Maggie Wu (吳詩敏)[1] and Tzu-Ching Lin(林子靖)[2]
When a procuring agency finds components of PRC origin in a product, a system integrator that purchased complete UAVs or components from upstream suppliers faces not only rejection, rescission, and penalties but also the question of how to seek recovery from its own supplier. Under the Civil Code, the two principal claims available are the warranty against defects (物之瑕疵擔保) and incomplete performance (不完全給付). They differ in their elements, in the time limits that apply, and in their legal effects. Drawing on the case discussed in this series, this article examines those differences.
The problem
In defense and government procurement, a UAV system integrator often purchases complete units or components from upstream suppliers and delivers them to the procuring agency in performance of its own contract. If the agency finds components of PRC origin, the integrator may face rejection, rescission, and penalties, and must then determine how to seek recovery from its upstream supplier. The Civil Code provides two principal bases for such a claim, the warranty against defects (物之瑕疵擔保) and incomplete performance (不完全給付), which differ in their elements, time limits, and legal effects. If the buyer relies on the wrong basis, its claim may be barred by the preclusive period (除斥期間) — a fixed deadline similar to a statute of repose — potentially before the problem is discovered.
The facts
In the case introduced in Part One, the system integrator purchased indoor UAVs and ground control stations from the supplier for NT$2.6 million to fulfill its procurement contract with the National Chung-Shan Institute of Science and Technology (NCSIST). NCSIST subsequently rejected the goods because the UAV motor and flight control board were of PRC origin and the flight controller had failed its performance test. NCSIST then rescinded the relevant portion of the contract and imposed on the integrator a contractual penalty and liquidated damages for delay totaling NT$1,296,306. The integrator withheld payment and rescinded its contract with the supplier. The supplier sued for the purchase price, and the integrator counterclaimed to recover the amounts imposed by NCSIST. Figure 1 shows the contractual relationships among the three parties.
Figure 1 Contractual relationships among the three parties
For the same batch of UAVs, the trial court ordered the system integrator to pay the full NT$2.6 million purchase price.[3] The Taiwan High Court reversed, holding that the integrator was not required to pay the purchase price and ordering the supplier to pay the integrator NT$1,296,306 plus interest.[4] The two courts had the same facts before them but applied different legal frameworks: the trial court analyzed the case under the warranty against defects (物之瑕疵擔保), and the High Court under incomplete performance (不完全給付). The Supreme Court subsequently dismissed the supplier’s further appeal on procedural grounds, making the High Court’s judgment final.[5]
How the two claims differ
(1) Legal nature
Warranty liability is a form of no-fault liability imposed by law on the seller, whereas liability for incomplete performance arises from breach and requires that the incomplete performance be attributable to the debtor. On the relationship between the two, Supreme Court Civil Judgment 100-Tai-Shang-Zi-1468 (Sept. 1, 2011) explains that the two “differ in legal nature, regulatory function, and elements,” constitute separate bases of claim under substantive law and separate causes of action under procedural law, and therefore require the court to “determine the elements according to the legal relationship the party asserts.”
The same judgment holds that where the delivered goods have a defect for which the seller is liable under the warranty, and the defect arose after the contract was formed and is attributable to the seller, the two claims coexist and the buyer may elect between them.
(2) Rescission
On rescission, Supreme Court Civil Judgment 94-Tai-Shang-Zi-2352 (Dec. 23, 2005) states that rescission for a defect in the goods and rescission for incomplete performance “are two different things,” and identifies four differences between them (Table 1).
Table 1 Rescission: warranty against defects vs. incomplete performance
| Point of comparison | Rescission under the warranty | Rescission for incomplete performance |
| Must the nonconformity be attributable to the seller? | No | Yes |
| Is a demand to cure required first? | No | If the defect can be cured, the buyer must first demand cure within a specified period and may rescind only if the seller fails to cure; if the defect cannot be cured, the buyer may rescind without first making a demand |
| Time limit (preclusive period) | Subject to Civil Code Article 365: the right to rescind is extinguished if not exercised within six months after notice under Article 356 or within five years after delivery | Civil Code Article 365 does not apply |
| If rescission would be manifestly unfair | The buyer may seek only a price reduction | No such restriction |
Source: compiled from Supreme Court Civil Judgment 94-Tai-Shang-Zi-2352.
(3) Damages
The difference is even greater with respect to damages. Under the warranty, the buyer is generally limited to rescission or a price reduction. To recover damages for nonperformance, the buyer must bring itself within Civil Code Article 360, which requires either that the goods lack a quality warranted by the seller or that the seller intentionally concealed the defect. A system integrator’s principal loss, however, is typically the penalties imposed on it by the procuring agency. In this case, the integrator recovered the NT$1,296,306 only under the provisions on incomplete performance.
Conclusion
The warranty against defects and incomplete performance differ with respect to fault, the requirement of a demand to cure, the applicable time limits, and the scope of recoverable damages. For a system integrator that has been subject to penalties from its end customer because upstream components did not meet country-of-origin requirements, the choice of claim may determine whether the loss can be recovered at all. That difference largely explains the opposite results reached by the two courts in this case.
The next article in this series examines how the trial and appellate courts diverged on the effect of the supplementary agreement, the duty to inspect, and the time limits, and whether a buyer that did not promptly inspect the goods and give notice may still rely on incomplete performance.
[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).
[5] Supreme Court Civil Ruling 115-Tai-Shang-Zi-424 (June 10, 2026) (dismissing the supplier’s further appeal on procedural grounds).