Maggie Wu (吳詩敏)[1] and Tzu-Ching Lin (林子靖)[2]
Disputes often arise when a procuring agency’s country-of-origin requirements are passed down the supply chain, from the agency to the system integrator and then to upstream component suppliers. Drawing on a recent Taiwan High Court civil judgment that has become final, this article examines how the agency traced the origin of individual components, how the court assessed a circuit board manufactured in Taiwan but designed by a company in the People’s Republic of China (PRC), and three common sources of country-of-origin risk.
Country-of-origin requirements in UAV procurement
Taiwan’s defense and government procurement rules increasingly require that the goods being purchased not originate in the PRC. Unmanned aerial vehicles (UAVs), which have both military and civilian uses, are especially affected. A single UAV contains many components (motors, electronic speed controllers, flight control boards, inertial measurement units, satellite positioning modules, video transmission modules, battery cells, and camera modules), and each may come from a different source. A critical question during contract performance is therefore how far the origin requirement reaches: only to the place of final assembly, to each key component, or all the way back to the source of the circuit design.
In a multi-tier supply chain, the agency’s country-of-origin requirements are passed down through the system integrator to upstream suppliers. Disputes arise when parties at different tiers interpret the scope of the “no PRC origin” requirement differently. The following case illustrates this problem.
The case
(1) Facts
A system integrator was awarded a contract by the National Chung-Shan Institute of Science and Technology (NCSIST), a defense research institute overseen by Taiwan’s Ministry of National Defense, for “high-precision optical positioning systems and two other items.” To fulfill the contract, the integrator purchased indoor UAVs and ground control stations from an upstream supplier for NT$2.6 million, including tax. From its initial request for quotation in January 2019 onward, the integrator repeatedly informed the supplier that components originating in the PRC were prohibited. During a visit to the supplier’s facility in January 2020, NCSIST reiterated this prohibition.
The goods were delivered in February 2020. NCSIST initially rejected them because the components bore no brand or model markings and no manufacturer’s certificate of origin had been provided. After the supplier took corrective action and resubmitted the goods, NCSIST rejected them again, this time because the UAV motor and flight control board were of PRC origin and the flight controller had failed its performance test. By then, the integrator had exhausted the opportunities to remedy the defects permitted under the contract. NCSIST therefore rescinded the relevant portion of the contract and imposed a punitive contractual penalty of NT$953,166, together with NT$343,140 in liquidated damages for delay, bringing the total to NT$1,296,306.
The integrator then refused to pay the supplier. The supplier sued for the NT$2.6 million purchase price, and the integrator counterclaimed for the NT$1,296,306 assessed against it by NCSIST. The trial court ruled in favor of the supplier.[3] On appeal, the Taiwan High Court reversed, holding that the integrator had validly rescinded the purchase contract and was therefore not required to pay the purchase price. The court also ordered the supplier to pay the integrator NT$1,296,306 plus interest. The Supreme Court dismissed the supplier’s further appeal on procedural grounds, making the High Court’s judgment final. From delivery in February 2020 to final resolution, the dispute spanned six years and four months.[4]
(2) Analysis
Two aspects of the court’s country-of-origin analysis stand out.
First, during its second inspection, NCSIST found the letters “MIC” on the UAV motor. An NCSIST assistant researcher testified that, under the relevant rules of the Ministry of National Defense’s Armaments Bureau, NCSIST prohibited components from PRC brands and required that components, integrated circuits (ICs), and sensors not be manufactured in the PRC. Both the UAV’s flight control module and its motor fell within the scope of these restrictions. In other words, NCSIST examined the origin of individual components rather than relying solely on the place of final assembly.
Second, the supplier argued that the flight control board was not of PRC origin because it had been manufactured in Taiwan using open-source Pixhack flight controller design files that the supplier had downloaded and partially modified. The Taiwanese contract manufacturer confirmed to the court that it had produced the printed circuit boards using circuit diagrams supplied by the supplier.
When the court asked whether such a board would be acceptable, NCSIST stated that it would not accept a board based on Pixhack design files originating in the PRC, even if the board itself was manufactured elsewhere. It cited the contract’s requirement that the goods, including hard drives and components, not originate in the PRC. NCSIST had also confirmed with the PRC manufacturer’s customer service team that the board models used in the flight control module were the company’s own designs.
The court therefore held that manufacturing the board in Taiwan did not bring it into compliance with NCSIST’s acceptance requirements, because its design originated from a PRC company. In this case, neither manufacturing the board in Taiwan nor obtaining the design files from an open-source platform was sufficient to overcome the objection to its PRC design origin.[5]
The case does not appear to involve a change in the acceptance standard. Rather, the dispute arose because the supplier and the agency interpreted the “no PRC origin” requirement differently.
Three country-of-origin pitfalls in UAV procurement
The case highlights three types of country-of-origin risk:
- Origin cannot be documented. NCSIST’s initial rejection was not based on a finding that the components were manufactured in the PRC. Instead, the components lacked brand or model markings, and no manufacturer’s certificate of origin had been provided. Suppliers should therefore obtain the necessary origin documentation before delivery. Where such documentation is required for acceptance, an inability to provide it may lead to rejection even without a finding that the components are of prohibited origin.
- Components originate in the PRC. A UAV assembled in Taiwan and sold under a Taiwanese brand may still contain components originating in the PRC. Where procurement requirements apply to individual components, assembly in Taiwan alone does not establish compliance. Suppliers need to identify which components are covered by the restrictions and verify their origin.
- The design originates in the PRC. This was the issue with the flight control board in this case. Although the board was manufactured in Taiwan, the court found that its PRC design origin rendered it noncompliant with NCSIST’s acceptance requirements. Local manufacturing and the use of open-source files did not resolve that issue.
Conclusion
In this case, the country-of-origin requirement extended beyond final assembly to individual components and the source of the circuit design. For suppliers and system integrators, the practical lesson is to clarify the scope of these requirements before committing to a particular product or design, and to obtain supporting documentation rather than rely solely on a supplier’s declaration.
The dispute lasted six years and four months. The supplier ultimately lost its claim for the purchase price and was ordered to pay damages equal to the penalties and delay damages imposed on the integrator by NCSIST. The case illustrates the cost of leaving different understandings of an origin requirement unresolved until acceptance.
The next article in this series examines how the Act for Strengthening National Defense Self-Reliance and Promoting the Unmanned Vehicle Industry (強化國防自主暨無人載具產業發展條例; unofficial translation), most of which takes effect on March 11, 2027, affects the legal consequences of an origin dispute. Part Three, on contract terms, explains why the supplier was bound by NCSIST’s acceptance
[1] Maggie Wu (吳詩敏) is the Managing Partner of Stellex Law Firm (有澤法律事務所). LL.M., Soochow University; LL.M., Indiana University Robert H. McKinney School of Law.
[2] Tzu-Ching Lin (林子靖) is the Managing Partner of Pan & Lin, Attorneys-at-Law (則誠法律事務所). LL.M., Graduate Institute of Law and Interdisciplinary Studies, National Chengchi University; LL.M. in Environmental and Energy Law, Georgetown University Law Center.
[3] Taiwan Taoyuan District Court Civil Judgment 110-Su-Zi-608 (May 12, 2023).
[4] Taiwan High Court Civil Judgment 113-Shang-Zi-66 (Oct. 29, 2025), appeal dismissed, Supreme Court Civil Ruling 115-Tai-Shang-Zi-424 (June 10, 2026).
[5] See Taiwan High Court Civil Judgment 113-Shang-Zi-66.