Thai Government Lifts Total Ban on Arbitration Clauses in State Contracts

A recent Thai Cabinet resolution relaxes the restriction on arbitration clauses in some public contracts.  The resolution is seen as a positive move for arbitration and investment in Thailand, but more remains to be done.

The New Cabinet Resolution

On 14 July 2015, the Thai Cabinet passed a resolution (the "2015 Resolution") amending a 2009 resolution (the "2009 Resolution") which prohibited the inclusion of arbitration clauses in all contracts entered into by private contracts with the public sector unless approved by the Cabinet on a case-by-case basis. 

Under the 2015 Resolution, Cabinet approval for arbitration clauses will now only be required for three types of contract, as explained further below.

Although a Cabinet resolution is a statement of government policy and does not have the binding status of a law, decree or regulation, in practice Cabinet resolutions will be followed by all of those affected.  In this case, all Thai ministries, government departments and other public bodies were notified of the 2015 Resolution on 17 July 2015.

Background

The 2009 Resolution was issued in response to the Thai government's defeat in an investment arbitration brought by Walter Bau under the German-Thai Bilateral Investment Treaty.[1]  On 1 July 2009, the UNCITRAL tribunal awarded Walter Bau over 29 million Euros plus interest and legal costs of around 2 million Euros.  By the end of the same month, the Cabinet had issued the 2009 Resolution, reasoning that when disputes arising out of government contracts with the private sector, particularly in large projects or concessions, are submitted to arbitration, “the state agencies, most of the time, tend to lose the case or be found liable for compensation resulting in a burden on the state budget”.[2] 

An earlier Cabinet Resolution issued in 2004 (the "2004 Resolution") had already placed restrictions on the inclusion of arbitration clauses in concession agreements.  This was also in response to an adverse arbitration award against the Thai government - an award of US$150m against the Expressway and Transit Authority following an expressway construction dispute.[3]  The 2009 Resolution, expanding the restriction to all public sector contracts, was a further blow to arbitration in Thailand.

2015: a new dawn for arbitration in Thailand?

The 2015 Resolution is obviously a very positive move for arbitration in Thailand.  But equally important are the Ministry of Justice's reasons for requesting the new resolution.  The Ministry concluded, rightly, that the 2004 and 2009 resolutions gave the impression that the government does not support arbitration as a method of resolving disputes, with negative consequences for the image of Thailand and investor confidence.  In addition, as Thai state agencies increasingly look to invest outside of Thailand, the 2009 Resolution was seen as hindering that potential.

What contracts are still affected by the restriction on arbitration clauses?

In the meantime, the three types of contract to which the restriction still applies are as follows.

1. Public Private Partnerships ("PPP")

The new Private Investment in State Undertaking Act B.E. 2556 (2013) sets out a legal framework for private sector participation in developing infrastructure and public services.  It applies to PPP projects with a value of more than THB 1 billion, or where ministerial regulations prescribe.

Recent high profile PPP projects in Thailand include projects in the energy sector (power plants constructed in conjunction with EGAT), telecommunications (AIS Mobile, Telecom Asia, ThaiCom) transport (BTS SkyTrain, BMCL Underground Train, Don Muang Tollway) and water and sanitation (Municipal Solid Waste Management and  Thai Tap Water (TTW) Water Production and Distribution).  Cabinet approval for arbitration clauses in these types of contract will still be required under the 2015 Resolution.

2. Concession agreements

There is no clear definition of what constitutes a "concession agreement" for the purposes of the 2015 Resolution.  However, legal scholars generally understand this to mean agreements granting the private sector the right to operate public services for a limited period at their own risk and using their own funds.  "…Notably, even though arbitration clauses in concession agreements in the oil and gas sector are already permitted by the Thai Petroleum Act B.E. 2514 (1971), it is not yet confirmed whether the 2015 Resolution would still be applied for the next bidding round for oil and gas concessions in the Gulf of Thailand.

3. Contracts that require Cabinet approval under Royal Decree 2005

This category is a catch-all provision to encompass all types of contracts that require Cabinet approval, and includes any large-scale investment (THB 1 billion plus) projects involving the public sector.

Obtaining Cabinet approval

Under the 2009 Resolution, Cabinet approval for arbitration clauses was not impossible.  For example, the Cabinet approved the use of arbitration in contracts between the government and the European Organisation for Nuclear Research and between Thai Airways and the International Air Transport Association ("IATA").

Hopefully, the new positivity towards arbitration will mean that obtaining Cabinet approval for those contracts that are still restricted by the 2015 Resolution is even more likely.  There is, for example, recognition that it may be expedient to accept arbitration clauses in PPP contracts and concession contracts. 

Looking ahead

While the restriction on arbitration clauses has not been fully lifted, international investors will remain wary about the investment climate in Thailand.  However, the relaxation of the restriction in the 2015 Resolution is a welcome step.  It demonstrates that the Ministry of Justice recognises that it needs to accept and promote arbitration in order to improve the investment climate in Thailand.   This, together with the Ministry's decision to establish a new arbitration institution, the Thailand Arbitration Center ("THAC"),[4] are positive signs for the future of arbitration in Thailand.

For further information, please contact Gavin Margetson, Partner, Vanina Sucharitkul, Senior Associate or your usual Herbert Smith Freehills contact.