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Thailand Contracts and Agreements – Insight into Commercial Contracts in Thailand

 

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 .”.

UCTA Reasonable

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.

Price-Fixing

  • 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.

Exclusive Supplier

  • 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.

Geographical Exclusivity

  • 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.

Non-Compete Clauses

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

Intellectual Property Licensing Agreements

Employment Agreements

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.

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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.

All written material on BANGKOK LEGAL BLOG (BLB) including this post are the Copyright of Joel Loo Sean Ee. Any attempt to plagiarize or reproduce these materials in whole or in part, in verbatim or in paraphrase, or in any other form that it can be conceivable that such attempt is being made is an offense in law and will be an invitation by offenders to face charges and prosecution in a Court of Law.
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(Presentation) Thailand Commercial Contracts

 Onscreen presentation given by Kelvin Chia Thailand on commercial contracts in Thailand on 25 April, 2014:

Handouts noting key takeaways from presentation given by Kelvin Chia Thailand on commercial contracts in Thailand on 25 April, 2014:

 

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.

 

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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.

All written material on BANGKOK LEGAL BLOG (BLB) including this post are the Copyright of Joel Loo Sean Ee. Any attempt to plagiarize or reproduce these materials in whole or in part, in verbatim or in paraphrase, or in any other form that it can be conceivable that such attempt is being made is an offense in law and will be an invitation by offenders to face charges and prosecution in a Court of Law.

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Thailand Foreign Investment – Circumvention of Thailand’s Restrictions on Foreign Investment

Thailand Foreign Investment

Legal Risks of Nominee Shareholding in Thai Corporate Entities

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The forerunner of circumvention, the commonplace vehicle employed by renowned foreign MNCs and lesser SMEs all the same is the joint venture with local partner to form a corporate entity and to the effect of, the ‘naturalization’ of an otherwise statutorily-deemed “Alien” / “Foreigner” to become a Thai entity.

Risks of severe legal ramifications & repercussions, albeit observably dormant risks are inherent in such ‘naturalization’. Some of these risks, without limitation, are set out below, with the overarching legal insinuation that these structures effectively allow the otherwise foreign entities to avoid the attraction of most foreign business restrictions (use of such structures to hold land is also dealt with briefly below) particularly the Thai Foreign / Alien Business Act (“FBA“), and essentially – a circumvention of the law.

1. Nominee Shareholding & Circumvention of the Law

Section 36 of the Foreign / Alien Business Act B.E. 2542 (A.D. 1999):

A Thai national or juristic person that assists a foreigner in avoiding the Foreign Business Act by means of holding shares as a nominee or being a nominal owner of the company, shall [including the foreigner so allowing the Thai nationals or juristic persons to commit this offence] be liable for a fine of THB100,000 to THB1,000,000 and/or imprisonment of up to 3 years.”

Vis-à-vis, liabilities & stipulated possible penalties for circumvention of the FBA is shouldered by the Thai nominees, the actual foreign entity(ies) utilizing the Thai nominees and responsible authorized directors, directors & senior management of the same and includes:

  • Fine of THB100,000 – THB1,000,000;
  • Imprisonment of up to 3 years; and/or
  • Termination or dissolution of business and / or the Thai private limited company.

In addition, the parties mentioned above may face the relevant sanctions under other primary legislation such as the Civil & Commercial Code, criminal sanctions under the Thai Penal Code, specific sanctions under industry-specific legislation and / or other sanctions under related ‘common’ law.

2.   Nominee Shareholding & Legal Feasibility

An especially pertinent consideration is the actual tact of nominee shareholding, especially in face of its clearly spelt out unlawfulness, and what risks the foreign investor runs vis-à-vis uncooperative nominees or a rebellion / mutiny by the local joint venture partners.

