The Supreme Court rendered the 103-Tai-Shang-2232 Civil Decision of October 24, 2014 (hereinafter, the "Decision"), holding that although it is specifically stipulated under Article 252 of the Civil Code that if the default penalty set in a contract is disproportionately high, the court may reduce it to a reasonable amount, still whether a contractual default penalty is too high is a factual matter and should certainly be substantiated by the obligor who makes such assertion. Before exercising its discretion to reduce the default penalty, the court should properly rule on such matter after both parties have exchanged their arguments and mounted their defenses and offenses based on the factual evidence and materials submitted by the parties by considering social economic circumstances and balancing the interest of the parties.
According to the facts underlying this Decision, the Appellant Meng-chieh Chen failed to perform a property purchase agreement within the required period, and the Appellee issued a letter to withdraw the agreement and forfeit the payment of NT$32,400,000, which had been paid by the Appellant. The original trial court held that since the value of the property at issue did not have significant fluctuations during the above-mentioned period and the Appellee continued to collect rents, the default penalty of Meng-chieh Chen was reduced to NT$9,400,000.
Under Article 252 of the Civil Code, it is specifically stipulated that "if a default penalty is disproportionately high, a court may reduce it to a reasonable amount." According to the Decision, however, whether an agreed-upon default penalty is too high is a factual issue and the person asserting that the default penalty is too high should assume the burden of proof for this. Before exercising its discretion to reduce the default penalty, the court should properly rule on such matter based on the factual evidence and materials submitted by both parties after the parties have exchanged their arguments and mounted their defenses and offenses by considering the social economic circumstances and balancing the interest of both parties.
It was further pointed out in the Decision that since whether the payment which was forfeited was part of the default penalty was not without dispute between the parties, it was necessary to have the parties exchange their arguments and mount their defenses and offensives. Without instructing the parties to do so, the original trial court jumped to the decision that the default penalty should be reduced to NT$9,400,000 without asking the Appellant to substantiate issues such as why the default penalty was too high and how it should be reduced and requesting the two parties to exchange sufficient arguments and mount their defenses and offenses regarding such issues. In addition, such litigation procedure also had material flaws. Therefore, the original decision was reversed and remanded.