Tort Law in Taiwan: An Economic Perspective. Tze-Shiou Chien * I. Introduction. The Fault Principle. Violation of Protective Laws.

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1 Tort Law in Taiwan: An Economic Perspective Tze-Shiou Chien * I. Introduction II. III. IV. The Fault Principle Violation of Protective Laws Strict Liability V. Products Liability VI. VII. Relationship to Liability Insurance Conclusion * Associate Research Professor, Institutum Iurisprudentiae, Academia Sinica; Associate Professor of Law, National Taiwan University College of Law 1

2 I. Introduction As a civil law system, Taiwan s tort law is an integral part of the Civil Code which went into effect in Liability for damages has been based on the fault principle. There are three basic categories of tort: infringement of rights, contra bonos mores, and violations of protective laws. Types of strict liabilities were added to the Civil Code in The Consumer Protection Law ushered in products liability in Insurance and other non-tortious compensation institutions which have effects on tort law have also found their places in Taiwan. Courts, as the interpreter of the law, have played a significant role in the development of tort law in Taiwan, although not to the extent they have played in common law systems. In this paper, I will critically examine this development from an economic perspective particularly the Coasean view, not the Pigovian or Posnerian views 1. Standard law and economics would characterize tort law as legal measures to deter injuring persons from engaging in cost-unjustified activities. The criterion for the liability for damages is the level of physical capacity to prevent accidents 2. This is an ex ante regulatory measure, however. It does not fit in with the tort law as an ex post compensation mechanism. In contrast, I see tort law as a set of default rules which are ex ante agreed upon by the injuring persons and the injured persons to be applied ex post in the concrete cases of accidents. The injuring persons and the injured persons would make a deal agreeing on a set of fault-based liability rules to allocate the loss because the rules are beneficial to both the injuring persons and the injured persons. Whether the damage is foreseeable to the injuring persons is the key. The law as a norm must be recognized by the ruled. Liability for damages must be foreseeable to the injuring persons, otherwise tort law would lose its normativity and thus also its 1 See Tze-Shiou Chien, The Legal Meaning of Coasean Economics, 1 Peking U. L. J (2013). 2 See Steven Shavell, Economic Analysis of Accident Law (1987); William M. Landes and Richard A. Posner, The Economic Structure of Tort Law (1987). 2

3 legitimacy. Based on the human nature of cognition, the foreseeability of damage depends on the riskiness of activities the injuring persons engage in. The more risky the activities are, the more likely the injuring persons will be liable for damage. The riskiness of activities, then, would depend on the physical capacity to prevent accidents of the injuring persons. The less capable the injuring persons are, the more risky the activities they engage in. As a result, the less capable the injuring persons are, the more likely the injuring persons would be at fault and then liable for the damage. In the fault principle, there exists a built-in incentive to improve the physical capacity to prevent accidents because this would increase the scope of activities that the injuring persons may engage in without being held liable for damage. Based on this understanding of the fault principle, the division of rights in rem and rights in personam can be explained. Rights in rem have to be backed up by the public. The holders of the conflicting rights in personam, therefore, would be deemed as assuming the risk because the risk can be avoided at very little cost. Various levels of contractual liabilities also can be illuminated. Debtors bear lower level of fault in gratuitous contracts while bearing higher level of fault in bargain contracts. In torts, the riskiness of the activities is negatively correlated with the injuring person s capacity to prevent the damage while in contracts, the riskiness of the activities is positively correlated with the injuring person s capacity to prevent the damage. The higher the price that the injured persons pay, the higher level of fault the injuring persons would bear. Furthermore, strict liability would no longer be an opposite of the fault principle. It would be a special type of fault-based liability rule. When the activities are extremely dangerous, the injuring persons certainly would be held liable for damage strictly liable. Protective laws usually are ex ante regulatory-oriented. In the ex post tortious liability framework, an examination of the requirement of causation is still needed 3

