An alarming shift in the court precedent following the amendments to Thai guarantee law

Indemnity Agreement was previously fine

Before the amendments to the guarantee law in 2014 and 2015 (Amendments), a guarantee was entered into in line with a standard guarantee agreement acceptable in the financial markets (i.e. guarantee the full performance of obligations) without any restriction. Alternatively, the parties could also enter into an indemnity agreement where a party agrees to be liable for another person's liability (whether as a joint obligor) instead of a guarantee. The Thai court upheld the legal principle of the freedom of contract that whether to enter into an indemnity agreement or a guarantee would depend on the parties' intention (Supreme Court Judgments nos. 196-197/2472 (1929), 1239/2505 (1962), 243/2522 (1979) and 1088/2530 (1987)).  

An indemnity agreement may now be treated as a guarantee 

The Amendments have imposed more limitations on a guarantee agreement. These includes the guarantor no longer being liable as joint obligors with the principal debtor (unless the guarantor is a legal entity) and the guarantee agreement specifying the nature and purpose of the guaranteed debts, the guaranteed period and, most importantly, the maximum guaranteed amount. 

There has been an argument on whether entering into an indemnity agreement would still be possible or would this be considered an attempt to avoid the newly established guarantee limitations imposed by the Amendments.  Would it be possible for the parties to be freed from all these limitations by simply calling their agreement an indemnity.

The recent Supreme Court Judgement no. 8425/2563 (2020) has addressed this issue. It undermined the freedom of contract doctrine by overruling the previous precedents and rendering that the agreement to be liable as a joint obligor without receiving any consideration from the underlying transaction would be treated as a guarantee. Thus, the guarantee, in this case, was void as the individual guarantor agreeing to be liable as a joint obligor is prohibited under the new guarantee law.

In addition, the said judgement also broadened the meaning of a guarantee as typically set out in Section 680 of the Civil and Commercial Code by stating that the guarantee is where a person be liable to a creditor if a debtor fails to perform its obligations. The agreement to be a joint obligor is to be liable as if he or she is a primary obligor whether or not the real primary obligor fails to pay its debts. Hence, it should not be considered as a guarantee pursuant to the strict interpretation of Section 680. Conversely, this arrangement was treated by this Supreme Court to be a guarantee. This would be an attempt to give a more protection to the individual guarantors which the court viewed that they have less bargaining power in the case and so these individual guarantors can enjoy the limitations proposed by the Amendments. 

What to do?

An indemnity agreement should be reviewed carefully and be considered with all limitation languages required to create a valid guarantee. Please liaise with a legal counsel on whether the indemnity agreement in question could be considered as a guarantee. If this is the case, we suggest taking into account the requirements under the guarantee law such as incorporating the limitation elements into the agreement or refraining from addressing the individual guarantor as a joint obligor.

If you wish to discuss this with us, please feel free to contact us through the contact details below.