Thailand, Towards an Arbitration-Friendlier Jurisdiction?

Over the past decade Thailand has faced criticism for its hostility toward arbitration, particularly in matters involving government agencies. In 2004, after the civil court upheld a highly-publicised arbitral award against the Rapid Transit Authority of Thailand of 6.2 billion baht (approximately USD 202,000,000), the Thai cabinet passed a resolution forbidding arbitration in concession agreements.¹ Upon losing a EUR 30-million Bilateral Investment Treaty case brought by the German construction firm Walter Bau, the Thai cabinet extended its 2004 resolution to forbid, in principle, arbitration in any contract between the government and a private entity.² These restrictions explicitly contradicted the Thai Arbitration Act 2002³ and have caused serious concerns for foreign investors seeking a neutral forum to resolve disputes with state entities. Well-publicised immigration problems for foreign arbitrators and the restriction on foreign lawyers representing parties in arbitration in Thailand have added to the negative perception of Thailand as an arbitration-friendly jurisdiction. Further criticism has focussed on delays and difficulties in enforcing awards through the Thai courts.

It would be premature to claim that the tide has turned. However, in recent months there have been some encouraging court decisions enforcing arbitration awards in international and domestic arbitrations (Herbert Smith Freehills acted for the enforcing party in both cases). While political and administrative obstacles remain unchanged, these recent decisions may reflect that Thai courts, at least, are increasingly willing to accept arbitration as a legitimate form of dispute resolution, and to appreciate the proper restraints on their own role and responsibilities in that regard.

Enforcement of International Arbitration Award

In August 2013, the Thai Intellectual Property and International Trade Court recognised and enforced an international arbitral award rendered in England in accordance with the New York Convention 1958, refusing all grounds for challenge.

The dispute arose out of a raw cotton sale and purchase agreement, which contained an arbitration clause under Rules and By-laws of the International Cotton Association in Liverpool, England.

When the buyer failed to open a letter of credit and to make payment as agreed, the seller commenced arbitration proceedings. The three-member tribunal, applying English law, ordered the buyer to pay in excess of US 1 million.

The Respondent challenged enforcement of the arbitration award on the basis that it was not notified of the arbitrator's appointment and therefore was denied the right to present its case. The Respondent further asserted that the arbitration award of the International Cotton Association was not binding on registered entities under Thai law because the association was registered overseas. As neither the Respondent nor Thailand has accepted or ratified the Rules and Bylaws of the International Cotton Association Limited, the award could not be enforced.

The Court held that:

• The Respondent was duly notified of the arbitration proceedings, the appointment of arbitrator and the award but failed to take any action. Therefore, the appointment of the arbitrator and the ex-parte hearing under Bylaw 306(5), as well as the award, were lawful.
• The Claimant was of Singaporean nationality, the Respondent was of Thai nationality and the seat of arbitration was in England. Singapore, Thailand, and England were all parties to the New York Convention. Under the Thai Arbitration Act 2002, Thailand recognised the operation of an association providing arbitration services located in Member States of the New York Convention without the need for any further consent or ratification of the association or institution concerned.
• The parties voluntarily entered into the sale purchase agreement containing the arbitration clause under Rules and Bylaws of the International Cotton Association Limited.

In ruling in favour of enforcement, the Court found that the award directing the Respondent to repay the Claimant was in compliance with the chosen arbitration rules and governing English law. Furthermore, it was not contrary to law, public order or good morals. As the proceedings were conducted in a member country to the New York Convention, there were no grounds to refuse enforcement of the award.

During the course of the proceedings the court also showed determination not to allow the enforcement application to be derailed or delayed by procedural devices. Untypically by reference to past experience, the court refused to allow the case to be suspended pending determination of such issues and, instead, moved forward directly and properly to confirm the enforcement application.

This decision by the Intellectual Property and International Trade Court is an encouraging sign of development in the enforcement of international arbitration awards in Thailand. If repeated in future cases, it should justify greater confidence in the Thai courts when it comes to enforcement of foreign arbitration awards.

Enforcement of Domestic Arbitration Award

More recently, in October 2013, the Bangkok Southern Civil Court recognised and enforced an arbitral award obtained in Bangkok by subcontractor against a joint venture contractor in a construction dispute. The contract contained a pay-when-paid clause and the contractor refused to make payments to the subcontractor on the basis that the employer had voided the main contract and the contractor had not been paid. The three-member tribunal, deciding the arbitration under the auspices of the Thai Arbitration Institute, found in favour of the subcontractor and dismissed all counterclaims.

The Respondent challenged the award on the ground that the Tribunal misinterpreted and wrongly applied Thai law and therefore violated public policy, known under Thai law as public order or good morals. The Respondent further argued that the tribunal failed to apply relevant Thai civil procedure laws.

The Court refused to review the award on the merits and dismissed the application to set aside the award in its entirety. On the issue of court civil procedure, the Court considered that the tribunal was free to adopt its own procedure as arbitration tribunals were not required to use court rules.

The Court's refusal to impose court rules in an arbitration proceeding demonstrates the Court's acceptance of the procedural flexibility in arbitration. The refusal to review the merits of the case is a welcome rejection of the expanded 'public policy' ground that has disfigured enforcement regimes in other countries.

Time Frame

Bearing in mind that there has been frequent criticism of delay in Thai court proceedings to enforce arbitration awards, it is worth noting that both enforcement decisions were obtained within six to eight months of initiating the enforcement proceedings.

Conclusion

Despite the negative perception of arbitration in Thailand over recent years, these enforcement decisions may suggest an increasingly supportive attitude amongst the Thai judiciary towards domestic and international arbitral proceedings. First instance court decisions have no precedent status in Thai law, therefore it is too early to claim a clear trend, but it is to be hoped that these decisions will start to foster a more favourable climate for arbitration within Thailand and wider use of arbitration as a dispute resolution mechanism when contracting with Thai entities.

For further information, please contact Chinnawat Thongpakdee, Partner, Alastair Henderson, Partner, Vanina Sucharitkul, Senior Associate, or your usual Herbert Smith Freehills contact.

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¹ The 27 January 2004 Cabinet Resolution states, “Concession agreements, under the current law, are administrative contracts and disputes under such agreements should be submitted to the administrative court or the judiciary. Therefore, concession agreements between the state and a Thai or foreign private sector party should not contain an agreement to settle the dispute by arbitration.” However, where there are “problems” or the contracting party requires including such a provision in the contract, “the matter should be referred to the Cabinet9 for approval on a case-by-case basis.”

² The inclusion of an arbitration clause in a contract with the government, including state entities, is subject to Cabinet approval on a case-by-case basis.

³ Section 15 of the Thai Arbitration Act states "In a contract between a government agency and private party, whether administrative contract or not, the parties thereto may agree to settle their disputes by arbitration. The parties to the contract shall be bound by such arbitration agreement."