Thailand Commercial Contracts
1. Thailand’s Principles of Contract
Thailand’s general principles of contract are spelled out in the cornerstone legislation enshrining the same – the Thai Civil & Commercial Code [“CCC“], particularly categorized under the Chapters on Contracts, Specific Contracts and Obligations. These stipulations set forth the foundations of Thai contract law, the elements to a contract, aspects of offer and acceptance, the effects of a contract, etc. – but are bare in concerning the substance, subject or contents of the contract.
As a benchmark, it is imperative to note that Thailand places much significance on the Freedom to Contract, thereby paying much heed to the contract as-is, and the intentions of the parties in making the same. Notwithstanding, the Thai legal regime has clear rules and limitations in enjoying the said freedom, often leading to the counter-effect of a term or condition (or in a worst case scenario, the entire contract) – un-enforceability.
That being said, these rules and limitations are at times completely unbeknownst to parties to a contract, restrictions that prowl in the Thai legal regime, which further extends to bits and pieces of restrictions spread over the vast sea of industry-specific and secondary legislation.
2. Thailand’s Restrictions on Contractual Terms & Conditions
It is fundamental for any party to a contract to consider Thailand’s restrictions on contractual terms and conditions – what may or may not be included – whether the subject matter of the contract is even available – what will or will not stand in the Thai Court – considerations of which are crucial lest the parties are blinded but a false sense of security or conversely, dutifully adhering to obligations which are simply unenforceable.
Primary legislation with significant bearing in this respect, for our discussion on commercial contracts are:
- Unfair Contract Terms Act B.E. 2540 (A.D. 1997) [“UCTA“]
- Trade Competition Act B.E 1999 (A.D. 2542) [“TCA“]
Examples of specific legislation with significant bearing on typical commercial contracts are:
- Foreign Business Act B.E. 2542 (A.D. 1999) [“FBA“]
- Labor Protection Act B.E. 2541 (A.D. 1998), Labor Relations Act B.E. 2518 (A.D. 1975), Act establishing the Labor Court and Labor Court Procedure B.E. 2522 (A.D. 1979) [“LPA“]
- Land Code B.E. 2497 (A.D. 1954) (as amended) [“Thai Land Code“]
- Trade Secrets Act B.E. 2545 (A.D. 2002)
- Trade Mark Act B.E. 2534 (A.D. 1991) (as amended) [“Thai Trademark Act“]
- Patent Act B.E. 2522 (A.D. 1979) (as amended) [“Thai Patent Act“]
- Product Liability Act B.E. 2551 (A.D. 2008)
3. Unenforceable Contract Terms under the Thai Unfair Contract Terms Act
Primarily, we shall explore the UCTA, which enshrines a number of general restrictive principles that need be strictly adhered to, with the UCTA notably bestowing wide discretionary powers to the Courts in determining the enforceability (and extent thereof) of terms and conditions in a contract should it contain a term deemed “unfair” and where such unfair terms are fundamental to the contract or form the subject matter of the contract – the entire contract may in effect be, literally just paper.
In light of such discretion, and where Thailand’s legal regime lacks any hard and fast rules in the interpretation of legislation and the construction of contractual terms and conditions, exacerbated by the inherent inconsistency in the application of the stare decisis doctrine, and the lack of precedent as to the ambit of these restrictions – parties to a contract need exercise extra caution in ‘stretching’ or attempting to give themselves too much leverage and advantage in a contract lest the protection they believe they enjoy is actually a mere illusion, being foul of the UCTA.
Examples of these general restrictions by the UCTA are:
- Terms that attempt to restrict the applicability of the UCTA, either partly or wholly, shall be void. (Section 11 UCTA)
- Terms exposing the contract to termination without reasonable grounds or granting such right of termination even though the other party is not in material breach. (Sub-section 4(3) UCTA)
- Terms excluding or limiting liability arising from breach of contract. (Sub-section 4(1))
- Terms granting a party the right not to comply with any clause of the contract or to comply only with contract only after a postponed period of time without reasonable grounds (Sub-section 4(4))
- Terms granting a party the right to claim or compel the other party to carry more obligations that that which existed at the time of making the contract (Section 4(5))
- Terms excluding or limiting the liability of the business, trading or professional operator for a defect or disturbance of right, except where the other party knew of the defect or the cause of such disturbance of right at the time of making the contract, in contracts between a party and a business trading or professional operator involving payment of debt by delivery of property to the former (Section 6)
It is easy to see how many contractual terms that would otherwise be in a party’s (generally the one with more bargaining power in an arrangement) better interests potentially being struck off as “unfair” or for that reason otherwise varied by the Courts when invoked.
