DOI: 10.14457/tu.the.2015.434
title: Problems of bank guarantee under Thai law

description: In international trade, there are several securities for performing an obligation under the international contract. Bank guarantee is one of a significant security which is widely used. Whereas banks are credible institutes, so that the provision of a written undertaking by a bank in favor of a buyer payable on demand is a credible security for both a buyer and a seller. Such undertakings are variously known as demand guarantee. Demand guarantee is a basic financial instrument issued by a bank under the commitment to pay maximum amount money arising merely upon making a demand for payment in a stipulated form and presenting documents as prescribed in the demand guarantee within the validity period. It means that even if the parties of the underlying contract cannot specify that there is a default under the underlying contract, the bank still has a duty to pay if proper complying documents are presented. While traditional means of security such as the accessory guarantee or the suretyship, is inconvenient and disadvantageous to a creditor because an accessory guarantor can invoke the principal debtor’s defenses against the creditor. While banks shall not act as accessory guarantors since it is difficult to determine in which situations they should pay. In addition, the bank may involve in a dispute between the parties under the underlying relationship. There are many international rules concerned with the demand guarantees; for instance, the regulations of International Chamber of Commerce (“ICC”) such as the Uniform Rules for Demand Guarantee ("URDG"), the Uniform Customs and Practice for Documentary Credits ("UCP") and the International Standby Practices ("ISP"). Under such rules, the demand guarantees are independent undertaking from the underlying contract, and they are paid on demand (primary undertaking) with no proof of default. However, these rules are different from the rules of guarantee under the Civil and Commercial Code of Thailand. The rules of guarantee under the Civil and Commercial Code is a suretyship which the obligation of the surety depends on the default of the principal debtor and does not arise until the principal debtor has failed to perform his primary obligation under the underlying contract. According to the rules of guarantee under Thai law, the guarantor will pay when the principal debtor fail to perform an obligation and the guarantor is not a primary debtor.At the present, Thailand does not have a direct rule related to the demand guarantee, results in that Thai courts have to decide a case by trying to adapt rules of guarantee under the Civil and Commercial Code of Thailand. While the demand guarantees under ICC regulations are independent undertaking, the guarantee under the Civil and Commercial and Code of Thailand is different. This conflict consequently causes many problems of bank guarantee issued under Thai law. For instance, one of the nature of demand guarantee is the guarantor has to pay on first demand so that the bank has to pay when the creditor presents documents. Nevertheless, under the Civil and Commercial Code, a guarantor has to invoke a primary debtor’s defense against a creditor because the guarantor will lose the right to recourse from the debtor if the guarantor ignores to invoke a defense. Additionally, the Regulations of the Office of the Prime Minister on Procurement B.E.2535 (1992) has stipulated bank guarantee templates which the private companies who are requested the bank guarantee to secure their obligation of the procurement contract with the government agencies, have to use the template attached with these regulations. Whereas there are many differences between the bank guarantee issued to the private sector and public sector such as the bank guarantees from the principal debtor are the security to perform an obligation under the underlying contract, and they are a penalty which the court may reduce it if it is disproportionately high. Since Thailand has no direct law or regulation concerning with the demand guarantee, under the doctrine of freedom of contract and autonomy of will, including Section 150 of the Civil and Commercial Code, all parties of demand guarantee should specify conditions of bank guarantee complying with ICC regulations.