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How developers may invoke Force Majeure in Thailand Real Estate

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In recent weeks we have seen several “Force majeure” notification letters mainly from developers in the coastal areas that previously offered some form of rental return to their clients. With a drastic decline in both local and international arrivals, occupancy rates of these properties have come to a bare minimum, and for off plan developments the post COVID effect will have consequences on the future rental returns.

Force majeure or so called “Act of God” clauses are contractual clauses which alter parties’ obligations and/or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations. The concept of force majeure is clearly recognised under Thai law Section 8 of the CCC but its a very broad term, and the legal provision does not include an exhaustive list of force majeure events. According to previous Supreme Court decisions, force majeure events include severe natural disasters, accidents and riots. However, there is no previous Supreme Court decision ruling on whether the outbreak of an infectious disease constitutes a force majeure event.

Therefore FazWaz spoke with Rajah&Tann Asia, one of the leading law firms in the region, to understand how Force Majeure is applicable in Thailand specifically during the COVID-19 crisis.

Q: Can a developer use the force majeure clause and release itself from its liability under the contract?

A: There is a widely-held (albeit untested) view that the pandemic would not be considered as a force majeure event in itself; however, where the pandemic triggers a specific event that prevents a party from performing its obligations under a contract, the party affected may then rely upon that event to invoke and rely upon the force majeure provision under the contract.

Q: What about rental returns on off plan projects?

A: For commercial transactions, where there is the occurrence of a force majeure event, parties to a commercial contract may rely on the specific legal provisions set out in the CCC to be relieved or excused from their obligations under the contract. A party who is unable to perform the contract as a result of a force majeure event may rely on Section 205 or Section 219 of the CCC as the case may be. Where the performance of a party’s obligations under a commercial contract becomes impossible as a result of a force majeure event, that party may rely on Section 219 of the CCC in order to relieve it from its obligations to perform the contract.

On the other hand, consider the case of a seller under a commercial contract. Where the seller’s ability to perform the obligations is not entirely impossible but is disrupted or delayed by the event of force majeure, the seller may seek to rely on Section 205 to claim that he is not in default of performance under the contract. In this case, the seller’s obligation to perform the contract is not relieved but he would not be liable for damages incurred as a result of the delay in his performance.

It is worth noting that there is no ruling by the Thai Supreme Court concerning the applicability of Section 219 and Section 205 to the COVID-19 situation. Therefore, each case would have to be considered on a case by case basis.

Q: How can developers invoke Force Majeure under Thai law?

A: For example, in the case where a force majeure clause provides that “If a party is prevented from performing its obligations under the terms of this agreement because of any cause or event beyond the reasonable control of such party such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes”
which are: (i) whether the COVID-19 pandemic is an event beyond the reasonable control of such party, and (ii) whether the party is prevented from performing its obligations under the terms of the agreement because of the COVID-19 pandemic.

In the case where a seller is prevented from delivering goods overseas within the period specified in the agreement as a result of a governmental lockdown order due to the pandemic, the seller would be entitled to argue that the governmental lockdown order (issued as a measure to prevent the spread of COVID-19) is an event beyond the seller’s control and has prevented such party from making delivery of goods overseas. As such, the seller should be able to rely on and invoke the force majeure clause.

On the contrary, if there is no governmental lockdown but it is simply not convenient for the seller to deliver the goods because of the COVID-19 situation (for example, if the seller has to incur additional transportation costs in doing so), the seller should not be entitled to rely on the force majeure clause because the seller is not prevented from performing its obligation. In any event, this question requires the consideration of the circumstances and facts of each case, the words of the contractual provision and the interpretation thereof. Parties who wish to avoid conflict in the interpretation of the force majeure clause should agree on a well-drafted force majeure clause and may also, for clarification, include a pandemic in either an exhaustive or non-exhaustive list of force majeure events. In the current COVID-19 situation, it is advisable for parties to commercial contracts to revisit terms in commercial contracts to prepare for an unpredictable event, the occurrence of which may prevent them from complying with or performing their contractual obligations.

Advised is that Parties who wish to avoid conflict in the interpretation of the force majeure clause should agree on a well-drafted force majeure clause and may also, for clarification, include a pandemic in either an exhaustive or non-exhaustive list of force majeure events. In the current COVID-19 situation, it is advisable for parties to commercial contracts to revisit terms in commercial contracts to prepare for an unpredictable event, the occurrence of which may prevent them from complying with or performing their contractual obligations.