4 from an ex post perspective in concrete cases. Taiwan s courts, however, have abused this law. Due to criminal law as a protective law, courts sometimes have tried using criminal penalty to extract compensation from the injuring persons although the level of fault required in criminal law should be higher than in civil liability. Welfare conferred by the protective laws also should not be automatically transformed into damage which should be compensated by private autonomous persons. If the purpose of tort law is deterrence, liability insurance would be problematic. The reason is the same as if criminal punishment can be substituted by monetary compensation, no property system would exist. The subjective understanding of fault has no such problem. People expect that accidents would occur and they would compensate the loss if they are at fault. Liability insurance would not induce moral hazard for them. II. The Fault Principle There are three categories of general tort in Taiwan: infringement of rights, contra bonos mores, and violations of protective laws. Article 184 (I) of Taiwan s Civil Code provides that A person who, intentionally or negligently, has wrongfully damaged the rights of another is bound to compensate him for any injury arising therefrom. The same rule shall be applied when the injury is done intentionally in a manner against the rules of morals. Article 184 (II) provides that A person, who violates a statutory provision enacted for the protection of others and therefore prejudice to others, is bound to compensate for the injury, except no negligence in his act can be proved. The infringement of rights is the most general one of torts, however. Courts and legal theorists in Taiwan adopt a three-phase analysis to apply this general clause of 4

5 tort law 3. They are: first, the fact that a right had been infringed has to be found; second, there are no negative factors to excuse this infringement; third, the injuring person s intention or negligence has to be found. This framework might be good for analyzing intentional torts, but it is bad for negligence. Negligence has subtly been transformed from (positive) foreseeability to (normative) responsibility. Take as the example how to determine the standard of negligence for the less capable driver, such as the near-sighted or the aged. If the less capable driver hits a person, in the current framework, he would be judged as infringing on another s rights with no excuse for the wrongfulness and moved to whether he is negligent or not. Then, it is said that negligence should be objectified to make the less capable driver liable for damage although he would not be liable under the standard negligence rule. This is responsibility imposed on the less capable driver without reasoning. If the less capable driver is not negligent under the standard negligence rule, what would be the reason why is he liable for damage due to the arbitrary raised standard of negligence? Negligence along with intention is a state of mind. Intention means that the injuring person did foresee that the accident would happen. Negligence means that the injuring person should have foreseen but did not foresee that the accident would happen. The foreseeability of the accident depends on its riskiness which then depends on the injuring person s taking action with a given physical (safety) capacity relevant to the accident. The moment when the less capable driver speeds up, he begins engaging in a riskier activity. In other words, if he had slowed down, he would have engaged in a much less risky activity. In the Hand formula B<PL, the reduced expected loss PL would be larger for the less capable driver. Under the usual assumption that the benefits enjoyed by driving should not differ based on the level of 3 See e.g., 王 澤 鑑, 侵 權 行 為 法,pp (2011). 5

6 the capacity to drive, i.e., B is the same for all drivers, whether capable or not, the less capable driver s standard of negligence rule is higher -- lower speed limit. At the same driving speed, the less capable driver would be more likely to be seen as wrongful. How about his state of mind? Usually, the capacity to drive does not correlate with the capacity to acknowledge the fact that the less capable the driver is, the slower he should drive. Therefore, the riskier the activity the injuring person engages in, the more likely he would be negligent and then liable for damage. The so-called objectified standard of negligence is misleading actually it is full of wrong. Negligence is subjective, as a state of mind. The requirement of negligence makes sure that the ruled would not be surprised by unforeseeable liabilities. It is for the reason of rule of law that a (subjective) negligence should be required! Actually, this subjective understanding of negligence is the principle of the entire private law. Questions including the distinction between rights in rem and rights in personam, why a person generally bears no affirmative duty to rescue, various standards of contractual liability, etc could be explained with this principle. Rights in rem are backed up by a notice system, meaning that the holders of conflicting rights in persam would not suffer damage unforeseeably. 4 An objectified standard of negligence would require a person to be a Good Samaritan because he can 4 J. Y. Interpretation No.349 (1994): Precedent T.S.T. No (Sup. Ct., 1959) states that: Once a separate-management contract of a co-ownership property has been concluded between its co-owners, the severance or separate-management contract shall remain binding on an assignee even after a co-owner has assigned his/her share of such property to such assignee. This is indeed necessary to maintain the stability of the legal order. However, if the assignee of the relevant share of the property received no notification of the separate-management contract concluded between the co-owners and ought not to have received such notification, the continued binding of that separate-management contract on the assignee may result in possible unforeseeable detriments to bona fide third parties. This is contrary to the Constitution s intent of safeguarding the people s property rights. Hence, with respect to the herein stated category, the abovementioned judgment shall no longer apply. It is also explained herein that, with respect to the question of whether the statutory vacant land of a separately owned building should be jointly owned and jointly enjoyed or jointly owned but with exclusive enjoyment, and the effect of its assignment, these matters should be dealt with by enacting relevant governing legislation as soon as possible. 6