Similarly, among other legislation, some provisions of the CCC also have far-reaching consequences upon terms of contracts which are considered unfair. An example under Chapter II of the CCC is that agreements “.. made in advance exonerating a debtor from his own fraud or gross negligence is void .”.
As the cornerstone threshold for enforceability, there is the overarching, far-reaching rule of ‘Reasonableness’ enshrined in the UCTA, i.e. contractual terms have to be reasonable to be enforced.
Criterion for the Courts’ exercise of discretion in determining whether a term is reasonable are laid out in Section 10, i.e ‘ In determining to what extent the terms be enforceable as fair and reasonable’:
- Section 10(1): Good faith, bargaining power, knowledge and understanding attributed to economic status, aptness, anticipation, precedent guidelines, alternatives, and all advantages / disadvantages of the contracting parties according to actual conditions
- Section 10(2): Ordinary / Customary usages / contexts applicable to such type of contract
- Section 10(3): Time and place of making the contract or performing the contract
- Section 10(4): The heavier burden borne by one contracting party as compared to that of the other party
These broad criterion leave considerable discretion to the Courts and parties (generally those on leverage) to contracts should be aware of the risks of their contractual terms falling shy of reasonable.
4. Unenforceable Contract Terms under Thai Anti-competition Laws
Thailand’s primary legislation enshrining the law’s restrictions against anti-competitive practices – the TCA 1999, has significant bearing on Thai Commercial Contracts, particularly supplier, distributorship, joint venture, franchise and other agreements governing business relationships. Once again, as all business operators aim to, derive more advantage, benefit and exclusivity under such commercial agreements – common terms employed in the typical business relationship, may, be deemed contrary to the TCA 1999 and limit, or in some cases, lose their intended effect.
- Where retail prices or price ranges are determined in the agreements, improper drafting of such terms that are essentially a limitation of one party’s freedom to determine its own selling prices may be deemed to violate the TCA 1999′s anti-price-fixing provisions.
- Although this may generally be in the nature of business relationships, in Thailand, the TCA 1999 expressly forbids companies from ‘fixing persons from whom business operators may purchase goods or services’. Of significance and especial address to foreign-Thai agreements, exclusive local distribution rights are prohibited by the TCA 1999, where the Act expressly enables Thais to purchase directly from foreign suppliers and prohibits any agreement incorporating exclusive local distribution clauses.
Exclusive Line of Products
- Again, despite this being a common feature of business relationships around the world, this type of provision may be in contravention of the anti-exclusivity provisions of the TCA 1999. One example is the Honda Motorcycles (Thailand) case where the motorcycle distributor refused to allow any of its resellers to carry non-Honda motorcycles so as to be deemed a violation of the TCA 1999 by the Trade Competition Board and causing the Board to initiate a formal criminal complaint with the public prosecutor.
- The TCA 1999 expressly prohibits agreements that constrict:
- Distribution – “geographical areas in which each business operator may distribute . . . goods or services”; and similarly
- Procurement – “geographical areas in which each business operator may purchase goods or services”.
It is prudent to highlight that enforcement of the TCA 1999 is directed at Thai entities and does not directly extend to contravening conduct of foreign entities that do not have a local presence in Thailand, in line with its historical interpretation of the intra-territorial applicability of Thai law. Effectively, it flows that foreign entities are free to enter into TCA 1999-prima facie contravening agreements. However, while such foreign entities may not be held liable for such infringement – the same foreign franchisor will be unable to seek enforcement of such contradictory terms within Thailand, as such attempt would be perverse with regards to public policy and unenforceable due to conflict-of-law with regards to arbitration.