Vis-à-vis the majority shareholding exercising their inherent rights in a manner adverse to the minority foreign ownership:

  • Foreign investor may be completely barred from exercising its rights in Court, whereby a derivative suit / derivative action is the only available recourse to protect the minority foreign ownership from the Thai partners. Further, if the minority foreign ownership prevails in Court, remedies & recompense are awarded to the company and not the minority foreign ownership.
  • Vide Civil & Commercial Code, it is to be noted that derivative actions generally have the requirement that it be shown that the minority shareholder is exercising its right of action in Court for the benefit of the company and that the company and not the shareholders have suffered as a result. This could well be an issue.
  • Another method is where the ‘beneficial owner’ that is the foreign minority wishes to recall the shares from the nominees, the foreign minority may do so by virtue of law because such shares were held in ‘trust’. Thereto, while the shareholder list is evidence in Thai law, but may be contested whether the shareholder(s) so listed are the actual owners. Such contest may be evidenced by proof of the source of funds having purchased the shares, and such evidence is admissible in Court to prove the identity of the ‘beneficial owners’ [Supreme Court Judgments Nos. 10274/2551 and 6735/2548].

It is important to note that the concept of ‘trusts’ are generally not recognized and do not accord well with the Courts. It may well be that these causes of action in case of default may not be plausible nor viable to the foreign minority what with its underlying unlawfulness making it effectively prima facie conceding to a Court of Law of such underlying illegality.

3. Nominee Shareholding, Practical Difficulties & Further Circumvention

There are further practical, corporate governance and accounting difficulties which come with such a structure, for instance, accounting-wise with regards to the declaration and payment of dividends. In this example, while this may be further accommodated by tailored accounting practices, the inherent gene of circumvention may branch out to further circumvention in this and other respects, adding to the myriad of unlawful elements.

4. Nominee Shareholding & Circumvention of Foreign Land Ownership Restrictions

Another pertinent issue to highlight is that foreign ownership of land (save for very limited exceptions) is prohibited. This restriction (enshrined under Section 97 of the legislation set out below)  is effectively avoided as the ownership of the land, being held by the subject entity, vests in a Thai entity when however in reality, the land is owned by the foreign minority.

The Act Promulgating the Land Code B.E. 2497 (A.D. 1954) as amended up till Land Code Amendment Act (No. 12) B.E. 2551 (A.D. 2008) (“LC“) prescribes liabilities & sanctions for circumvention of restrictions on the foreign ownership of land:

  • Foreign individuals are liable to fines not exceeding THB20,000 and / or terms of imprisonment not exceeding 2 years (Section 111 LC)
  • Company is liable to a fine not exceeding THB50,000 (Section 112 LC)
  • Nominees are liable to fines not exceeding THB20,000 and / or terms of imprisonment not exceeding 2 years (Section 113)
  • Land being held by subject entity shall be disposed by the nominee within the period of time specified by the Director-General of the Department of Lands which shall be not less than 180 days and not more than 1 year. The Director-General shall have the power to dispose of such land if the time limit elapses.
  • Further, there is criminal liability for the offence of furnishing false information to a competent official in view of recording a false statement in official documents – a term of imprisonment not exceeding 3 years and / or a fine not exceeding THB6,000 (Section 276 Thai Penal Code).

If the Thai company subsequently converts into a foreign company (by way of purchase of shares or otherwise) – the reconstituted company has to dispose of the land within 1 year from the date of such reconstitution.

These are just the legal risks, foreign investors have to always bear in mind the risks of the counterpart, empowered by majority shareholding, being uncooperative or rebelling. While there exists a plethora of devices where the minority retains control (vide preference shares, directorship, articles of association, etc.) – this remains a risk, especially as the foreign investor’s hands are somewhat shackled by, once again, the underlying illegality of circumvention.

N.b.   Another common way employed by foreign investors to circumvent Thai foreign land ownership restrictions is the use of back-to-back 30 year leases, with the additional ‘safety’ of an usufruct Agreement / superficie Agreement. This strategy however, is inherently unenforceable by law as an attempt to circumvent the Land Code and is therefore riddled with legal risks.

Conclusions

While the employment of such structures is conceded as being widely commonplace in Thailand, and there exists a number of facades to “minimize” risks of detection (there are claims that legal risks may be minimized too) – years of such structures being in existence with a large majority having faced little or no problem may offer some proof of the dormancy of such risks or conversely the inaction of the authorities in enforcement. Notwithstanding, and also in consideration to the minority that have faced severe legal repercussions or internal hostility – these remain inherent risks which (i) resemble a weak point in a structure that may blow up in face of challenge; and (ii) represent a form of compromise in terms of a corporation’s foundation which may be used as a bargaining chip in negotiations involving the entity with the shady gene.

