Credit: K.Pornsatid/Adobe Stock

Nuanporn Wechsuwanarux
Partner, Chandler MHM, Bangkok
nuanporn.w@mhm-global.com​​​​​​​

David Beckstead
Partner, Chandler MHM, Bangkok
david.b@mhm-global.com

Phalintip Ueprapeepun
Associate, Chandler MHM, Bangkok
phalintip.u@mhm-global.com​​​​​​​

Introduction

At present, there are no specific statutes governing construction contracts in Thailand. Construction services fall under the general category of ‘hire of works’ under section 587 of the Thai Civil and Commercial Code (CCC) and the provisions under sections 587–607 of the CCC apply. Given the complex nature of construction agreements, it is unsurprising that these 21 general provisions of the CCC provide minimal guidance on how to resolve practical disputes that often arise in the sector. Thai law allows for the parties to agree on the terms and conditions of their contract, in either verbal or written form, to the extent that those terms are not contradictory to mandatory laws, public order or the good morals of Thailand, which would render the contract or certain provisions void.

Construction contracts in Thailand often allow the project owner to withhold payment of the contract price if a delay in the execution of the works occurs, or to impose a delay penalty or delay liquidated damages on the contractor. Further, ‘conditional payment’ clauses are often included in subcontracts, whereby the main contractor is not obligated to pay the contract price to its subcontractor(s) until it is paid by the project owner (sometimes called the ‘pay-when-paid’ principle). These conditional payment clauses are generally enforceable under Thai law in accordance with the principle of freedom of contract.

Payment issues are a major cause of disputes in the construction industry. Related court or arbitration proceedings can be quite lengthy and costly, and often result in contractors or subcontractors being denied full recovery of payments due. The current state of the law may have a negative influence on the Thai construction industry, with construction works being suspended or even abandoned. As a typical construction project involves multiple parties at different tiers, including the main contractor, subcontractors, suppliers and the project engineer, any delays arising from payment disputes can result in huge damages and a domino effect to parties on lower tiers. In practice, the Dispute Adjudication Board (DAB) concept as contemplated under FIDIC contracts is not a typical interim dispute resolution mechanism utilised in Thailand; meaning if a dispute cannot be settled through amicable discussions among the parties, a court or arbitration process has to be initiated.

To mitigate problems relating to delayed payments, Thai lawmakers have introduced a bill governing construction contracts under which a regime of statutory adjudication proceedings would take place.

The draft bill

A draft bill, the ‘Act on Settlement of Disputes relating to Payment under Construction Contracts’ (the ‘Bill’), has been introduced and is presently undergoing mandatory public hearings. Under the Bill, there are significant features that enable payment disputes to be resolved promptly with fewer transaction costs, thus responding to the parties’ real-time requirements. Some of the key features of the Bill are set out below.

Scope of application

The Bill strictly applies to any construction contracts (including consultancy agreements) that are made in writing and where the construction works are carried out in whole or in part in Thailand, regardless of whether the contract is governed by Thai law. The Bill does not apply to verbal construction agreements, which continue to be governed exclusively by the CCC. Further, the Bill explicitly states that any contractual provision contrary to, or inconsistent with, the Bill or any agreement seeking to exempt the construction contract from falling under the provisions of the Bill will be invalidated. Accordingly, although a construction contract for work to be carried out in Thailand may still be governed by a foreign law, its provisions would need to comply with the terms of the Bill, as the Bill would be considered a law relating to public order.

Pay-when-paid prohibition

An inclusion of a pay-when-paid provision in a construction contract would be prohibited by the Bill. The purpose of this restriction is to ensure that the contract price is properly paid to the contractor pursuant to the contract, thereby minimising its cash-flow problems. This clause will enable subcontractors and suppliers to receive payment from the main contractor pursuant to the payment terms agreed by the parties, regardless of whether the main contractor has already been paid by the project owner. In addition, payment obligations that depend on the project owner’s financial position or the existence of funding would also be deemed void.

Adjudication proceedings

Most significantly, the Bill provides for the statutory right of a party to a construction contract to refer a payment dispute to an adjudication institution as an alternative form of dispute resolution. It is likely that the adjudication proceedings under the Bill will result in Thailand converting to a ‘pay now argue later’ jurisdiction; the adjudicator’s decision gives rise to an immediate payment obligation even though it is not final, as the adjudication proceedings do not prejudice the parties’ right to pursue arbitration or court proceedings thereafter. This mechanism should enable main contractors and subcontractors to continue carrying out works under their respective contracts without the need to resort to the suspension or abandonment of the works.

Some salient features of the adjudicative mechanism introduced by the Bill are discussed below.

When can adjudication proceedings begin?

Once a payment default has occurred, the creditor may initiate the adjudication proceedings by giving a demand notice to the debtor. The debtor’s failure to make a payment pursuant to the demand notice allows the creditor to submit the dispute to the adjudication institution. Subject to any objections from the debtor, the institution will appoint an adjudicator who must be a specialist, capable of dealing with the complexities of construction contracts, to decide on the dispute and issue an award.

Can the debtor object to the dispute?

Yes. Within three days from the date the case is accepted by the institution, the creditor must submit a dispute notice to the debtor so that the debtor may raise objections along with relevant legal grounds within seven days from the date of receipt of the dispute notice. Given this tight timeline, it is debatable whether the seven-day period is practicable for the debtor to submit a meaningful objection along with the necessary supporting documents.

How long does it take to issue an award?

The Bill envisages that the whole process of adjudication until the issuance of an award will take approximately 40 days. This would be an expedited procedure compared to court proceedings in Thailand, which can take anywhere from six months to two years for a ruling on first instance.

Is an adjudication award binding upon the parties?

The adjudication award will be binding upon the parties and their guarantors (if any), save for: (1) where the award is revoked by the Court; (2) if the payment dispute is finally settled by the parties; or (3) if it is superseded by a subsequent decision reached in court or via arbitration proceedings initiated by one of the parties. Under the Bill, when an award is issued, the debtor is required to make a payment within 15 days from the award date or as otherwise specified in the award, without a right to appeal the decision. The debtor’s failure to make a payment within the stipulated period will provide grounds for the creditor to execute the award against the debtor and/or its guarantor, including by suspending its works under the construction contract in proportions equivalent to the unpaid amount, until the due and payable amount is fully paid, but in any event no longer than 30 days. It is questionable whether the 30-day time limit for work suspension will be able to solve payment problems arising out of the withholding of payment by the employer.

Conclusion

As the Bill is still undergoing public hearings and has not yet become law, it is unclear when, if ever, the Bill will be enacted. Based on the current drafting of the Bill, there are a number of issues that need to be reviewed further in order to ensure that the interests of the construction industry are being appropriately addressed. However, if adopted, the resolving of disputes relating to payment disputes in the Thai construction industry may be significantly improved by the Bill.