| ผู้เขียน | Wirot Poonsuwan |
|---|
A recent court ruling establishing that a final court judgment was needed to prove that a contractor was in breach of contract before the employer could demand a Thai issuing bank to pay its performance bond has raised eyebrows.
Generally, a project owner, who is typically referred to as the employer in the construction contract, would expect to be paid from the performance bond, which is actually a bank guarantee issued by a Thai bank or an international bank branch operating in Thailand, right away upon its demand lodged on the bank over its allegation of breach of contract by the contractor, without having to sue the contractor first.
The ruling which requires a breach by the contractor to be established in a court case before the bank can pay throws the sanctity of performance bonds into doubt.
Employer Might Have to Sue Contractor First
According to the ruling, the reason why the court ordered the issuing bank to pay is that there was already a final judgment in one other case deciding that the contractor was liable to pay liquidated damages to the employer and when the contactor failed to pay the amount, the bank guarantor had to pay it.
To enforce from the bank guarantee, this employer had to sue the contractor first, won a favorable judgment, then sued the bank which issued the bank guarantee.
The case took four years before the employer could obtain a winning judgment against the bank!
Unfortunately, the ruling relied on the employer’s final judgment against the contractor in one other case. It did not uphold the sacred wording of the bank guarantee that says in enforcing the bank guarantee, the employer does not need to claim or file any lawsuit against the contractor.
The bank guarantee contains these words:
“The bank guarantor is jointly and severally liable with the contractor to pay the employer unconditionally and without any objection in accordance with the employer’s right of claims in the amount guaranteed, in the case that the contractor causes any damages or must pay liquidated damages or any expenses or the contractor fails to carry out any of its obligations in the contract. The employer is not required to claim from the contractor first.”
Ambiguous wording in bank guarantee
The wording of the bank guarantee of this issuing bank quoted above is unclear on the issue of the employer’s right and has led to litigation. From an employer’s perspective, the phrase “in accordance with the employer’s right of claims” is vague and should not have been there at all.
The wording is too protective of the bank at the expense of the employer, who somehow might have given in to the bank easily to allow the wording in. The employer might have been scared by the bank into submission when the bank officer typically says, “These words are standard form of the bank that cannot be changed.”
In reality, there is no such fixed standard form that is incapable of being changed in a business transaction. If the employer cannot change the dangerous wording, ask the contractor to change the bank.
The words leave a lot of room for the bank to consider whether the employer’s demand is in accordance with its right and whether if that right is substantiated and justified. The bank can say no to payment based on its consideration.
What the employer should have done is to eradicate the bank’s consideration element by requiring the bank guarantee to be paid based instead on a written demand from the employer. The bank guarantee should have stated that the bank must pay “when the employer presents a written notice specifying that the contractor is in breach of contract.”
No proof of such breach required. The payment will then rely on this wording in the notice rather than on the bank’s discretion on the actual breach.
One School of Thought: Trust Our Bond as Cash
There are dozens of banks operating in Thailand. None looks at bank guarantees the same way. Expert finance professionals will be able to identify which bank thinks in what way.
One school of banks will highly respect the nature of the “first demand guarantee” and honor their paper and their own bank guarantees as cash equivalent. Beneficiaries of these bank guarantees will have a peace of mind and assurance that, upon presentation of a proper demand, their claim will be paid. No questions asked. Payment is semi-automatic.
These banks will pay “when the employer presents a written notice specifying that the contractor is in breach of contract” without any further proof or legal proceeding to verify that the contractor has in fact been in breach.
The express and clear words of their guarantees are holy and bank executives who make payment are not allowed by the banks to use their personal discretion in interpreting the wording. The bank executives have only one duty to perform that is to determine whether the employer’s demand notice conforms to the wording of the bank guarantee. If it does the executives have no choice but to release the money to the employer.
The Power of Bank Guarantee Application
If the employer happens to act in bad faith and falsely demands from the issuing bank, then it is liable legally to the contractor separately under the construction contract, independently from the bank guarantee.
In fact, the application for the issuance of a bank guarantee that the contractor signed as the customer of the issuing bank to ask the bank to issue a performance bond at the beginning will expressly say that the contractor irrevocably authorizes the bank to make payment to the employer’s first demand and agrees that the contractor has no right to make any objection whatsoever to such payment.
On the flip side of the coin, the contractor will indemnify the bank for whatever amount the bank paid to the employer with an agreed interest rate at a default rate of 15% p.a. or higher as the bank might declare such rate to be its default interest rate from time to time, a far greater interest rate than its normal loan interest rate.
By the power of the guarantee application, the contractor will have an absolutely no right of interfering with the issuing bank’s decision to obey the employer’s demand.
The Other School of Thought: Our Bond, Our Legal Protection
The other school of banks will give priority to legal protection for their banks when looking at their bank guarantees. The words of the bank guarantees for this group are vague in the bank’s favor at an advantage over the employer. Considerable discretion of bank executives is routine before the bank decides whether or not to pay the performance bond. Payment is not automatic, but rather discretionary.
Instead of relying on a written notice from the employer demanding a payment to be exactly in compliance with the wording quoted in the bank guarantee itself, the issuing bank in this school will normally say in the bank guarantee it will pay the employer on two conditions being met: (1) “if the contractor is in breach of contract;” and (2) “if the contractor fails to pay to the employer as demanded.”
In condition (1), the bank requires more than a notice that says there is a breach, but an actual determination by the bank whether in reality there is such a breach by the contractor. How? By the employer proving its case in court, of course. To ensure its paper marketability, the bank does not always go to court, but in some cases it does.
Bank Should Not Have Discretion Not to Pay
If the bank in the “legal protection” school decides that there is no such breach of contract by the contractor, then it might not pay and instead be willing to be sued in court by the employer.
There is less belief among banks in this group that their bank guarantees are cash equivalent, even though the guarantee application signed by the contractor—similar to a bank guarantee application for the “cash” school of banks—has authorized the bank to pay to the employer without any objection.
In practice, after the bank receives a demand from the employer, it will inform the contractor of such demand. If the contractor objects to the demand and bank payment, the bank will consider its position. It still has the right to make payment in defiance of the contractor’s objection. But in exceptional cases, the bank does obey the contractor and refuses the employer its payment.
Wirot Poonsuwan is the Senior Counsel and Head of Special Projects at Bangkok law firm Blumenthal Richter & Sumet and can be contacted at [email protected].