 

 

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.

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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.

All written material on BANGKOK LEGAL BLOG (BLB) including this post are the Copyright of Joel Loo Sean Ee. Any attempt to plagiarize or reproduce these materials in whole or in part, in verbatim or in paraphrase, or in any other form that it can be conceivable that such attempt is being made is an offense in law and will be an invitation by offenders to face charges and prosecution in a Court of Law.

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Before Buying Thai Real Estate (reproduced extract)

Before Buying Thai Real Estate

extract from old BLB newsletter –

As lucrative and promising that investing in Thai Real Estate may be, the eager prospective proprietor has to exercise much prudence and caution as there are many crucial legal aspects that have to be looked into before jumping onto the buy Thai bandwagon.

Factors for consideration include, inter alia:

Foreign Ownership Restrictions

Can you legally own what you are purchasing? Do you fall within the limited exceptions? Is your ‘holding’ vehicle legally tact? What are the legal implications of the form in your ‘usufruct’, ‘superficie’, Thai PLC, etc. in face of adversity?

Form & Method of Conveyance

Do you have a Sales & Purchase Agreement? Is your Sales & Purchase Agreement protective enough, or is it lopsided? Is it enforceable?

Taxes

Are there specific tax liabilities involved? Is the House & Land Tax applicable and what is its method of computation?

Fees

What are the official fees involved in the conveyance? Who is responsible for payment of such fees?

Structural / Environmental Assessments

Have these been duly conducted by the developer?

Specific Liabilities

What are the specific liabilities that may be shouldered by the parties in such specific circumstances?

Property Due Diligence

Do you know what you are really buying into behind those enticing promises of ROIs and loose assurances? Know what you are buying. Caveat Emptor!

Legal Consultation is strongly recommended for Real Estate transactions in Thailand as there are truly far reaching consequences for taking small steps in err.

The Sale & Purchase Agreement

The Sale & Purchase Agreement (SPA) is fundamental, if not the benchmark to any sale & purchase transaction of real property. The SPA has to be in writing and registered with the Land Office.

Is your SPA intact? Thai localization of an SPA is necessary and the nuances of Thai law and practice should see accommodating adjustments to such salient terms as:

  • Description of the Property
  • Terms of Payment
  • Vendor’s Representations & Warranties
  • Date of Title Transfer
  • Liability for Transfer Fees & Taxes

Common, mandatory representations and warranties include, inter alia:

  • The Vendor’s valid title to the property
  • The property is free of all forms of encumbrances, including mortgages, claims, charges, liens and c.
  • The property is free of pending investigation, actions, suits or legal proceedings that seek to prohibit, challenge or restrict the sale of the property

Notwithstanding these warranties, Property Due Diligence is much emphasized as a legal claim for breach of contract could take years to reach an outcome.

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For more information on the foregoing, 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.

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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.

All written material on BANGKOK LEGAL BLOG (BLB) including this post are the Copyright of Joel Loo Sean Ee. Any attempt to plagiarize or reproduce these materials in whole or in part, in verbatim or in paraphrase, or in any other form that it can be conceivable that such attempt is being made is an offense in law and will be an invitation by offenders to face charges and prosecution in a Court of Law.

 

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Thailand Franchise Basics (reproduced extract)

Thailand Franchise Basics

extract from an old BLB newsletter –

It is important to first and foremost appreciate that there is an absence of specific legislation with regards to franchising in Thailand, and much significance is given to the freedom to contract. Despite this general liberty, there are many stringent legal safeguards in place of which must be given thorough consideration.

In a categorization exercise, there are typically 6 main legal aspects inextricable from franchising:

Franchise Agreement – Localization

Franchise Agreements have to strictly adhere to Thai law. This dominantly involves compliance with the Thai Unfair Contract Terms Act B.E. 2522 (A.D. 1979) (“UCTA”), the Thai Civil & Commercial Code (“CCC”), the Trade Competition Act B.E. 2542 (A.D. 1999) and the various Thai Intellectual Property legislation.

