You are using an outdated browser and your browsing experience will not be optimal. Please update to the latest version of Microsoft Edge, Google Chrome or Mozilla Firefox. Install Microsoft Edge

August 23, 2022

Enforcing Indemnification Clauses in Thailand

Subscribe to Updates

Indemnification clauses are common contractual provisions in many jurisdictions including Thailand, but enforcing them can be challenging in the eyes of Thai law.

In general, to “indemnify” means to hold another party free of responsibility for a potential risk or loss. When one party (i.e., the “indemnitor”) indemnifies another party (i.e., the “indemnitee”), the indemnitor is obligated to pay or compensate the indemnitee for any liabilities or losses (within the scope agreed in the contract). In this way, an indemnification clause can be a useful provision to shift responsibility for potential risks from one party to another.

In some jurisdictions, “indemnity” includes the recovery of attorneys’ fees incurred by the indemnitee. It may even carry with it the duty to defend or fund the defense of any claim brought against the indemnitee. If that is the case, even though the contract does not say so, the indemnitor would have to hire an attorney and pay the legal fees for the indemnitee.

In contracts that contain an indemnification clause, the indemnity would typically include the duty to defend. Let’s use a case example to elaborate this point. In this hypothetical case, a supplier of machinery agrees to indemnify and defend a retailer against claims from the retailer’s customer in the event that a purchased machine becomes defective. As a result, besides being responsible for the damages that the retailer may suffer based on contract law or negligence, the supplier must also pay for the lawyers to defend the retailer if the customer decides to sue.

In Thailand, this kind of indemnification clause may not be enforceable. Unlike contract rules in many jurisdictions, Thai contract law is silent on “contractual indemnity.” It is commonly understood in Thailand (and confirmed by Supreme Court decision 7943/2542) that “indemnity” means “compensation” under section 222 of the Civil and Commercial Code (CCC). The CCC provides that damages claims are inclusive of all damages “usually” arising from nonperformance of a contract, and further specifies that claimants are allowed to seek compensation for damages arising “from special circumstances, if the party concerned foresaw or ought to have foreseen such circumstances.”

Under this section of the CCC, there are two types of “compensation”: ordinary compensation and special (consequential) compensation. Ordinary compensation is for “direct” damages that could reasonably be anticipated. It may even include loss of opportunity, benefit, income, or profit. For example, using the previous scenario, the retailer could sue the supplier of the defective machine to claim direct damages including the cost of fixing the machine and loss of leasing income while waiting for the repair.

Special compensation refers to compensation for “indirect” damages considered foreseeable by the defendant—either because the plaintiff had already informed the defendant of the risk, or because the defendant ought to have foreseen the damages prior to the breach of the contract. Going back to the same example, if the retailer had agreed to pay a penalty to its customer if the machine was not provided on time, that penalty would be considered “indirect” or “special” damages. The supplier would only be responsible for covering these indirect damages if it was aware when the sale transaction was concluded of the retailer’s agreement regarding the penalty.

The question now becomes: Since the contract between the supplier and the retailer said that the supplier agrees to indemnify and defend the retailer against customer claims, can the retailer recover lawyers’ fees if the supplier fails to hire a lawyer to defend the retailer?

As the Thai codes are silent on contractual indemnification, we must look at relevant Supreme Court decisions for guidance. In decision 4023/2541 from 1998, the Supreme Court considered the validity of a particular contract provision requiring the defendant to pay for the plaintiff’s attorneys’ fees in the event of the defendant’s default. The court ruled that this provision was void and against public order, explaining that the obligation to pay for the lawyers was against the Civil Procedure Code, which provides that discretion on whether to award attorneys’ fees to a winning party belongs to the court.

However, in 2005 the Supreme Court decided that attorneys’ fees specified in a contract were direct damages that could be claimed as ordinary compensation under the first paragraph in section 222 of the CCC. (Decision 6288/2548)

Just when there appeared to be a new guideline, a 2008 Supreme Court ruling seemed to contradict the 2005 decision by holding that a defaulting party’s contractual obligation to pay attorneys’ fees was not supported by any law, and that the attorneys’ fees were neither direct nor special damages under section 222 the CCC. (Decision 2147/2551)

Based on these divergent Supreme Court decisions, it is unclear how a Thai court might rule in future cases concerning indemnification obligations to cover lawyers’ fees. Parties to potential cases will have to decide how exactly to pursue resolution of disagreements over such contract provisions. Over time, however, additional disputes and cases surrounding this issue will continue to encourage the Supreme Court to revisit these questions. Hopefully, the court will ultimately recognize how common it is around the world for parties to negotiate contract terms on indemnification.