7 easily rescue another. However, the person is not negligent 5 because the risks were not caused by him. A person is negligent because human nature dictates that he should know the consequence of his action the more risky the action is, the more likely the actor recognizes the riskiness. A Good Samaritan might be a moral requirement but it is not for private law. Consistent with this reasoning, a person has to make a contract with another to reduce preexisting risks which he bears. In gratuitous contracts, a person would bear a lighter responsibility than in bargain contracts. 6 With the same reason, the benevolent intervener in another s affairs only bears liability of gross negligence and bad faith. 7 III. Violation of Protective Laws According to Article 184 (II) of the Taiwan Civil Code, a person who violates laws enacted for protecting another and causes damage to another shall be liable for this damage. This provision expands the protection of non-contractual liability to interests which are not covered by Article 184 (I) of the Taiwan Civil Code. To expand coverage of reparation, however, is not intrinsically good in private law. Damage is not always legally relevant. Article 148 (I) of Taiwan Civil Code provides: A right cannot be exercised for the main purpose of violating public interests or damaging others. This provision reveals that the exercise of rights will always damage another person. Taiwan s courts, however, have abused Article 184 (II). Firstly, the provisions of the Civil Code should not be the protective laws of - 5 Nobody would say that he intentionally caused the damage. 6 Article 220 of the Taiwan Civil Code provides: The debtor shall be responsible for his acts, whether intentional or negligent. The extent of responsibility for one's negligence varies with the particular nature of the affair; but such responsibility shall be lessened, if the affair is not intended to procure interests to the debtor. 7 Article 175 of the Taiwan Civil Code provides: If the undertaking of the management of the affair is in order to avert an imminent danger which threatens the life, body or property of the principal, the manager is not responsible for any injury derived from his management, except in case of bad faith or gross negligence. 7

8 Article 184 (II). In a recent case, the Taiwan Supreme Court ruled that Article 794 of Civil Code is the protective law of Article 184 (II), the injuring person therefore is presumed negligent and liable. Article 794 provides, In excavating the land or in constructing buildings, the landowner shall not cause the foundations of the adjacent land to be shaken or endangered, nor can he cause any injury to the building or other works of the adjacent land. Obviously, the foundations of the adjacent land, the building or other works of the adjacent land are the (absolute) rights which are protected under Article 184 (I). Article 794 is only a clarification and does not create the right. If a person kills or hurts another, whether he is liable or not is determined by Article 184 (I), and then there is no reason that a building or land should be protected more by Article 184 (II). It is not necessary for the Civil Code to contain a provision such as Article 794. If there is an impending infringement of adjacent land, the landowner thereof can sue for injunction according to Article 767 of the Taiwan Civil Code 8. Secondly, causation is still required for a person to be held liable for violating regulatory protective laws. In the age of the regulatory state, there exist many regulations which are intended to protect the interests of another. Take as the example of traffic accidents. Whereas a driver without a driving license violates traffic regulations, he would not be liable for damage if the damage was not caused by him. Taiwan courts, however, too rigidly apply the traffic rule requiring cars to maintain a safe distance. In one case, the court stuck to the rule and refused to consider the possibility that the injured car suddenly cut into the lane where the injuring car was driving on. Riding motorcycles without safety helmets is recognized as a factor 8 It provides, I. The owner of a thing has the right to demand its return from anyone, who possesses it without authority or who seizes it. Where his ownership is interfered, he is entitled to claim the removal of the interference; and where the ownership might be interfered, he is entitled to claim the prevention of such interference. II. The provision of the preceding paragraph shall apply mutatis mutandis to the rights in rem other than ownership. 8