There is an overarching catch-all requirement of ‘fair and reasonable’ in determining if a clause in question is enforceable per Thai law, criterion for exercise of discretion for such determination being contained in Section 10 UCTA.

Failure for proper localization may lead to unenforceable clauses, wholly void the agreement and be fatal to the franchise.

Intellectual Property Aspects of the Agreement – Registration

Patent Licenses are required to be in writing and submitted with the Thai Department of Intellectual Property (“DIP”) and in strict compliance with the Thai Patent Act and in particular the Ministerial Regulation No. 25 (1999) introduced in view of preventing contractual oppression by the party with more bargaining power. Otherwise, such Patent Licenses may be deemed void by virtue of Section 41 of the Thai Patent Act read together with Section 152 of the CCC.

Trademark Licenses on the other hand or franchise agreements containing Trademark Licensing provisions similarly need to be in writing and registered with the DIP, pursuant to Section 68 of the Thai Trademark Act.

Conversely, Trade Secrets which are similarly commonly intertwined with franchising agreements do not require registration but have to be clearly spelt out in the franchise agreement, embracing specific protection conferred by the Trade Secrets Act B.E. 2534 (A.D. 1991).

Tax Aspects – Implications

With respect to local franchisee – foreign franchisor royalties / franchise fees, the tax liabilities are generally 15% Withholding Tax as varied according to applicable double taxation treaties + 7% Value Added Tax + possible Stamp & Import Duties if any.

Precise methods of calculation have to be determined to properly discharge these liabilities.

Trade Competition Aspects – Restrictions

The TCA has significant bearing upon Thai Agreements and is of especial importance to franchise agreements. In matters such as price-fixing, confining the franchisee to one or more exclusive suppliers and/or exclusive lines of products and/or geographical exclusion – the TCA may render such terms and to an extreme the Franchise Agreement bad.

Trade Competition disputes may be adjudicated at first-instance by the Trade Competition Board.

Franchisor Security – Protection

There is an absence of statutory provision governing the securing of liens against personal property. Viz-a-viz a creditor’s claim in the case of a defaulting
franchisee, the franchisor is handicapped in preventing equipment and inventory that are unique to the franchise from being given to third-party.

It is a delicate balancing exercise between the fanchisor’s interests and the franchisee’s rights.

Leases (of real property) on the other hand are not automatically assignable unless the lease agreement expressly provides for. It is crucial that a franchisor ensures that franchise-related leases (e.g. retail space) of the franchisee expressly provides authorization from the landlord for assignments back to the franchisor and subsequently to a new franchisee.

In absence thereof, in the face of franchisee default – the franchisor is incapacitated from usurping possession of the franchise location.

Franchise Agreement – Enforcement

There are 3 main avenues for enforcement in Thailand which are Litigation, Mediation and Arbitration. In the case of a franchise relationship gone sour, parties may seek legal recourse in the form of damages, injunctions, Anton Piller orders, and other legal remedies.

Both the DIP and Central Intellectual Property & International Trade Court provide facilities for mediation which has seen notable success in recent years. Similarly, arbitration clauses are recognized and enforceable.

Away from the prospect of the lengthy, cumbersome and costly Court process, Thai Alternative Dispute Resolution may be a preferred avenue promising efficacious obtaining of, and effective results.

Other Fundamental Considerations

  • Thailand Foreign Business Restrictions
  • Franchise Due Diligence
  • Termination

Did you know? International Franchising –

Thailand is a member of over 10 International Free Trade Agreements.

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For more information on the foregoing, 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.

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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.

All written material on BANGKOK LEGAL BLOG (BLB) including this post are the Copyright of Joel Loo Sean Ee. Any attempt to plagiarize or reproduce these materials in whole or in part, in verbatim or in paraphrase, or in any other form that it can be conceivable that such attempt is being made is an offense in law and will be an invitation by offenders to face charges and prosecution in a Court of Law.

 

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Hiring Employees in Thailand Basic Necessities (reproduced extract)

Thailand Employment

Hiring Employees in Thailand Basic Necessities

– Extract from an old BLB newsletter –

An insight into the legal aspects of Thai employment is necessary of course as most business ventures will follow with such need. It is prudent to first note that while the statutory provisions relating to employment are quite typical in nature as compared to other jurisdictions: its application and interpretation by the Thai Courts and labor authorities are well known as tending toward employees.

