Thailand Case Update: Arbitration and Secondary Agreements Part II (Supreme Court Decision No. 3786/2554)

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I.  BACKGROUND 

The plaintiff (the “Contractor”) entered into a construction agreement with N.C. Engineering ltd., (the “Sub-Contractor”), the co-defendant, for a construction project in the Polyester Industrial Plant, situated in, Nikhom Phattana, Amphoe Barn Kai, Rayong (the “Principal Agreement”). The Agreement provides that any disputes shall be resolved by means of arbitration.

The Contractor gradually made payments to the Sub-Contractor during the course of the Project, while withholding 10 percent of the remuneration amount as a guarantee in accordance with the terms of Agreement.

With the Project afoot, the Sub-Contractor requested that the amount withheld by the Contractor be released to the Sub-Contractor. The Contractor proceeded to do so, under the condition that a bank guarantee agreement be concluded between the Contractor and a guarantor (the “Guarantor”), stipulating that if the Sub-Contractor breaches the Agreement, the Guarantor would pay the Contractor the equivalent of the amount released to the Sub-Contractor (the “Bank Guarantee Agreement”). The Bank Guarantee Agreement did not contain an arbitration clause.

Subsequently, it was alleged that the Sub-Contractor breached the Agreement. The Contractor filed a claim against the Guarantor with the court demanding that the Guarantor pay the amount equivalent to the amount released to the Sub-Contractor, plus additional damages suffered by the Contractor as a result of the breach.

The Guarantor requested that the court dismiss the case and filed an application requesting that the Court summon the Sub-Contractor to join into the case as a co-defendant. The Court of First Instance granted the request. Once entered into the case as a co-defendant, the Sub-Contractor filed a counterclaim stating that, during the construction, the Contractor ordered for additional construction works, which resulted in increased expense exceeding the scope of work of the Project. The Sub-Contractor alleged that the Contractor failed to make the agreed payment for these variations to the Project’s scope of work. As such, the Sub-Contractor requested that the court dismiss the Contractor’s claim in its entirety and implored the Court to order the Contractor to pay the outstanding remuneration due to the Sub-Contractor with interests calculated at a rate of 7.5 percent per annum .

In turn, the Contractor filed a motion to dismiss the Sub-Contractor’s claims arguing that the Sub-Contractor’s case was based on the Principal Agreement which contains an arbitration clause, hence the dispute ought to have been decided by an arbitral tribunal.

The Court of First Instance found that the Sub-Contractor’s counterclaim concerning the Agreement was unrelated to the claims under the Bank Guarantee Agreement and therefore must be resolved through arbitration. The Court thus ordered for dismissal of the Sub-Contractor’s counterclaim for reimbursement pursuant to the Agreement, and also found that the Sub-Contractor, had no standing in the dispute over the Bank Guarantee Agreement. Accordingly, the Court ordered that the Contractor’s claim concerning the disputes between the Contractor and the Guarantor to continue to be heard in court.

The Sub-Contractor appealed against the Court of First Instance’s ruling. The Appellate Court affirmed the ruling of the Court of First Instance. The Sub-Contractor then appealed to the Supreme Court.

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II. ISSUES FOR THE COURT

• Does the arbitration clause in the Principal Agreement extend to the Bank Guarantee Agreement?
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• Can the Sub-Contractor rely on the Principal Agreement to deny the Contractor’s rights vis-a-vis the Bank Guarantee Agreement?
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III.  THE COURT’S DECISION 

The Arbitration Clause in the Principal Agreement does not extend to the Bank Guarantee Agreement

The Supreme Court noted that the Contractor’s claims were premised on the Bank Guarantee Agreement which was made between the Contractor and the Guarantor. As such, since the Bank Guarantee Agreement did not contain an arbitration clause, the Court found that the disputes regarding the Guarantor’s liability to the Contractor under the Bank Guarantee Agreement was not required to be resolved by way of arbitration.

While the Sub-Contractor argued that the obligations, upon which the Guarantor based its claim, originated from the Principal Agreement, the Supreme Court found that the Bank Guarantee Agreement and the Principal Agreement are wholly different agreements. This is because the Bank Guarantee Agreement is neither an accessory document to the Principal Agreement nor an attachment to the Principal Agreement. The legal obligations, upon which the Contractor based its claim in this case, are thus different from those under the  Principal Agreement. In alleging that the Sub-Contractor violated the Principal Agreement and in demanding that the Guarantor make payments to the Contractor according to the Bank Guarantee Agreement, the Contractor was merely enforcing its rights under the Bank Guarantee Agreement. The Court ruled that this did not render the two agreements indivisible as claimed by the Sub-Contractor.

The Sub-Contractor cannot rely on the Principal Agreement to deny the Contractor’s rights vis-a-vis the Bank Guarantee Agreement

According to the Section 57 (3) of the Code of Civil Procedure, in becoming a party to the dispute, the Sub-Contractor would became susceptible to the right of recourse by the Guarantor. In other words, the Guarantor would be able to exercise its rights against the Sub-Contractor should it be found liable to the Contractor pursuant to the Bank Guarantee Agreement. The Court found that the Sub-Contractor may not invoke any legal relations between itself and the Contractor arising from other agreements, i.e. the Principal Agreement, so as to deny the Contractor’s rights  vis-a-vis the Guarantor under the Bank Guarantee Agreement.

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IV. CONCLUSION

 Since the Contractor is not required to submit the dispute to arbitration, the Contractor is permitted to file its claim under the Bank Guarantee Agreement to the Court. The Sub-Contractor’s claim that the arbitration clause in the Principal Agreement extended to the Bank Guarantee Agreement was found to be untenable. The Court of First Instance was therefore empowered to rule on the claims under the Bank Guarantee Agreement. As such, the Supreme Court affirmed the ruling of the Court of First Instance.

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This article may be cited as follows: Molthida Songchareon, Pundaree Tanapathong, Gunthorn Supatadarut and Patrick Liu, “Thailand Case Update: Arbitration and Secondary Agreements  Part II (Supreme Court Decision No. 3786/2554)”, International Arbitration Asia (23 September 2015) <http://www.internationalarbitrationasia.com/Supreme-Court-Decision-No-3786-2554>.