Ministry of Science and Technology of Taiwan (MOST 103-2919-I-002-004-A1) and Multiculturalism in Monsoon Asia Program at National Tsing Hua University, Taiwan. Any remaining error s or omissions are, of course, my own.
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Tsai, Ch. (2016). The Effects of the Global Financial Crisis on the Binding Force of Contracts: A Focus on Disputes over Structured Notes in Taiwan. In: Başoğlu, B. (eds) The Effects of Financial Crises on the Binding Force of Contracts - Renegotiation, Rescission or Revision. Ius Comparatum - Global Studies in Comparative Law, vol 17. Springer, Cham. https://doi.org/10.1007/978-3-319-27256-6_16
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