Considering the limited space available here, we shall have to contend to point-form descriptions of some salient points for consideration when hiring.

Age

Minimum age for employment in Thailand is 15; if employee is 15-18, additional restrictions apply such as the necessity of informing the labor authority; no maximum age in private sector.

Form & Nature of Employment Agreement

No requirement to be in writing; contractual in nature; deemed as ‘Contracts for Hire of Service’.

Working Hours

Maximum of 8 hours/ day 48 hours/ week, generally 8.30 a.m – 5.30 p.m with lunch break from 12.00 p.m – 1.00p.m; if work is ‘detrimental to health / safety’, 7 hours/ day 42 hours/ week.

Minimum Wage

Currently (pursuant to Thailand’s Employment Committee No. 6), varying according to province from THB 300/ day (Bangkok, Phuket, Nakorn Pathom, Nonthaburi, Pathum Thani, Samut Prakarn and Samut Sakorn) to THB 222 (Payao); THB 15,000/ month for fresh university graduate (bachelor’s degree).

Minimum Rest Periods / Paid Leave

1 rest day/ week; 1 rest hour/ day; 13 public holidays/ year (which must include National Labor Day 1st May); 6 days paid leave/ year of service; 30 days of paid sick leave/ year (cannot include inability to work due to injury/illness arising out of working, medical certificate can be required if sick leave taken for 3 or more days consecutively, failure to submit of which reasonable explanation must be given.

Working Rules

Where 10 or more employees are employed, must be in writing and lodged with Department of Labor Protection & Welfare and a copy must be posted in prominent location at place of work and must include details such as Working Days, Regular Working Hours, Rest Periods, Rules on Overtime and Holiday Work, Procedures for Submission of Grievances, etc.

Social Security Contributions

These are mandatory and statutorily codified in the Social Security Act B.E. 2533 (A.D. 1990); rate of 5% (both employer and employee contributes, monthly) on employees’ wages with a cap of 750 THB; tax deductible; provides 7 types of employee benefits including sickness / injury / disability / death not suffered in course of employment, maternity, child welfare, unemployment and old age pension.

Workmen’s Compensation Fund

On the other hand, this fund covers sickness / injury / disability / death suffered in the course of employment; mandatory and statutorily codified in the Workmen’s Compensation Fund Act B.E. 2537 (A.D. 1994); contributions are paid annually; rates being between 0.2% – 1% of the total payroll varying according to the type of business and nature of the work.

Vicarious Liability

Employers are vicariously liable for the acts of the employees, save for such acts of the latter that are ‘wholly outside’ the scope of their employment

Records

Employee records and wage payment documentation have to be maintained.

Among many other things, these initial requirements are fundamental to Employment in Thailand.

Foreign Employees

Foreign employees need a Work Permit to work in Thailand, which will subsequently endorse their Visa. The process may be summarized as follows:

90-day Non-Immigrant ‘B’ Visa à Work Permit à 1-year Non-Immigrant ‘B’ Visa + Multiple Entry Permit

Requirements: 2 Mill THB capitalization of Employer Company per Work Permit; 4-1 Thai-foreign employee ratio; and compliance with minimum salary in accordance with the current guidelines.

The Labor Office & Tribunal

The forum of adjudication for employment disputes is the Labor Court. Labor related complaints and employee grievances may be filed with the Labor Officials which are known to be supportive to employees.

Employment Agreement

The Employment Agreement should be as clear and comprehensive as appropriate as any discrepancy or uncertainty will likely be interpreted in favor of the employee.

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For more information on the foregoing, 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.

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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.

All written material on BANGKOK LEGAL BLOG (BLB) including this post are the Copyright of Joel Loo Sean Ee. Any attempt to plagiarize or reproduce these materials in whole or in part, in verbatim or in paraphrase, or in any other form that it can be conceivable that such attempt is being made is an offense in law and will be an invitation by offenders to face charges and prosecution in a Court of Law.

