Thailand: Draft Security for Payment Bill

Introduction

In common with construction industries across Asia and the rest of the world, non-payment of contractual debt is the key problem facing the construction industry in Thailand. The draft bill on Security for Payment seeks to free up cash flow in the industry, by introducing a pay now argue later dispute resolution procedure, along the lines of similar legislation which has been so successfully introduced in Singapore and Malaysia.

Construction, engineering and infrastructure projects in Thailand are currently stalled by lengthy arbitration proceedings. A new speedy form of dispute resolution is needed, particularly for minor disputes, which allows the project to continue while the dispute is resolved. Although the draft bill can be seen as very contractor friendly, it may be in the interests of all parties to the industry, including employers, to reduce project delay by allowing projects to proceed while minor payment disputes are resolved, whilst leaving more significant disputes relating to defects to a later date.

In common with the legislation introduced in Singapore and Malaysia, Thailand is proposing to introduce a short form dispute resolution procedure, adjudication, in which construction payment disputes are decided within approximately 30 days and payment must be made within 15 days of the adjudicator’s decision. Decisions of an adjudicator are temporarily binding, meaning that they must be complied with, but can later be overturned at litigation or arbitration. If the losing party fails to comply with the decision of an adjudicator, it can be enforced as if it were a court order.

Section 15 of the draft bill sets out the information that the responding party needs to provide to commence an adjudication. These include the amount due and the date on which it became due, the relevant clause of the construction contract, a description of the circumstances of the dispute, the details of the works or services and a statement that if the debt is not paid within the deadline, the referring party is willing to refer the dispute to adjudication under the Act.

It is proposed that the Thailand Arbitration Centre (THAC) administers the rapid adjudication process.

The draft legislation has been designed to cover construction contracts and related contracts, including subcontracts and consultants’ appointments, regardless of the governing law. Once a debt has been refused, there is no time limit for when an adjudication can be started, and the responding party cannot halt the process by refusing to participate.

 The legislation is not currently intended to apply to oral contracts, but to written contracts only. “Pay-when-paid” clauses, which make payment to contractors or subcontractors reliant on payments from a third party such as the employer, will be outlawed.

Suggested amendments

The implementation of the Security of Payment Act in Thailand may encounter several challenges concerning the adjudication process, procedural roadmap and timeframes, scope of application, and legislative progress.

Prior to the enactment of this Act, it is essential for the legislative bodies to consider a few challenges that may arise during the implementation, to ensure that the Act is implemented effectively. These include:

• Article 7 of the draft Act provides that if a construction contract conflicts with the Act it will be void. Today's construction contracts, especially for large projects with state-owned enterprises, usually contain a suite of interlinked contracts with provisions that favour the employer, for example giving the right to deduct performance bonds, retention or accrued payments such as wages. The current wording of article 7 could potentially impact these contracts, and it remains unclear whether they will be void or excluded from the ambit of the Act.
• Article 16, paragraph 2 of the draft bill may be ambiguous to some, as it is not clear whether the debtor’s silence amounts to a denial of the debt. To avoid potential delays in the process, clarity is necessary to make it clear whether silence will be considered a denial or not.
• Paragraph 23 provides a very short period of 7 days for the responding party (usually the employer but it could be the contractor in a claim by the subcontractor) to put forward any objections to a payment claim. It is hoped that the timeframe will be increased, or the responding party will have the right to request an extension.
• Article 47 provides a right for the contractor/subcontractor to suspend work in the case of non-payment, but this right only lasts for 30 days, after which the unpaid party must return to work. This does not ultimately solve the problem for non-payment, as the prevailing legal practice in Thailand tends to prolong dispute resolution process until all challenges against the adjudication, court decision, or arbitral award are exhausted.
• Moreover, Article 47 proposes that the completion date for the affected works will be extended by the amount of time for which the work was suspended. However, this provision is unclear and may create a loophole for the contractor/subcontractor to have an extension of time for works in float, which would be an irregular event.

Conclusion

It is worth noting that the Security of Payment Act in Thailand is currently undergoing a thorough review by industry professionals and the drafting committee. While no significant revisions to the original draft of the bill have been made yet, it is encouraging to see that it is being carefully considered by the Ministry of Justice.

It is important to recognize that these reforms are still in the draft stage, and there is still much work to be done before the bill can be passed into law. However, the constructive discussions and debates between industry professionals and the drafting committee are a promising sign that the issues raised in the public hearing will be addressed.

As the process moves forward, we can remain hopeful that the Security of Payment Act will be updated in a way that promotes fairness and transparency in the payment process, while also providing necessary protections for all parties involved.