Terminating a Taiwan Distributor: Notice Periods, Compensation Claims, Inventory and Customer Data

A Minnesota maker of water-filtration equipment signed an exclusive distribution agreement for Taiwan in 2021: a three-year term, automatic one-year renewals, a minimum annual purchase that the distributor has missed twice, and three invoices from early 2025 still unpaid. A Taiwanese retail chain now wants to buy direct. The US sales director's plan is to send a termination e-mail, stop shipping and open the direct account the following month (a fictional example).

Each step in that plan has a Taiwanese rule attached to it. This column takes them in the order a US exporter should handle them: the money already owed, the legal nature of the distributor, how and when to give notice, what happens to stock and customers, and which forum will decide any dispute.

Collect first: the two-year limit on the price of goods

Termination tends to stop payments. Before giving notice, deal with the receivables, because Taiwan's limitation period for them is short. Where Taiwan law governs the sale, Article 127 of the Civil Code gives a merchant's or manufacturer's claim for the price of goods supplied a two-year limitation period, against the fifteen-year general rule. Invoices from early 2025 are inside that window now and may not be by the time a termination dispute is resolved.

A demand interrupts the period only provisionally: under Article 130 the interruption falls away unless suit, or a step with the same effect such as a payment-order application (Article 129), follows within six months. A debt with a fixed due date is already in default when the date passes, and service of a payment order counts as a demand for default purposes (Article 229). The payment-order procedure, attachment and enforcement are described in the firm's column on collecting unpaid invoices from a Taiwan buyer. The practical sequence is to send the demand for the old invoices with, or before, the termination notice, so the distributor cannot treat the two as a package to be negotiated away.

What kind of distributor you have

US contracts use "distributor" loosely. Taiwanese law draws a line that affects the notice period. Article 558 of the Civil Code defines a commercial agent (代辦商) as a person who, without being the business's manager, handles its affairs in its name within a given place or territory under its authorization. That is a sales agent: it books orders in your name and earns a commission, which under Article 560 follows the contract, then custom, then the importance and volume of the work.

A party that buys your goods, takes title and resells for its own account is not a commercial agent. Its relationship with you is a framework of repeated sales (Article 345) and has no dedicated chapter in the Code. Most Taiwanese "distributors" of US industrial goods are in this second group, and the contract label does not decide which group yours is in; the flow of orders, invoices and risk does.

The consequence is in Article 561. For a commercial agency with no fixed term, either side may terminate at any time on three months' notice, or without notice where a cause not attributable to that party makes termination unavoidable. A buy-sell distributor has no statutory notice period. The contract governs, and where it is silent, the good-faith principle in Article 148 is likely to be applied to require notice long enough for the other side to wind down. A contract that renews year to year, like the one in the example, can be read as a series of one-year terms, so the safest course is written notice of non-renewal several months before the next renewal date, rather than termination in the middle of a term.

Exclusivity, minimum purchases and the grounds you actually have

An exclusive territory cuts both ways. If the exclusivity clause covers your own direct sales, opening a direct account with the Taiwanese retail chain while the agreement runs is a breach of your own obligation, and the distributor will claim the margin it lost on those sales. A penalty clause, if the contract has one, is treated as the agreed total compensation unless the parties provided otherwise (Article 250); a court may reduce an excessive amount (Article 252), but the exporter will be the one asking.

The missed minimum purchases are the exporter's lever. If the contract makes them a condition or a termination ground, use that clause and follow its procedure exactly. If it does not, the general rules apply: once the distributor is in default on a performance obligation, the exporter may set a reasonable period for performance and rescind if it passes unmet (Article 254); where timing is of the essence, rescission without the prior demand is possible (Article 255). A rescission or termination is declared to the other party and cannot be withdrawn (Article 258), and Article 263 applies the same declaration rules to termination under a statutory ground. Whether past shortfalls, tolerated for two years without complaint, still support termination today is exactly the kind of question the good-faith principle decides, which is why the demand letter matters.

The certified letter and the dates that count

Taiwanese practice sends demands and termination notices as a 存證信函, the Chunghwa Post certified letter. The sender prepares identical copies; the post office keeps one for three years from the mailing date as evidence of what was sent and when, and proof of delivery comes from a return receipt (回執) attached to the registered letter (Postal Handling Rules, Articles 28 and 34). Under Chunghwa Post's instructions for certified letters the text must be in Chinese, with foreign-language wording allowed only where a name or term must be quoted in the original.

For a US exporter the letter does three jobs at once: it demands the unpaid invoices and sets the payment deadline; it sets the cure period for the missed minimums under Article 254; and it gives notice of non-renewal or termination with a stated effective date. Date the legal clock from the return receipt, not from the e-mail the sales director sent.

