Thailand Case Update: Arbitration and Secondary Agreements Part I (Supreme Court Decision No. 3260/2554)

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I.  BACKGROUND 

Five contractors, collectively comprising a joint venture company (the “Contractors”) provided construction management services to a company (the “Employer”) over a waste water rehabilitation project.

The project agreement between the Contractors and the Employer (the “Project Agreement”) contained a dispute resolution clause indicating that all disputes between the parties were to be resolved by arbitration under the rules of the Thai Arbitration Institute (the “TAI”).

As surety for the Contractors’ services, the Employer obtained performance guarantees with various banks (the Performance Guarantee). The Performance Guarantee agreement, of which the Employer and the banks (the Guarantors”) were party to, contained a provision that the Guarantors “waive any rights to dispute any claims and shall honour the Performance Guarantee, if so demanded by the Employer, even without proof or production of evidence by the Employer”. No dispute resolution clause was included in the Performance Guarantee agreement.

Subsequently, the Employer alleged that the Project Agreement was void on the basis that it was entered into by mistake as a result of certain misrepresentations by the Contractors. As such, the Employer refused to accept the work that the Contractors had performed under the Project Agreement, and rejected the Contractors’ claim for payment under the Project Agreement. The Contractors then sought to terminate the Project Agreement and submitted a claim for payment to arbitration under the auspices of the TAI.

In response, the Employers sought to redeem the Performance Guarantees vis-à-vis the Guarantors. The Contracts made an application to the Thailand Court to prevent the Employers from redeeming the Performance Guarantee on the basis that the question of liability was subject to ongoing arbitration proceedings arising from the Project Agreement.

The Court of First Instance granted an interim injunction in favor of the Contractors, finding that the Project Agreement contained an enforceable arbitration agreement, and that the parties were bound to resolve any disputes between them via arbitration, before the Client could enforce the Performance Bonds.

The Client appealed to the Supreme Court, arguing that the Project Agreement was void on the grounds that it is contrary to public order and good morals. This argument was made by the Client on its assertion that it had entered into the Project Agreement on the basis of a mistake or misrepresentation. Further, the Client submitted that the Guarantee Agreement contains no arbitration clause and could thus be litigated before the Thailand Courts.

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II. ISSUES FOR THE COURT

• Can the Employers seek to enforce the Performance Guarantee against the Guarantor before the resolution of arbitration proceedings involving the Employers and the Contractors?
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• Did the Contractors have the legal standing to seek an injunction before the Courts to prevent the Employers from enforcing the Performance Guarantee?
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• Was the principal Project Agreement (containing the relevant arbitration clause) void on public policy grounds relating to a “mistake” and misrepresentation?
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III.  THE COURT’S DECISION 

The Performance Guarantee cannot be enforced prior to the resolution of arbitration proceedings

Although the Employer’s claim for the Guarantors to honor Performance Guarantee is an exercise of a contractual right that exists between the Employer and the Guarantors, such right exists only because of the principal Project Agreement. Therefore, the Employer only has the right to claim against the Performance Guarantee in the event that the Contractors breach the principal Project Agreement.

As long as the arbitral tribunal has not reached a decision as to whether the Employer or the Contractor was in breach of the Project Agreement, the Employer cannot commence a claim under the Performance Guarantee for the following reason: if the Guarantors honor the Performance Guarantee, the Guarantors have the right of recourse against the Contractors as principal debtors (from the time the Guarantors honor the Performance Guarantee), which would create the situation whereby the Contractors would suffer significant losses even before the arbitral tribunal has reached a final decision on its potential liability.

Although the Performance Guarantee agreements between the Employer and the Guarantors do not have a clause stating for disputes to be resolved by means of arbitration, a claim for damages made by a non-breaching party to a breaching party is regard as a principal debt. Since a decision has not been made as to which party had been in breach of the Project Agreement and as to the amount of damages, the Employer cannot make a claim under the Performance Guarantee as if the principle debt has already fallen due.

It was further held that the clause within the Performance Guarantee agreements, which stated that the Guarantor waives its right to dispute any claims and shall honor the Performance Bond, is independent of the Contractors’ claim for an injunction before the court. It is reasonable to temporarily protect the interests of the Contractors until the arbitral tribunal has reached its final decision over the principal Project Agreement.

If the Court grants the Employers to right to claim against the Performance Guarantee, and if the arbitration process eventually finds the Contractor not liable under the Project Agreement, under Thai law, the Guarantors right of compensation against the Contractors may still stand. As such, if the Employers were allowed to claim against the Performance Guarantee and if the arbitral tribunal eventually finds the Contractors not liable to the Employers, it would be difficult to restore the parties to their former condition.

The Contractors had the requisite standing to file for this injunction

The Court also decided that under Thai law, the Contractors had standing to file for the injunction; i.e, the Contractors were not required to be authorised by the Guarantors in order to exercise its legal right to dispute the claim made against the Guarantor to pay the debt.

Was the principal Project Agreement void on public policy grounds?

The Court did not rule on this issue of whether the Project Agreement was void. Rather, the Court noted that this particular dispute was a matter that had been submitted to the arbitral tribunal, which was the proper forum to decide this matter. The Court found that this was a dispute relating to the Project Agreement, observing that it related to the Contractor’s alleged rights under the Project Agreement relating to payment for its work. As such, the Court decided that the Contractors possess the right to submit the dispute to arbitration under the conditions of the Project Agreement.

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IV. CONCLUSION

As the basis of the foregoing, the Supreme Court upheld the decision of the Court of First Instance to grant an interim injunction pursuant to Section 254(2) of the Civil and Commercial Code of Thailand and dismissed the appeals of the Employer.

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This article may be cited as follows: Pimvipa Kunanusorn, Pornphan Uasunthonphanit and Natthicha Wiriyatornphan, “Thailand Case Update: Arbitration and Secondary Agreements (Supreme Court Decision No. 3260/2554)”, International Arbitration Asia (30 August 2015) <http://www.internationalarbitrationasia.com/Supreme-Court-Decision-No-3260-2554>.