 

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Thailand Foreign Investment – Navigating Thailand’s Foreign Investment Restrictions

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Foreign Investment in Thailand – Navigating Thailand’s Restrictions on Foreign Investment

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Establishing a Foreign Owned Corporate Entity in Thailand and Thailand Foreign Business Restrictions in a Nutshell

When prospective foreign investors walk in our door already with the presumption that there is no such thing as a fully foreign owned company in Thailand – it often strikes us as an unfounded, ill presumption.What more when fellow business consultants & even occasional legal practitioners seem to make the same sweeping assumptions. A quick visit on corporate structures in Thailand however reveals that even reputable foreign MNCs with entities in Thailand appear to favor this predisposition to “naturalize”. This brings us to briefly revisit these investment restrictions to quickly underline to readers the reasons for this tendency for foreign-controlled Thai private limited companies in Thailand, whether by direct or indirect means (such as the common 2-tier / 3-tier / like multi-tier structures).

The primary obstacle – Foreign / Alien Business Act B.E. 2542 (A.D. 1999) (“FBA“)

1. The notorious FBA is the cornerstone legislation that appears to bar foreign owned companies to carry out business in Thailand.

2. The FBA has 3 schedules / lists – schedules which will be listed out at the end of this write-up, these schedules spell out the businesses that are caught under the FBA. Please see below, briefly, to explain their respective mechanisms briefly.

  • List 1 is an absolute ban for, inter alia, farming or animal farming, extraction of Thai herbs, radio broadcasting, newspaper or television station businesses, etc.
  • List 2 mandates 40% Thai ownership & cabinet approval for, inter alia, land, water & air transportation, mining, production of carved wood, etc.
  • List 3 mandates a foreign business license for, inter alia, forestry, operating a fishery.
  • Of especial restrictiveness, List 3 contains a catch-all provision for service businesses.

3. Anything that does not fall within these Schedules, subject to other industry laws & regulations and minimum capitalization requirements, may be fully foreign owned. Some of the businesses as listed in the Schedules also come with qualifiers, for instance, retailing – the FBA does not prevent a fully foreign owned retailer if it meets the specific minimum capitalization requirement as spelt out.

4. This includes manufacturing, import & export, to wit: any business not falling within the Schedules.

5. Commentators have commented that the definition of Alien / Foreigner under the FBA does not extend to “foreign control”, to wit: what attracts the FBA’s restrictions is foreign shareholding, and foreign control is not prima facie in contravention, suggesting that control via preference share structures and other means are not the issue, so long as:

6. There is no attempt to circumvent the FBA, which attracts severe legal repercussions for the business, the Alien / Foreigner & the Thai nominees if a Thai nominee structure is the manner of circumvention / avoidance that is being employed – despite the definition of “nominee” being rather obscure.

7. Other industry-specific restrictions include those related to banks & financial institutions ; insurance brokers ; businesses dealing with securities ; telecommunication companies ; and so forth.

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Legal Foreign Ownership of Companies / Corporations in Thailand

Moving forward:

1. Of course, the prescribed “solution” is to obtain the foreign business license for businesses under List 2 and cabinet approval for those caught under List 3. However, this may not be plausible for some, but this “solution” is the proper way forward by operation of law.

2. Foreign investors may avail of a number of exemptions, investment incentives and / or promotions that allow full or a higher ownership allowance for their local corporate entities, which are available for a wide scope of industries, such as:

3. Exemptions under various free trade agreements such as the AMITY Treaty (American-owned companies), JTEPA (Japanese-owned companies) and TAFTA (Australian-owned companies).

4. Exemptions under Board of Investment (BOI) promotions.

5. Exemptions granted by the Industrial Estate Authority of Thailand (IEAT).

6. Representative Office or Regional Office.

7. On a cursory evaluation: (i) What is the nature of the business activity? Does it fall under one of the FBA lists? (ii) If it falls within Lists 2 or 3, are there qualifying factors that the proprietor can meet? (iii) Can the foreign investor obtain a foreign / alien business license? (iv) Are there exemptions which would be applicable to the business activity and/or the proprietor’s nationality and/or the site of the local business operation and/or by virtue of other factors? (v) Would a representative office or regional office be sufficient for the proprietor’s local interests? (vi) Does the foreign investor have one or more bona fide Thai joint venture interests?

