New Amendments on Suretyship Law in Thailand

On November 13, 2014, important amendments to the Civil and Commercial Code, a foundational law of Thailand, were proclaimed in the Royal Thai Gazette. The amendments are aimed at protecting the rights of “indirect” debtors, such as guarantors and mortgagors. Legislative research revealed that creditors, largely financial institutions, are in a position that is too powerful in relation to the aforementioned types of debtors, who are mostly members of the public. Furthermore, creditors use gaps in the law in order to engage in practices that take advantage of their position, such as forcing the aforementioned types of indirect debtors to assume liability to an extent greater than their actual liability.

The amendments include changes and additions to Section 681 of the Civil and Commercial Code, which deal with surety, or the legal act where one person guarantees the debt of another. An original translation of the new Section 681, with the changes highlighted in italics, is as follows:

“Section 681. Suretyship can be given only for a valid obligation.

A future or conditional obligation may be secured for the event in which it would have effect. However, it must be specified as to the purpose of the debt, the characteristics of the basis of the debt, the maximum amount of money that is secured, and the duration of the debt that is secured, except that a suretyship for a series of transactions according to Section 699 do not have to specify the duration.

The suretyship contract must clearly specify the debt or the contract that is secured and that the surety assumes liability only for the aforementioned debt or the contract that is secured.

An obligation, resulting from a contract which under mistake or incapacity does not bind the debtor, can be validly secured if the surety at the time when he binds himself knows such mistake or incapacity.

Section 681/1. Any agreement that states that a surety must accept the same extent of liability as the debtor or accepts joint liability with the debtor shall be void.”

As is evident from the above, the amendments have not made any fundamental changes to the law other than to clarify the extent of the law in more detail. It has greatly expanded the original Section 681 and have filled in several gaps in the law that institutional creditors have used to take advantage of indirect debtors.

Section 686 of the Civil and Commercial Code

Another fundamental change involves enforcement of the obligation of a surety under Section 686. The original section was a sentence long and stated only as follows: “As soon as the debtor is in default, the creditor is entitled to demand performance of the obligation for the surety.” However, this original section has been fundamentally changed and extended to as follows:

• “Section 686. As soon as the debtor is in default, the creditor shall send a letter of notification to the surety within sixty days from the date that the debtor is in default. In any case, the creditor shall not demand that the surety to pay the debt before the letter of notification reaches the surety. However, the right of the surety to pay the debt on the deadline for payment shall not be forfeited.
• In the event that the creditor does not produce a letter of notification to the surety within the period of time specified according to the first paragraph, the surety shall be free from liability in regards to all interest and compensation, including associated expenses arising after the the passage of the deadline as stated in the first paragraph.
• As soon as the creditor has the right to demand that the surety pay the debt or as soon as the surety has the right to pay the debt according to the first paragraph, the surety may pay the entire debt or may pay the debt according to the conditions and payment methods extended by the creditor to the debtor before the expiration of the deadline; however, this shall be applicable only to the extent of his or her liability. Furthermore, Section 701, paragraph two, shall apply mutatis mutandis.
• During the time that the surety pays the debt according to the conditions and payment methods extended to the debtor according to the third paragraph, the creditor shall not increase the rate of interest on the grounds that the debtor had missed the deadline.
• The payment of the debt by the surety according to this paragraph shall not have any effect on the rights of the surety according to Section 693.”

Section 691 of the Civil and Commercial Code

A new addition to the Civil and Commercial Code that prohibits joint liability of debtor and surety. This new clause has the effect of invalidating Section 691 of the Civil and Commercial Code which originally dealt with limiting the rights of a surety in the event of joint liability between debtor and surety. The new amendments to the Code have replaced the language of Section 691 with a new clause that limits the liability of sureties, rather than to limit their rights. An original translation of the new Section 691 is as follows:

• “Section 691. In the event that the creditor takes any action that has the effect of reducing the amount of debt that is secured, including interest, compensation, any associated expenses, if the debtor has paid the debt according to the reduced amount, or if the debtor has paid the debt according to the reduced amount, but not completely, and the surety has paid the remaining amount, or the debtor has not paid the debt according to the reduced amount, but the surety has paid the remaining amount, in this case, whether or not the deadline for paying the debt according to the reduced amount has passed, the surety shall be free from the suretyship.
• Any agreement that has the effect of increasing the burden on a surety more than as described in the first paragraph shall be void.”

This amended clause along with the other changes passed regarding surety law serve as consumer protection laws that protect the rights of the public against large financial institutions. Before the recent amendments, those who acted as guarantors of debts, normally the spouses or close family of the debtor, were unprotected against unjust and/or overreaching actions on the part of the the creditor, which is normally a commercial bank. For example, such actions include forcing the surety to be liable for the full amount of the debt beyond the amount actually guaranteed by the surety. Nevertheless, the new laws have been amended into the Civil and Commercial Code itself and therefore affect legal relations between all creditors and sureties, regardless of whether the parties in question fall into the category of financial institution and consumer or not. At this time, it is not apparent as to how the new amendments will have a positive effect on the business relationship between a creditor and a surety who are in an equal position, such as two companies. It is conceivable that in such cases, the new law would unjustly disadvantage the creditor. In any case, the new amendments are complex; therefore, creditors and sureties are advised to consult with competent legal counsel to understand the implications of the new law.

 

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Category: Civil and Commercial Law, Litigation