Thailand: Deference to Arbitration in “Related Contracts” Situations

I.  INTRODUCTION

Within the commercial, construction and insurance industries, it has become increasingly popular practice to read arbitration clauses (contained within a principal agreement) into a string of related contracts in multi-contract transactions (“Related Contracts” Situations). This effectively shifts the determination of all contractual disputes from local judicial organs into the hands of arbitrators, for what parties often consider a more efficient and confidential platform for dispute resolution. 

However, careless drafting can leave one or more agreements (usually accessory) without an arbitration clause (“non-arbitration agreements”). Disputes over arbitration-regulated agreements and non-arbitration agreements cannot be considered in isolation, particularly if they all relate to, or revolve around, the same transaction. This raises the legal conundrum of whether courts should (a) strike out claims under the former, to await the decision of the arbitral tribunal, or (b) continue hearing the claims under the latter in court, irrespective of the outcome of any simultaneous arbitration proceedings.

This article first reviews two recent cases in which the Thai Supreme Court examined issues arising out of such “Related Contracts” situations. Arguably, the Court differed in its reasoning on the interconnection between the principal agreement (with an arbitration clause) and the accessory agreement (with no arbitration clause), in deciding whether certain claims should be heard by the court or the  parties’ designated arbitral tribunal.

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II.  RECENT DECISIONS BY THE SUPREME COURT OF THAILAND

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A.  Supreme Court Decision No. 3260/2554 (the “First Decision”)

The five claimants, comprising a joint venture company, (the “Contractors”) sought an emergency interim injunction to forbid the defendant (the “Employer”) from requesting the five guarantors (the “Guarantors”) honour the six bonds (the “Bank Guarantee Agreements”) issued for the benefit of the Contractors under a construction agreement for a waste water rehabilitation project (the “Agreement”) until the arbitral tribunal reached a final decision or the court ordered otherwise.

The Court of First Instance granted it. The Employer appealed, arguing both that (a) the Agreement was void, as it was contrary to public order and good morals, and that (b) the Guarantee Agreement contained no arbitration clause and could thus be enforced by the court.

The Supreme Court held that, although the Bank Guarantee Agreements per se contained no arbitration clause, such right existed because of the prior Agreement that the Contractors had entered into with the Employer. Therefore, the Employer would only be entitled to claim the Guarantors to honor the retention bonds in the event that the Contractors were in breach of the Agreement. As long as the arbitral tribunal has not reached a decision as to whether there had indeed been such a breach, the Employer could not exercise its right to claim the Guarantors honor the retention bonds. If the Guarantors honoured the retention bonds, the Guarantors would have the right of recourse against the Contractors as principal debtors (from the time the Guarantors honor the retention bond) – equivalent to treating the Contractors as the losing party before the arbitral tribunal reached a final decision.

The Supreme Court thus upheld the Court of First Instance’s decision to grant an emergency interim injunction to the Contractors according to Section 254(2) of the Civil and Commercial Code of Thailand, dismissing the appeal.

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B.  Supreme Court Decision No. 3786/2554 (the “Second Decision”)

The plaintiff (the “Contractor”) entered into a construction agreement, containing an arbitration clause, (the “Agreement”) with the co-defendant (the “Sub-Contractor”). The Sub-Contractor provided a bank guarantee to the Contractor, under which the defendant (the “Guarantor”) was to pay the bank guarantee in the event of default (the “Bank Guarantee Agreement”). The Bank Guarantee Agreement did not contain an arbitration clause.

After such default, the Contractor sought to enforce the Bank Guarantee Agreement against the Guarantor in court. He requested the court include the Sub-Contractor as a co-defendant (for subsequent recourse) in accordance with Section 57(3) of the Thai Civil Procedure Code.

The Sub-Contractor filed a counter-claim. He argued that (a) it was, in fact, the Contractor who was in breach of the Agreement, and (b) since the legal obligations at the heart of the claims originated from the Agreement, they must be resolved by arbitration. The Contractor sought to dismiss this counter-claim,arguing that while (a) the Sub-contractor’s counter-claim was based on the Agreement and must therefore be decided by the arbitral tribunal, (b) the claims by the Contractor under the Bank Guarantee Agreement could be decided by the court, as the Bank Guarantee Agreement contained no arbitration clause.

The Court of First Instance found that the Sub-Contractor’s counter-claim with respect to the Agreement, was unrelated to the Contractor’s claims under the Bank Guarantee Agreement. It dismissed it and removed the Sub-Contractor as a co-defendant, allowing the Contractor’s claim against the Guarantor under the Bank Guarantee Agreement to continue to be heard in court. The Appellate Court affirmed the ruling, upon the Sub-Contractor’s appeal. The Sub-Contractor appealed against this to the Supreme Court.

The Supreme Court upheld the decision of the Court of First Instance. It emphasised that the Agreement and the Bank Guarantee Agreement and the Agreement were two wholly separate contracts; the Bank Guarantee Agreement was neither an accessory nor attachmentto the Agreement. The legal obligations referred to in the Contractor’s claims were thus different from those arising out of the Agreement. The Sub-Contractor could not invoke clauses pertaining to the obligations between the Sub-contractor and the Contractor other than those existing in the Bank Guarantee Agreement.

The Contractor had only made reference to the Sub-Contractor’s breach of the Agreement to request that the Guarantor pay damages in accordance with the Bank Guarantee Agreement. This per se did not create or purport to create a relationship between the Agreement and the Bank Guarantee Agreement. As the Bank Guarantee Agreement did not contain an arbitration clause, the Contractor had the right to file its case against the Guarantor with the courts, without submitting it to the arbitral tribunal beforehand. The Court of First Instance was therefore empowered to both (a) rule on the claims under the Bank Guarantee Agreement and (b) defer the claims under the Agreement to arbitration.

