On-demand bonds in Thailand: not worth the paper they are written on?

Our recent experience here in Thailand, alongside previous case law, suggests that property owners and employers may want to think twice before deciding upon Thailand as the governing law for on-demand bonds. This is because while the requisite funds may still be ring-fenced, you are unlikely to get the money ‘on demand.’ The courts will require you to go through the legal process laid out in the Disputes Clause of the underlying construction contract so that you may have to wait years before recovery.

Background

We had first-hand experience of this when representing an international hotel and hospitality group that employed a contractor to build a luxury hotel on the banks of the Chao Phaya River in Bangkok. The hotel sits on top of a commercial development with shops, offices and a convention centre – presenting some challenges to the builder.

The project almost immediately fell into delay and ended up being completed some 18 months after the contracted completion date. Of even more concern, the building started to exhibit apparent defects during construction and other defects appeared after claimed completion of elements of the works. These included:

  • The façade sprang a number of leaks – a serious issue during the Thai rainy season!
  • A major architectural feature began to crack and threatened to collapse.
  • The lobby water feature started to leak and destroy the marble floor.
  • The fire doors were found to be non-compliant with safety specifications.

The contractor denied some of the issues existed and attempted to pass the buck on others. The owner was left with no choice but to embark on a number of costly rectification and replacement exercises.

The on-demand bond

As with most construction contracts there was a facility for such a situation – the on-demand bond. It stated the bank irrevocably undertook to pay the owner the amount of the bond upon receipt of a demand stating:

“a) That the Principal has failed to carry out his obligations to rectify certain defects under the Contract, and

b) The nature of such defects.”

Consequently, the owner wrote to the bank notifying of the contractor’s failure to rectify defects and the nature of them.

The injunction hearings

The bank asked for time to process the demand, during which time the contractor became aware of the demand. The contractor attended court the following day and was granted an emergency injunction preventing payment of the funds. The contractor’s arguments were that they disputed responsibility for the defects and the proper course for the owner was to follow the Disputes Clause – in this case arbitration.

As Thailand is a Civil Law jurisdiction, there is no system of case precedent. However, such cases are persuasive and we were mindful that this was not the first time a bond or guarantee had been blocked. That said, the owner was understandably disturbed they were being made to pay for defect rectification and, more importantly, the bond would soon lapse.

We attended court to argue that the bond was on-demand, the owner had made the written request as required and no proof of the defects was needed (while providing proof of defects in any event). The court opined that there wasn’t enough ‘emergency’ to our emergency application and asked us to attend again in a couple of weeks when the deadline for call of the bond was closer. We complied and were then able to have the injunction lifted.

The owner again approached the bank, who again enabled the contractor to attend court the following day. This time, the contractor approached a different judge’s panel who once again gave an injunction. It was unclear whether they were aware of the previous injunction being lifted. In any event, when we approached this panel their only response was to order the contractor to have the bond extended to avoid it lapsing.

Despite argument to the contrary and reference to evidence, the court deemed its only responsibility was to ring-fence the money for later availability. They did not concur that an on-demand bond should be available for immediate call and referred us to arbitration as our way to recover the funds – leaving the owner to foot the bill for defect rectification in the meantime.

Comment

Thai courts may forego the letter of the contract in favour of ensuring both sides are able to live to fight another day. ‘Judge shopping’ to reverse results is also not uncommon. In relation to an on-demand bond, this results in decisions such as the one we encountered.

We suggest that if you wish to have an on-demand bond that you can actually call on in Thailand, you have it placed with a bank in a common law jurisdiction. At the very least, the bond should state it is governed and construed in accordance with the laws of a common law jurisdiction.

Read other items in the Construction and Engineering Brief - November 2018