Over and above the TCA 1999, various specific legislation / secondary legislation also persecute terms effecting anti-competitive practices. For instance, the Ministerial Regulation No. 25 (1999) which was introduced in view of preventing contractual oppression by the party with more bargaining power. This Ministerial Regulation is discussed in more in detail in Patent Licensing Agreements – The Intricacies of Thai Patent Licenses.
Sufficient specificity and clarity such as illustrated below may save such a non-compete clause, where the Courts’ exercise of discretion with regards to the determination of validity of like non-compete clauses is generally stemmed from (Section 5 UCTA):
- Specified restriction period which is reasonable in the circumstances, eg. 1 year
- Specified restriction as to the range of activity which is reasonable in the circumstances, eg. teaching English to pre-school children (in the employment context) or starting a business of an advertising agency (in a business context)
- Specified restriction as to the type of employer / competing establishment which is reasonable in the circumstances, eg. an English tuition center
- Specified geographical restriction which is reasonable in the circumstances, eg. within the Silom sub-district
- All legitimate advantages and disadvantages of each party
Thence, a delicate balancing exercise has to be cared for between the one party’s need for protection and the other party’s rights and freedom, with further considerations of trade secrets and confidentiality aspects as well as unfair competition.
5. Unenforceable Contract Terms for Contracting Out of Law
Parties to a contract cannot contract out of law. This essentially means that parties, whatever their intentions are, have to ensure that all material terms of the contract and the nature and form of the contract itself are in adherence to the law. Further, there may be notice or registration requirements for specific contracts which have to be complied with.
Examples of Unenforceable, Typical Terms in Common Thai Contracts
Sale and Purchase Agreements for Immovable Property
- These agreements have to be in writing and registered with the Land Office.
- Subject to limited exceptions, only Thai nationals may own land. Foreign ownership is restricted to buildings over land and a total minority ownership of a condominium building.
- Tax responsibilities are stipulated in legislation but may be contracted otherwise, i.e. the other party may choose to bear the burden despite the ultimate responsibility.
Lease Agreements for Immovable Property
- Leases of land for over 30-year terms are unenforceable, neither are back-to-back 30 year leases.
- Leases of property for over 3 years have to be in writing and registered with the Land Office – for this reason, inter alia, many landlords prefer lease terms of 3 years less one day.
- Leases are typically split into 2 agreements (eg. the lease agreement and accompanying “service agreement”, “furniture rental contract”, or “maintenance contract”) in apportioning the actual lease price to reduce tax.
- Leases are contractual rights and do not attach to the property c.f. real property rights, a nuance which obscures the legal mechanics in transfers of rights of ownership in the leased property or transfers of the lease leaving ambiguity of the lessor’s / lessee’s transferees’, heirs’, legatees’, successors’ and other beneficiaries’ legal position in respect of the lease.
- (Conditional) assignments of leases are generally unenforceable if they are not included in the main lease agreement itself.
Agreements Effecting Nominee Shareholding
- Contracts or terms effecting nominee shareholding are unenforceable, however worded, if it is deemed an attempt to circumvent the FBA.
- For more information, please see Foreign Investment in Thailand – Circumventing Thailand’s Restrictions on Foreign Investment
Intellectual Property Licensing Agreements
- Trademark licenses for trademarks registered in Thailand have to be registered.
- Patent licenses for patents in Thailand have to be registered.
- For more information, please see Chapter 1: Things to Consider Before Buying into / Selling a Franchise in Thailand
- All employment contracts have to meet all statutory minimums.
- Need not be in writing.
- For more information, please see Thailand Employment – Chapter 1: Employing Employees in Thailand
For more information on the foregoing, or on Thailand-bound investments in general, please contact the author JOEL LOO SEAN EE, the Bangkok-based Senior Regional Counsel at Kelvin Chia Thailand and a member of Kelvin Chia Partnership’s Regional Practice Group at Joel.Loo@KCPartnership.com.
This article is published to provide general information only and is not offered as specific advice on any particular matter – This information is to be taken subject to proper consultation with a lawyer.