Up Again Thailand: Suppliers and Contractors

Restructuring

1. Navigating the supply chain in a distressed market:

a. My company supplies goods and I am concerned about the solvency of my customers. Are there any steps I can take to mitigate risk/my exposure?

To manage the risk/exposure of a supplier we recommend you engage in the following measures:

  • Maintain an open and honest dialogue with essential customers to ensure you are kept abreast of their solvency situation.
  • Monitor customer accounts periodically for red flags such as late payments. This should give you time to either speak to your customers or take specific measures.
  • Retain title of the goods supplied until all payments due are made.
  • Ask for bank guarantees or letters of comfort by a solvent parent company.
  • Consider switching to advance payments for products sold if possible. However, in such difficult times please note this could result in liquidity issues for your customers.

b. My company relies upon the supply of goods/services and I am concerned about the solvency of my supplier? Are there any steps I can take to mitigate risk?

To manage the risk/exposure of a customer, we recommend you engage in the following measures:

  • Identify key suppliers.
  • Identify the impact of the sudden loss of a key supplier on your other contractual obligations (e.g. your own supply contracts).
  • Maintain an open and honest dialogue with essential suppliers to ensure that you are kept abreast of their solvency situation.
  • Consider whether there are alternative suppliers in the marketplace and how quickly an alternate supplier could replace your current supplier.
  • Monitor supplier accounts for red flags such as late deliveries.

Litigation and Regulation

2. How will legal disputes that have arisen as a result of COVID-19 or its effects (for instance, in relation to force majeure) be affected by restrictions being lifted and resuming business operations in whole or in part?

The pandemic has resulted in several governmental restrictions. This includes curfews, international travel bans, and closures of business premises. These restrictions will invariably have resulted in legal disputes and raised the question of force majeure or similar doctrines that discharge a party of their obligations under a contract.

Under Section 8 of the Thai Civil Commercial Code (CCC), a force majeure event is an event that could not be prevented and once it has occurred, its harm could not be prevented even through the application of reasonable care.

When a force majeure event occurs and results in the impossibility of performance of a contractual obligation, the obligor is discharged from their obligations to the obligee. Thus, where an obligor has been discharged from their obligations before the easing of restrictions, the fact that restrictions are being lifted and businesses are resuming shall not reinstate those prior obligations.

Alternatively, for parties currently disputing whether COVID-19 or its effects are a force majeure event, the easing of restrictions and resumption of business is likely to require the obligee to continue honouring its contractual obligations.

Under the CCC, an obligor is obliged to exercise reasonable care to mitigate the impact of the non-performance of a contract. The nature of these mitigation obligations is unspecified in the CCC; however, it may be specified in the terms of the contracts in dispute. This may include a mandatory waiting period for a force majeure event. Where such a clause exists, parties should consider whether it is applicable to this situation and, if so, follow their stipulations accordingly.

The impact of restrictions being lifted on a dispute which has arisen as a result of COVID-19 or its effects will be unique from case to case and therefore should be assessed on a case-by-case basis.

3. How should you manage those disputes once COVID-19 restrictions are lifted?

First, review the contract to identify the force majeure clause and determine whether COVID-19 or its effects (e.g. curfews, restrictions, premises closures) are considered force majeure events within the meaning of the clause. If the contract does not contain a force majeure clause, consider whether COVID-19 or its effects are considered force majeure under the CCC.

Second, identify and implement measures that can mitigate potential consequences arising from the lifting of restrictions.

Third, review the dispute resolution clause in your existing contracts and develop a commercial strategy to try to resolve any legal disputes that have arisen or may arise from the imposition and subsequent lifting of restrictions.

Fourth, if the parties wish to continue working together in the future and the mutual objective of all parties is to resume pre-COVID-19 performance as soon as possible, in circumstances where no party is at fault, we recommend the parties enter a constructive dialogue to better understand the goals and needs of the other party.

A key tip for managing disputes moving forwards is to keep an updated chronology of the applicable national and local laws that apply to the imposition and easing of restrictions in your jurisdiction.