9 contributing to brain damage. The most distorted reasoning arising from this provision was a case in which a doctor was held liable on the grounds that he violated a regulation requiring a written agreement from the patient for surgery, rather than on the grounds that he had performed a second surgery in an attempt to cover up the failure of first surgery. It seems that courts in Taiwan try to be seen as rule-bound without making any value judgments. Thirdly, violation of criminal law should not be used as a means of coercing the injuring person to compensate the injured person. It seems to have been a trend that Taiwan s courts, particularly in traffic accidents, would hold the injuring person criminal and then give him on probation if the injuring person settles with the injured person on compensation. This is a presumption of guilt for the injuring person. As this paper argued above, negligence rule is the recognition of human defects with which both the injuring person and the injured person share. The accidents per se should not be the cause for the injuring person s liability. Of course, it should not be for criminal penalty. Logically, the level of negligence should be lower in civil torts than in criminal penalty otherwise the legal system would be inconsistent. IV. Strict Liability Strict liability usually has been seen as the opposite of fault-based liability. But strict liability only means that courts need not investigate whether the injuring person is at fault or not once the damage occurred. Strict liability does not logically mean no-fault liability. If the fault of the injuring person is so obvious that any further investigation of fault is not necessary, the injuring person is certainly liable. In other words, strict liability can be a type of fault-based liability. As this paper argued above, the fault principle means: the more risky the activity the injuring person engages in, the more likely he would be liable for damage. When the activity the injuring person 9

10 engages in is extremely risky, he is certainly liable for damage. As the law develops, a category of strict liability which is still fault-based might arise. In1999, three provisions concerning semi-strict liability were added to the Taiwan Civil Code: Article (products liability) 9, Article (motor vehicles liability), 10 and Article (dangerous activities liability). 11 The feared tort cases flood did not happen. Article has rarely applied due to the preemption of the earlier Consumer Protection Law which was enacted in The traffic accident cases still be decided by Article 184 (II) concerning protective laws rather than by Article V. Products Liability Article 7 of Taiwan s Consumer Protection Law provides I. Business operators engaging in the design, production or manufacture of goods or in the provisions of services shall ensure that goods and services provided by them meet and comply with the contemporary technical and professional standards of the reasonably expected safety prior to the sold goods launched into the market, or at the time of rendering services. II. Where goods or services may endanger the lives, bodies, health or 9 Article 191-1: I. The manufacturer is liable for the injury to another arising from the common use or consumption of his merchandise, unless there is no defectiveness in the production, manufacture, process, or design of the merchandise, or the injury is not caused by the defectiveness, or the manufacturer has exercised reasonable care to prevent the injury. II. The manufacturer mentioned in the preceding paragraph is the person who produces, manufactures, or processes the merchandise. Those, who attach the merchandise with the service mark, or other characters, signs to the extent enough to show it was produced, manufactured, or processed by them, shall be deemed to be the manufacturer. III. If the production, manufacture, process, or design of the merchandise is inconsistent with the contents of its manual or advertisement, it is deemed to be defective. IV. The importer shall be as liable for the injury as the manufacturer. 10 Article 191-2: If an automobile, motorcycle or other motor vehicles which need not to be driven on tracks in use has caused the injury to another, the driver shall be liable for the injury arising therefrom, unless he has exercised reasonable care to prevent the injury. 11 Article 191-3: The person, who runs a particular business or does other work or activity, shall be liable for the injury to another if the nature of the work or activity, or the implement or manner used might damage to another. Except the injury was not caused by the work or activity, or by the implement or manner used, or he has exercised reasonable care to prevent the injury. 10