Inventory, warranty and customer records

The Civil Code imposes no buy-back duty on a supplier. Goods from a sale you rescind for breach must be returned, and the price refunded with interest, under Article 259; stock the distributor bought and still holds is otherwise its own. Because the distributor's remaining inventory will be sold into the same market your new direct account is entering, the practical document is a termination agreement that fixes a sell-off period, any price floor during it, which units you will take back and at what price, and who services warranty claims on units already sold.

Customer records follow the contract. Taiwan law does not hand a supplier the distributor's customer list on termination; a confidentiality or return-of-materials clause is the basis, and the termination agreement is the place to settle it. For a commercial agent, Article 562 bars competing in the same line of business during the relationship without the principal's consent, and Article 563 lets the principal claim the profits of a breach, but only within two months of learning of it and one year of the act. After termination, the Civil Code imposes no non-compete; only the contract can.

Check the trademark register before the letter goes out. Taiwanese trademark rights arise from registration, and a distributor that registered your brand in its own name holds a card that turns a commercial exit into an opposition or invalidation proceeding at the Intellectual Property Office.

Two short notes: the Fair Trade Act and changed circumstances

A distributor facing termination may mention the Fair Trade Commission. Articles 20 and 25 of the Fair Trade Act reach conduct that is likely to restrain competition or that is deceptive or obviously unfair in a way that affects trading order; replacing one distributor with a direct account under the terms of the contract does not ordinarily meet that threshold, while coordinating with the new account to cut the old distributor off from other suppliers could. Article 227-2 of the Civil Code lets a court adjust a contract for unforeseeable changes that make its original effect manifestly unfair, but ordinary market shifts do not qualify, and neither side should plan around it.

Which law and which forum, seen from the US side

If the agreement names no governing law, Taiwan's Act Governing the Choice of Law in Civil Matters Involving Foreign Elements, Article 20, applies the most closely connected law, presumed to be the law of the domicile of the party performing the characteristic obligation. For the distribution framework that is likely to be the Taiwanese distributor's performance, while for individual sales it may be the seller's, so the law governing the price claims is not certain; treat the two-year date above as the deadline that matters. A US exporter that wants Minnesota law must say so in the contract.

Forum follows the assets. The distributor's receivables, bank accounts and stock are in Taiwan, so whatever a US court or arbitral tribunal decides has to be enforced there. A US arbitral award is recognized by a Taiwanese court ruling under the Arbitration Act, a short non-contentious procedure explained in the column on enforcing a US arbitral award in Taiwan; a US court judgment requires a separate enforcement action under Article 4-1 of the Compulsory Enforcement Act, covered in the column on enforcing a foreign judgment in Taiwan. That difference is a reason to consider an arbitration clause in Taiwanese distribution contracts. Any arbitration agreement must be in writing (Arbitration Act, Article 1), and a choice of Taiwanese court must be evidenced by a document (Code of Civil Procedure, Article 24).

For a Taiwan-side assessment, send the distribution agreement with its renewal history, the open invoices and their due dates, the record of the missed minimum purchases, and any exclusivity or non-compete wording to attorney Wei Tseng (曾雋崴), partner at Hovering International Law Firm (昊鼎國際法律事務所), at wei@hoveringlaw.com.tw. Taipei office: 7F-2, No. 35, Sec. 1, Chengde Rd., Datong Dist., Taipei City 103, Taiwan.

Sources

Sources opened and checked on October 7, 2026 (Taiwan time). Chinese statutory text controls over any English rendering in this column.

• Ministry of Justice, Civil Code (民法), amended August 17, 2026 (the amended Article 1223 is not yet in force and does not affect the provisions cited): Article 127, Article 129, Article 130, Article 148, Article 227-2, Article 229, Article 250, Article 252, Article 254, Article 255, Article 258, Article 259, Article 263, Article 345, Article 558, Article 560, Article 561, Article 562 and Article 563.
• Ministry of Justice, Postal Handling Rules (郵件處理規則): Article 28 (return receipt) and Article 34 (certified letter copy kept three years); Chunghwa Post, Frequently asked questions on certified letters (存證信函), on the use of Chinese text.
• Ministry of Justice, Fair Trade Act (公平交易法): Article 20 and Article 25.
• Ministry of Justice, Act Governing the Choice of Law in Civil Matters Involving Foreign Elements (涉外民事法律適用法): Article 20; Code of Civil Procedure (民事訴訟法): Article 24; Arbitration Act (仲裁法): Article 1; Compulsory Enforcement Act (強制執行法): Article 4-1.

General information, not individualized legal advice. Sources checked October 7, 2026 (Taiwan time).