4. What should you do when restrictions are lifted if you have suffered loss under a contract as a result of COVID-19 or the restrictions, but have not yet taken legal action in relation to that loss?

If you have suffered loss under a contract as a result of COVID-19, you should seek legal advice on your rights under the contract. Before doing so, however, we recommend you immediately review your rights and obligations under the contract. Special attention should be paid to such clauses such as the following:

  • Force majeure clause: how is force majeure defined in the contract? Are COVID-19 and the various restrictions at both national and provincial level enough to satisfy the wording of the clause?
  • Material adverse event clause: parties may be entitled to terminate the contract if there is an event that has a material adverse effect on the parties to the contract.
  • Variation clause: amendments to the contract resulting from COVID-19-related negotiations may need to be formally agreed (e.g. in writing and signed by authorised signatories from both parties) in accordance with the variation clause of the contract.

In these difficult times, constructive engagement with the counterparty may be worthwhile. Parties may also wish to discuss alternative dispute resolution methods such as mediation or negotiation (unless this is already required under the contract).

Parties should be careful not to inadvertently waive any rights through any actions or measures taken following the easing of restrictions. Where you are unsure whether an action could lead to a waiving of rights, consider notifying the other side that you reserve all your rights and that any measures you take are without prejudice to such rights.

In our experience, supply chain contracts typically involve parties from different jurisdictions with multiple places of performance. This may lead to complex legal issues concerning conflict of laws. If so, we recommend you consult a lawyer.

5. Is there any risk of mass claims being brought against your business? If so, how would such claims be brought?

At the time of publication, the risk of mass claims in Thailand is low.

Thailand’s Class Action legislation, the Act to Amend the Civil Procedure Code (No. 26) B.E. 2558 came into effect in December 2015. However, it has been relatively slow to take off. This is primarily because the Thai class action regime offers a high-risk low-reward environment for the budding class action industry. Attorneys have low incentives to establish a class. This is largely down to the following reasons:

  • While defendants may be held liable for plaintiff’s legal fees for up to 50% of the judgment amounts, the culture of typically low legal fee awards made by the Thai courts would deter an attorney determined to make a living from, or even apply sufficient resources to a class action practice.
  • It is difficult for a Thai attorney to make an educated risk assessment on whether to accept a class action case in a civil legal system without a body of binding case law.

6. What should I do about recording contractually or otherwise any of the changes put in place during the COVID-19 lockdown period?

As mentioned above, it would be prudent to check the terms of your contract and ensure that any variations to the contract are as per the requirements of the variation clause (e.g. in writing and signed by authorised signatories of both parties).

If there are no requirements, we still recommend that any changes put in place, whether agreed orally, via any electronic communication or in writing, should be formalised in an agreement and signed by authorised representatives of both parties.

7. Any return to normal will likely not be as immediate as the impact of COVID-19 when it started (e.g. sales/orders will take time to ramp up, raw materials will take time to flow through supply chains, etc.) what should I think about and do to best manage this in my contracts?

We suggest you enter into a dialogue with your counterparty for a mutually agreeable commercial alternative while business slowly returns to normal.

Parties should also consider diversifying their supply chain to ensure that international travel bans, country or regional specific lockdowns and other disruptions can be hedged against.

Given the risk and realities of a second wave of infections, continued international disruptions to travel and other potential disruptions, parties should be cautious and attempt to implement a phased approach to returning to business.

8. What additional protections or changes to existing provisions (e.g. force majeure) should I put into any new supply arrangements having regard to COVID-19?

To protect your supply arrangements, we strongly recommend you consider adding elements to your force majeure clause. This includes: expressly including references to pandemics, public health emergencies of international concern, epidemics or COVID-19.

Further, we suggest you include specific clauses which govern the rights and responsibilities of each party (supplier and customer) during the various levels of a public health emergency. This will provide parties a greater degree of control and clarity during a public health crisis like COVID-19.