11 properties of consumers, a warning and the methods for emergency handling of such danger shall be labeled at a conspicuous place. III. Business operators violating the two foregoing two paragraphs and thus causing injury to consumers or third parties shall be jointly and severally liable therefor, provided that if business operators can prove that they are not guilty of negligence, the court may reduce their liability for damages. The following Article 7-1 further provides I. Where business operators allege that when their goods launched into the market or at the time of rendering service were in compliance with the contemporary technical and professional standards, of reasonably expected safety, they are required to produce evidence in support thereof. II. Goods or services cannot be presumed inconsistent with the requirement of safety set forth in the first paragraph of the preceding Article simply because better goods or services are subsequently provided. A unique aspect of the Consumer Protection Law in Taiwan is that it includes services, which has resulted in debates regarding whether to impose strict liability on medical providers for malpractice. Courts in Taiwan debated this issue heavily at the start, but recently decided that the Consumer Protection Law has no application to medical malpractice. While their decision was correct, their reasoning, including their economic analysis, was faulty. The first court to perform economic analysis in a medical malpractice case was the Taipei District Court in In arguing against the application of strict liability to medical malpractice, the court first argued that the purpose of adopting strict liability is to reduce dangerous activities, unlike under negligence in which the purpose is to increase the level of care of the actors. However, the court further argued that if strict liability is applied to medical malpractice, the doctor would reduce his activity causing harm, which means that he would adopt the less risky option of treatment with medication while forgoing the more suitable treatment, surgery. The court 11

12 concluded that this result would not satisfy the requirement in Article 1 Paragraph 1 of the Consumer Protection Law, which states, The Consumer Protection Law is enacted for the purposes of protecting the interests of consumers, facilitating the safety of the consumer life of nationals, and improving the quality of the consumer life of nationals. The primary problem with this reasoning is that in distinguishing between level of activity and level of care, the court did not distinguish between contract and tort, causing the argument to be circular. The court first argued that the purpose of strict liability is to reduce the level of activity, and in this case, the doctor reducing his level of activity (danger) satisfies this purpose. Then why did the court add that reducing the level of activity (danger) is bad, which follows that strict liability is bad, and so therefore they must return to negligence? The reason why we use strict liability is that compared to negligence, it can reduce the level of danger, which is good (fulfills the purpose of the law), but the court basically stated that reducing the level of danger is not the ultimate goal of the law. If reducing the level of danger is not the ultimate goal, then 1. Why is there even the need to distinguish between negligence and strict liability, and 2. The only presumption of strict liability is to reduce the level of danger, but reducing level of danger is not even the ultimate goal, so strict liability definitely does not conform to the goal of the law! In reality, level of care and level of activity cannot be completely separated. In the case of car accidents, is the speed of the car considered level of care or level of activity? Once a speed limit is imposed, the degree of caution of the driver turns into level of care. The driver falling asleep constitutes insufficient level of care. But why does negligence have to be limited to this scope? If the driver speeds, even if he or she does not fall asleep, there is adequate level of care, but the level of activity has 12

13 increased, and thus the driver would be deemed negligent, so why is strict liability even necessary? There are varying standards of negligence for the various types of medical treatment. Once a treatment method is selected, negligence must be determined based on its individual standard. But in an emergency situation, medication is insufficient and surgery becomes the only option (even if success rate is not 100%), but if doctors choose not to perform, they would not be found negligent based on this model because these medical options have been defined as level of activity instead of level of care. The model should serve the situation or facts, not the other way around! It is nonsense to apply the model based on decreasing the level of activity to explain the contractual obligations of medical care, which increase the activities that reduce danger. The inappropriateness of strict liability for medical malpractice is not that it would not decrease or would even increase harm, but that the reduction in danger is not enough. As the court stated, defense medicine is a consequence of the imposition of strict liability excessive care leading to a portion of cases receiving perfect medical care, but another portion completely barred from receiving any medical care. Cases that receive medical attention witness reductions in harm, but those that do not receive any medical care do not see reductions in harm. So even though the overall danger is decreased, on the one hand, the distribution of the reduction is unfair, and on the other hand the reduction is not enough. This is reflected in the decrease in medical malpractice litigation, contrary to the predictions of some that it would increase. The ruling also tried extremely hard to distinguish between consumer products and medical services, but the standard it used was wrong. Use of consumer products and provision of medical care both arise from contractual transactions, so in principle adopting strict liability is inappropriate for both cases. Consumer purchases imply 13