Related Professionals

Practices

Antitrust and Competition

Dispute Resolution and Litigation

Location

RELATED INSIGHTS​ 

August 29, 2022
Disputes are unavoidable in the business world—not only civil disputes between business partners but also criminal matters, in which a company or its representatives, or even an individual, are accused of legal or regulatory violations or other crimes. While this can be a daunting situation—especially for those facing a criminal matter in a jurisdiction with unfamiliar laws or litigation processes—knowing what to expect out of criminal proceedings can bring clarity and make the situation feel much more manageable. Thailand, for instance, is a vibrant economy in the heart of Southeast Asia that has attracted many businesses to pursue opportunities in the country. However, the relatively well-developed and sometimes unfamiliar regulatory regime in Thailand means that companies can unintentionally fall afoul of the legal requirements and find themselves having to defend against criminal litigation. In such a situation, understanding  how criminal proceedings work in Thailand  is critical step to  prepare for the case. Thailand’s legislative system is  based on a civil law system. Notably, however, Thai courts are still influenced by previous Supreme Court decisions as precedent references for adjudicating cases. Most criminal offenses are contained in the Penal Code (also called the Criminal Code). There are also other offenses prescribed in the country’s acts (of which there are approximately 1,000), which specify the obligations and prohibitions people must observe. Although most offenses are misdemeanors, many are nonetheless punishable by imprisonment—a dire prospect for anyone, and even more so for an accused party whose home country is not Thailand. By its nature as a juristic person, a company charged with a criminal offense is subject only to fines. However, company directors or other representatives are often accused as codefendants along with the juristic person itself. These individuals can be found guilty for the offense conducted by the juristic person if
Read More
July 12, 2022
Before the issuance in late 2019 of the Trade Competition Commission of Thailand’s Guidelines on Unfair Trade Practices in Franchise Businesses, which took effect in February 2020, Thai law made little mention of franchising as a business model—despite the great popularity of franchising in the country. The guidelines, which were issued under the Trade Competition Act B.E. 2560 (2017), partly made up for the absence of a single, codified franchising law in the country and offered valuable direction on how franchisors and franchisees should operate in compliance with Thai law. One of the most significant conditions introduced by the original guidelines in February 2020 was a requirement for franchisors to provide a right of first refusal to their existing franchisees before opening a new franchise outlet within current franchisees’ operating vicinity. An update to the guidelines addressing the right of first refusal was issued in August 2020. Most recently, a second update was announced on July 13, 2021. It was published in the Government Gazette on August 19, 2021, and came into force on the following day. The August 2021 update further revised this provision, and the updated guidelines now adopt a less restrictive approach for franchisors in relation to this first-refusal requirement. Under the updated guidelines, a franchisor who decides to open a new outlet, whether it will be operated by the franchisor or by another franchisee or person, must notify the existing franchisee located in closest proximity to the intended location, and provide the franchisee with a right of first refusal for a period of 30 days. However, the franchisor does not have to provide the closest franchisee with a right of first refusal if the franchisee’s existing performance does not meet the franchisor’s criteria as specified and communicated to the franchisee in advance. In determining what
Read More
March 7, 2022
Attorneys from Tilleke & Gibbins wrote the Thailand chapter for Licensing 2022, a comprehensive guide from Lexology Getting the Deal Through to licensing in 17 countries around the world. Two specialists from Tilleke & Gibbins’ Bangkok office—Alan Adcock, partner and deputy director of intellectual property, and Kasama Sriwatanakul, senior associate—authored the Licensing 2021 Thailand chapter, which covers the following topics: Laws: Unfair Contract Terms Act, Trade Competition Act, pre-contractual disclosure, registration of international licensing, implied obligations, Civil and Commercial Code, Trademark Act, Patent Act, and Trade Secrets Act. Intellectual property issues: Paris Convention for the Protection of Industrial Property, PCT, TRIPs. Contesting the validity of licensor’s IP rights, invalidity and expiry of IP rights, evidence of use, licensing unregistered IP, opposability requirements, sub-licensing, co-owners, trade secrets, and copyright. Software licensing: Perpetual licensing, import/export restrictions, improvements and modifications, user restrictions, and legal developments. Competition law: Trade Competition Act, specific restrictions on licensing agreements, and significant court decisions. Indemnification, disclaimers, and damages: Prevalence and enforceability of indemnity provisions and contractual waivers of damages. Termination: Conditions, indemnity, agency, and impact on sub-licenses. Bankruptcy: Impact of licensee bankruptcy on licensor and vice versa, protection, and rights to terminate. Dispute resolution: Governing law, arbitration, enforcement, injunctions, contractual waivers Royalties and payments: Currency conversion, tax, remittance restrictions, and jurisdiction-specific payments. The Thailand chapter is available below as a PDF. Tilleke & Gibbins also contributed the Vietnam chapter to Licensing 2022. To browse all 17 jurisdictions covered by the guide, please visit the Getting the Deal Through website.
Read More
March 7, 2022
Attorneys from Tilleke & Gibbins have written the Vietnam chapter for Licensing 2022, a comparative guide from Lexology Getting the Deal Through to licensing law and practice in 17 countries around the world. Licensing 2022, a guide that provides an overview of a wide range of licensing relationships, including licensing of copyrights, trademarks, and patents; software licenses; technology transfer agreements; and franchise agreements. The book also addresses issues of royalties and other payments, taxes, competition law, and termination of licensing relationships. The Vietnam chapter was authored by Linh Thi Mai Nguyen, partner and head of Tilleke & Gibbins’ trademark team in Vietnam; Son Thai Hoang, trademark executive; and Chi Lan Dang, associate, of Tilleke & Gibbins’ trademark team, along with corporate and commercial senior associate Tu Ngoc Trinh, who has extensive experience in franchising and competition law. The Vietnam chapter is available below as a PDF. Tilleke & Gibbins also contributed the Thailand chapter to Licensing 2022. To browse all 17 jurisdictions covered by the guide, please visit the Getting the Deal Through website.
Read More