Maggie Wu (吳詩敏)[1] and Tzu-Ching Lin(林子靖)[2]

Drafting a country-of-origin clause is, in substance, a decision about how origin risk is allocated among the parties at each tier of the supply chain. Building on the case introduced in Part One, this article examines how the court concluded that an upstream supplier was bound by the end customer’s acceptance standard. It then sets out drafting considerations for the system integrator as buyer and for the supplier as seller, together with points to review before signing.

Incorporating the end customer’s specifications

In the Part One case, the supplier had a sales contract only with the system integrator and no direct contractual relationship with NCSIST. However, one of the principal grounds for the High Court’s reversal was a supplementary agreement signed by the two parties on March 30, 2020. That agreement provided that NCSIST’s procurement contract terms for the project the parties were jointly performing “shall be deemed effective under this supplementary agreement.”[3] The court held that this provision incorporated the terms of the NCSIST procurement contract into the parties’ own contract, so the products delivered by the supplier were required to meet NCSIST’s requirements.[4]

Absent that provision, the supplier could have argued that it had entered into a single NT$2.6 million sales contract with the system integrator and had never agreed to be bound by NCSIST’s acceptance standard. In practice, buyers often forward specifications to suppliers by email. An email record, however, generally shows only that the supplier was aware of the specifications; it does not necessarily establish that the supplier agreed to perform in accordance with them.

Drafting recommendations

(1) The system integrator as buyer

When contracting with an upstream supplier, a system integrator should consider the following four points:

1. Incorporate the specifications into the contract. Attach the end customer’s acceptance criteria table, country-of-origin clause, and penalty provisions to the upstream contract in full, and provide expressly that a breach of those requirements constitutes a breach of the upstream contract. Forwarding the documents by email is not sufficient.
2. Define “origin” The definition should cover, at a minimum, the place of manufacture, the place of assembly, the origin of key components (motors, electronic speed controllers, flight control boards, inertial measurement units, satellite positioning modules, video transmission modules, camera modules, and battery cells), the source of the circuit design, the source of the firmware, and the identity of any contract manufacturer. The supplier should be required to deliver a bill of materials identifying the origin of each item, together with the manufacturers’ certificates of origin; to obtain prior written consent for any change; and to provide the documents needed to apply for trusted supply chain certification. Because the components used in test samples may differ from those used in mass production, controls on component substitution are particularly important.
3. Specify the scope of indemnification. State expressly which losses the supplier must reimburse, including contractual penalties and liquidated damages imposed on the buyer by the end customer, losses arising from rescission, and rework costs. Because 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) takes effect on March 11, 2027, the clause should also cover losses the buyer incurs if upstream components or origin documents prove to be false, including repayment of funds received, administrative fines, and loss of procurement eligibility. In the Part One case, the system integrator had to rely on the Civil Code’s general provisions on incomplete performance, and the dispute went through three levels of court before it was resolved. An express contractual provision could have narrowed the issues in dispute.[5]
4. Keep written records of communications and, where possible, obtain written confirmation from the other party. The court accepted the system integrator’s position largely on the basis of witness testimony and records of LINE group chats and emails. Before and after the contract was signed, the integrator’s staff repeatedly sent NCSIST’s acceptance criteria table, reiterated that components of PRC origin were prohibited, and requested manufacturers’ certificates of origin. The supplier’s general manager also testified that he had received the image and the criteria-table file sent by the integrator.

(2) The supplier as seller

At the quotation stage, a supplier should confirm three matters: the identity of the end customer, the applicable country-of-origin standard, and the acceptance specifications.

If the buyer does not provide the end customer’s specifications but requests a blanket representation that no component is of PRC origin, the supplier may seek to narrow that representation in the contract. For example, the representation could be limited to the items listed in the bill of materials delivered with the goods, or the contract could provide that the supplier is not responsible for any nonconformity resulting from the buyer’s failure to provide the specifications. When undertaking defense or government procurement work, the supplier should also require its own upstream suppliers to give the same country-of-origin representation and to observe the same controls on component substitution, so that it has recourse against them if a problem arises.

In addition, under Article 19, paragraph 2 of the Act, anyone who provides false information in an eligibility review, certification, procurement, performance, or acceptance proceeding is subject to a fine of NT$1 million to NT$5 million. Suppliers should therefore exercise particular care when issuing a certificate of origin or a bill of materials.[6]

Points to review before signing

If any of the following applies, the contract and the supply chain should be reviewed before signing:

1. The end customer is the military, NCSIST, or another public body, and the business is a second-tier or lower-tier supplier.
2. The contract uses language such as “deemed effective” or “applies mutatis mutandis” to incorporate an upstream contract, but the business has not reviewed the full text of that upstream contract.
3. The product uses an open-source flight controller, open-source firmware, or contract-manufactured components built from drawings supplied from outside Taiwan.
4. The business intends to apply for trusted supply chain certification, tax incentives, or investment credits, but is uncertain whether its business model falls within the definition of “unmanned vehicle business” in Article 3, subparagraph 6 of the Act.
5. The damages clause in the existing contract provides only for liability “for damages according to law” and does not specify which penalties may be passed through to the supplier.

The appropriate drafting of a country-of-origin clause depends on the business’s position in the supply chain, the end customer’s acceptance standard, and the extent to which the business can in fact exercise control further down the chain. Circumstances vary, and no single formulation will be suitable in every case.

Conclusion

The Part One case suggests that whether origin risk can be allocated effectively by contract depends on three factors: whether the end customer’s procurement requirements were actually incorporated into the upstream contract, whether the test for “origin” is clearly defined, and whether the parties’ communications were properly preserved. A country-of-origin requirement can operate as intended only if the parties at each tier share the same understanding of its scope. Agreeing on that scope clearly at the outset can reduce the risk of later disputes.

The next article in this series considers which claim a buyer should bring when a problem with components or origin documents comes to light: a claim under the warranty against defects (物之瑕疵擔保) or a claim for incomplete performance (不完全給付). It also considers whether the Civil Code’s six-month preclusive period (除斥期間) can bar the claim before the problem is discovered, an issue on which both the High Court and the Supreme Court commented.

[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 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).

[4] See Taiwan High Court Civil Judgment 113-Shang-Zi-66.

[5] Article 227, paragraph 1 of the Civil Code provides that if the debtor’s performance is incomplete for reasons for which the debtor is responsible, the creditor may exercise its rights under the provisions on delay in performance or on impossibility of performance. See also Civil Code Articles 226, paragraph 1, and 256.

[6] Article 19, paragraph 2 of the Act.