14 market transactions, and thus they are under the domain of the Consumer Protection Law, but this constitutes negligence, not strict liability. In addition, the court is also wrong when it emphasized that in medical care, strict liability is unable to encourage potential victims to increase their level of care, but in consumer products, it can. As long as strict liability is adopted, regardless of whether it is applied to consumer goods or to the provision of medical services, it is never able to encourage potential victims to increase their level of care. The primary difference between purchase of consumer goods and provision of medical services lies in that when the purchase of a product transforms the situation that had no presence of danger to one in which there is a presence of danger, the implication is that there is not a significant difference between B, the cost for the manufacturer/party performing the service to reduce the amount of danger, and PL, the expected reduction of damages. But for the provision of medical services, the activity causes the situation to transform from one in which danger was present to one in which danger is not present, or at least from one in which there was a high level of danger to one in which there is a reduced level of danger. Thus, B and PL differ significantly. If doctors are found liable, the consequence to society may not be optimal. This fundamental difference should lead to courts leaning on the side of rejecting liability for the doctor unless the portion of medical malpractice litigation as a percent of total medical cases becomes too high and if the burden of proof becomes too difficult. VI. Relationship to Liability Insurance In the standard law and economics, the goal of tort law is to deter people from engaging in those activities which externalize the costs. Liability insurance then would frustrate the deterrence goal. In the deterrence theory of tort law, there would 14

15 be no accidents which are not cost-justified because the injuring person would fully comply with the legal standard and thus he would not need any liability insurance. The fact that the injuring person wants to get liability insurance indicates that the benefits he gets from engaging in the activity must be larger than the loss which he has to compensate via tort liability. This means that courts systematically underestimate the loss of the injured person. In Taiwan, the Compulsory Automobile Liability Insurance Act was specially adopted in order to ensure prompt basic coverage for the injured parties in automobile traffic accidents that result in injury or loss of life and to maintain roadway traffic safety. 12 The Act knows that the liability for intentional torts or gross negligence cannot be insured otherwise the injuring person would be no incentive to engage in only those activities which are reasonably risky. Article 29 (I) of the Act provides: When an automobile traffic accident involving an insured automobile occurs as a result of any of the following behaviors on the part of an insured, the insurer shall still bear liability for payment of insurance benefits as provided herein, provided that the insurer may be subrogated to the claimant's right of claim against the insured, within the amount of benefits paid: 1.Was driving the automobile after ingesting alcohol or another similar substance and had a breath or blood alcohol concentration exceeding the standard set by any act or regulation governing road traffic. 2. Was driving after having taken intoxicants, hallucinogens, narcotics, or other similar controlled substances, as verified through a test. 3. Caused it through a deliberate act. 4. Was engaging in a criminal act or evading lawful arrest. 5. Was driving an automobile in violation of Article 21 or 21-1 of the Act Governing Management of Roadway Traffic and Administration of Sanctions. 12 Article 1 of the Act. 15

16 VII. Conclusion As a civil law system, the fault principle of the tort law in Taiwan has interwoven with other branches of private law. The principle provides a clue to the distinction between rights in rem and rights in personam. It also explains the various levels of liability corresponding to benevolent intervention in another s affairs and contracts. The courts and jurists in Taiwan, however, misunderstand the negligence and objectify the standard. Thus the individuals autonomy and the derived transactions among them have been blurred. Strict liability, a special type of the fault, has been adopted for loss spreading or other wealth redistribution. Fortunately, the courts finally rule that the products liability established in the Consumer Protection Law shall not apply to medical services. The liability insurance is inconsistent with the tort law if the law s goal is to deter. In contrast, it is consistent with the autonomous understanding of the fault principle. However, in compulsory liability insurance, the injuring persons intention or gross negligence to cause the damage should be excluded from insurance coverage because it violates the autonomy principle which has been done in Taiwan via the insurer being subrogated to the right of the injured person against the insured injuring person. 16