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For more information on the foregoing, 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.

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Businesses Restricted from Full-foreign Ownership in Thailand

— excerpt from the FBA —

LIST ONE

The businesses not permitted for aliens to operate due to special reasons:

(1)

 Newspaper business, radio broadcasting or television station business

(2)

 Rice farming, farming or gardening.

(3)

 Animal farming

(4)

 Forestry and wood fabrication from natural forest

(5)

 Fishery for marine animals in Thai waters and within Thailand specific economic zones.

(6)

 Extraction of Thai herbs.

(7)

 Trading and auctioning Thai antiques or national historical objects.

(8)

 Making or casting Buddha images and monk alms bowls.

(9)

 Land trading

LIST TWO

The businesses related to the national safety or security or affecting arts and culture, tradition, folk handicraft or natural resource and environment.

Group 1: The businesses related to the national safety or security

(1)

 Production, selling, repairing and maintenance of:

(a)

firearms, ammunition, gun powder, explosives.

(b)

Accessories of firearms, ammunition, and explosive

(c)

Armaments, ships, air-crafts or military vehicles.

(d)

Equipment or components, all categories of war materials.

(2)

 Domestic land, waterway or air transportation, including domestic airline business.
Group 2 : The businesses affecting arts and culture, traditional and folk handicraft:

(1)

 Trading antiques or art objects being Thai arts and handicraft.

(2)

 Production of carved wood.

(3)

 Silkworm farming, production of Thai silk yarn, weaving Thai silk or Thai silk pattern printing.

(4)

 Production of Thai musical instruments.

(5)

 Production of goldware, silverware, nielloware, bronzeware or lacquerware.

(6)

 Production of crockery of Thai arts and culture.
Group 3: The businesses affecting natural resources or environment:

(1)

 Manufacturing sugar from sugarcane;

(2)

 Salt farming, including underground salt;

(3)

 Rock salt mining;

(4)

 Mining, including rock blasting or crushing;

(5)

 Wood fabrication for furniture and utensil production

LIST THREE

The business which Thai nationals are not yet ready to compete with foreigners:

(1)

 Rice milling and flour production from rice and farm produce

(2)

 Fishery, specifically marine animal culture.

(3)

 Forestry from forestation.

(4)

 Production of plywood, veneer board, chipboard or hardboard.

(5)

 Production of lime.

(6)

 Accounting service business.

(7)

 Legal service business.

(8)

 Architecture service business.

(9)

 Engineering service business.

(10)

 Construction, except for:

(a)

Construction rendering basic services to the public in public utilities or transport requiring special tools, machinery, technology or construction expertise having the foreigners’ minimum capital of 500 million Baht or more.

(b)

Other categories of construction as prescribed by the ministerial regulations.

(11)

 Broker or agent business, except:

(a)

Being broker or agent for underwriting securities or services connected with future trading of commodities of financing instruments or securities.

(b)

Being broker or agent for trading or procuring goods or services necessary for production or rendering services amongst affiliated enterprises.

(c)

Being broker or agent for trading, purchasing or distributing or seeking both domestic and foreign markets for selling domestically manufactured or imported goods in the manner of international business operations having the foreigners’ minimum capital 100 million Baht or more.

(d)

Being broker or agent of other category as prescribed by the ministerial regulations.

(12)

 Auction, except:

(a)

Auction in the manner of international bidding not being the auction of antiques, historical artifacts or art objects which are Thai works of arts, handicraft or antiques or having the historical value.

(b)

Other categories of auction as prescribed by the ministerial regulations.

(13)

 Internal trade connected with native products or produce not yet prohibited by law.

(14)

 Retailing all categories of goods having the total minimum capital less than 100 million Baht or having the minimum  capital of each shop less than 20 million Baht.

(15)

 Wholesaling all categories of goods having minimum capital of each shop less than million Bath.

(16)

 Advertising business.

(17)

 Hotel business, except for hotel management service

(18)

 Guided tour.

(19)

 Selling food or beverages.

(20)

 Plan cultivation and propagation business.

(21)

 Other categories of service business except that prescribed in the ministerial regulations

 — excerpt from the FBA —

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