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III. THE APPROACH TAKEN BY THE COURT

There are some differences in the central issue arising in each case. In the First Decision, the court was not asked to decide on the merits of the disputes under the Principal Agreement. The claims only sought an interim injunction against enforcement of the Performance Guarantee, to protect the interests of the sub-contractor while the case under the Principal Agreement was being arbitrated. In the Second Decision, on the other hand, both the disputes under the Performance Guarantee Agreement and the Principal Agreement were submitted to the court for determination – although the court deferred certain claims under the Principal Agreement to arbitration.

In both decisions, nonetheless, the court was asked to apply its view towards the relationship between the Principal Agreement (which contained an arbitration clause) and the Performance Guarantee Agreement (which did not contain an arbitration clause), to decide whether the power to determine the disputes arising out of both agreements vested with the court or the arbitral tribunal. Interestingly, different approaches were applied. 

In the First Decision, the court applied a wide, broad-brush approach. It did not pay undue attention to the fact that the Performance Guarantee Agreement did not contain an arbitration clause. It recognised the close nexus between the two agreements; the Performance Guarantee Agreement was an accessory agreement to the Principal Agreement. Thus, to determine the Sub-Contractor’s liabilities under the Performance Guarantee Agreement, the Sub-Contractor’s violation of the Principal Agreement had to first be established. Since the arbitral tribunal was empowered to rule on the disputes under the Principal Agreement, not granting an interim relief to the sub-contractor would, in substance, amount to pre-judging the outcome of the arbitration proceedings to conclude that the sub-contractor is in breach of the Principal Agreement when, in fact, the sub-contractor may or may not prevail in the arbitration. 

The First Decision should be recognised for its holistic and commercially-sensitive approach. Should the tribunal come to a conclusion opposite from that of the Court in relation to the parties’ breach of the principal agreement, protracted and costly complications in the subsequent enforcement of both the court judgement and the arbitration award would likely ensue. By allowing the tribunal to be the sole forum for resolving the entire dispute at hand, the Court has eliminated such risk. 

In the Second Decision, however, the court opted for a far more strict, narrow view, preferring form over substance. The fact that the Sub-Contractor had not contracted into the Performance Guarantee Agreement per se led the court to conclude that the two agreements were non-related, which led it to defer the claims under the Principal Agreement to arbitration – only examining the claims under the Performance Guarantee Agreement itself.

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IV.  RECOMMENDATIONS

In light of the uncertainty as discussed above, parties should pay careful attention and be sure to include arbitration clauses in the Performance Guarantee Agreement itself, should parties’ wish to arbitrate all disputes arising from their relationship. One possible option would be for the dispute resolution clauses in the Performance Guarantee Agreement to be specifically tailored to refer to the arbitration clause in the Principal Agreement. This will ensure that all disputes arising under the Performance Guarantee Agreement and/or the Principal Agreement can be submitted for resolution under a single arbitration proceeding.

Should multiple contracts contain individual arbitration clauses that fail to refer to one another, the risk of multiple proceedings being commenced over the same substratum of facts would arise. This would be costly for parties and inefficient. One way to streamline dispute resolution in such a situation would be via a “joinder”. A request for joinder may be made by an existing party to the arbitration to include a new party or parties. For example, the contract, a party to the Principal Agreement, may seek to join the bank, a party to the Performance Guarantee Agreement, as a party in an ongoing arbitration proceeding. Under general arbitration practice, joinders would typically require (a) consent of the party that is to be joined; (b) consent of all existing parties; and (c) permission by the tribunal. 

It should be noted, however, that at present both Thai arbitration law and existing arbitration rules in Thailand are silent on the issue of joinder. Hence there is no guarantee whether the tribunal would agree to facilitate a joinder when requested, or if the Thai courts would recognise the legitimacy of such arrangements. A third possibility is to rely on “consolidation”, so as to to combine two or more arbitration proceedings into a single arbitration proceeding for greater efficiency. To allow for consolidation, both the Performance Guarantee Agreement and the Principal Agreement must contain arbitration clauses not inconsistent with each other (i.e, both specify the same form of institutional arbitration, arbitration procedure, etc.). Parties may also expressly agree to potential consolidation of proceedings between the Principal Agreement and the Performance Guarantee Agreement in the relevant arbitration clauses.

As with joinder, consolidation has not yet been expressly recognised under Thai arbitration law or any existing arbitration rules in Thailand. Therefore, it remains to be seen whether the tribunal would permit consolidation when requested and if so, what elements precisely are needed to be satisfied.

Further to the above, parties to the arbitration may wish to apply to a competent court for a provisional relief which can be enforced by the court in case of non-compliance, before or during the arbitral proceedings – as was the situation in the First Decision. The application for such legal aid is governed by Section 16 of the Thai Arbitration Act, B.E. 2545. This section stipulates that “[i]n deciding to grant the interim measure, the court will consider whether the court would have been able to issue such order had such proceedings been conducted in court. The provisions governing provisional measures under the Civil Procedure Code shall apply mutatis mutandis”.

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This article may be cited as follows: Molthida Songchareon, “Thailand: Deference to Arbitration in “Related Contracts” Situations”, International Arbitration Asia (23 September 2015) <http://www.internationalarbitrationasia.com/Deference_to_Arbitration_in_Related_Contracts_Situations>.