Are you planning to start a business in Thailand? Be assured that you have to undergo the process of drafting, reviewing, and executing several types of agreements and contracts. It will start from the lease or purchase contract of your business premises. Then there are service providers, vendors, employment, and labor contracts. In the process, you have to ensure that you are drafting a contract strictly under Thai law.
The same goes when you are planning to lease or buy property in Thailand. Be it a freehold or leasehold, a villa or a condominium, contracts will govern the process of your possession of any type of property in Thailand. Therefore, you must have basic knowledge about the process of drafting a contract under Thai law. The attachments, annexures, titles, or structures can be distinctly different from those in your native country. Thai residents are conversant with these protocols, but if you are an international investor, the only thumb rule to safety is to take local Thai legal consultation.
This article outlines the conditions of drafting, reviewing, and validity of a contract under Thai law. Being the basic principles, the information in this article applies to all types of contracts requiring the approval of Thai law.
Definition of “Contract” under Thai Law
Contract law deals with promises, which create both parties’ rights and obligations. To be a valid contract, not only must the parties agree on the essential terms, specific performance, warranties and assignment, force majeure, and contract remedies for instance, but also subject to the validity of the contract, the illegality of the subject matter, fraud in the inducement, and a lack of legal capacity, for instance.
A contract comes into action when two or more parties agree on a specific set of operational or business conditions on paper. However, a contract’s effectiveness and legal validity depend on its adherence to Thai Law. In addition, nowadays contract law deals with electronic data, which is influenced by international model law. All electronic transactions must be taken into account when making one.
Let us help you understand the requisites of drafting a contract under Thai law. Firstly, note that all contracts and agreements in Thailand are under the Civil and Commercial Code of Thailand (CCC). Additionally, there can be more governing laws applicable based on the nature of the business or type of property you are planning to buy in Thailand.
In the context of law, a contract refers to a legal agreement between two or more parties that establishes, alters, transfers, safeguards, or terminates their rights and responsibilities. It brings about reciprocal legal obligations among the involved parties, as outlined in Section 149 of the Civil and Commercial Code of Thailand (CCC).
Step 1: The free and clear consent of the parties
To prevent a contract from becoming void, the declaration of core intention must be free from errors. For instance, imagine you purchase a Picasso for a high price after consulting with an expert, only to later discover that the painting is not by the renowned master. This mistake is an essential part of your consent to the contract. If you had known this fact at the time of purchase, you would not have agreed to pay such a high price. In this scenario, the mistake regarding a crucial element allows us to consider the contract potentially void.
Step 2: The legal capacity
In Thailand, the minimum age to enter into a contract alone, known as “sui juris,” is twenty years old. This legal threshold determines an individual’s capacity to engage in contractual agreements without the need for a legal representative’s consent. However, age is not the sole criterion.
Adults under legal protection, must have a guardian’s consent to engage in contractual activities. This must be in adherence to Sections 153, 19, and 21 of the Civil and Commercial Code of Thailand.
A notable illustration of this principle involves the sale of real estate. While one spouse’s name may be on the title deed, any transaction involving the sale or creation of a lien on the property requires the other spouse’s written consent. Without this consent, the transaction is invalid, as per Supreme Court Judgement n. 6889/2540.
Step 3: The objective must be permissible by the law
- A contract must not contradict public order, or good Thai morals, be impossible to execute, or hold legal prohibitions.
- The cause is the reason parties enter into a contract, and the object is the subject matter of the contract.
- Illegal contracts, such as those involving the sale of narcotics, are void.
- If some terms violate public order or morals, the rest of the contract may still be valid.
- Unfair terms, even if understood, may be void to protect vulnerable parties (Unfair Terms and Conditions Act, B.E. 2540).
Step 4: Use compulsory forms
- Section 152 of the Civil and Commercial Code (CCC) specifies mandatory form conditions for certain contracts.
- Contracts such as construction agreements can be verbal, while land purchases and leases must be written, signed, and registered.
- Loan agreements require the borrower’s signature but not additional signatures.
- Since 2001, virtual signatures like emails have been permitted but excluded for specific juristic acts like family and inheritance contracts.
- Non-compliance can result in the contract being void, affecting both parties and third parties depending on their good faith.
- Consequences of failing to adhere to form conditions can vary and may impact the validity of the contract.
Step 5: Prevent the common mistakes
In Thailand, several common mistakes can negatively impact the validity of a contract. These mistakes include:
1: Unclear terms and conditions and interpretation of the parties
The term “lease” is more appropriate than “rental agreement” when the contract period exceeds three years. The parties must adhere to the laws governing leases. Additionally, it must avoid the term “rental” outside of the reference of the Civil and Commercial Code of Thailand (CCC).
However, legal disputes arising from a contract without its registration with the land department need certain considerations. In such cases, the court will consider the parties’ intent, the form of the contract, and the duration of the agreement. In such cases, the tenant or lessor may lose the case if the contract exceeds three years without registration. Note that a lease or rental agreement of more than three years must be written and registered at the Land Department, as per Sections 171 and 538 of the CCC.
2: Conflict of interest in the case of company director(s)
To provide benefits to the director, a Thai company is mandatory. This includes purchasing real estate under the company’s name and subsequently renting it out solely for the director’s use. It’s important to note that the declaration of this benefit is at a value lower than the prevailing market rate. This rule is according to Section 74 of the Civil and Commercial Code of Thailand (CCC).
3: Amended terms and conditions without evidence
The adage “Words fly away, writings remain” emphasizes the significance of written documentation, particularly in a legal setting. The life cycle of a contract involves three key stages: preparation, execution, and termination. Each stage requires meticulous attention and thorough comprehension, regardless of whether the contract is private or administrative.
Drawing from our extensive experience, we have encountered various unique situations. If you have queries regarding Thailand’s contract laws or seek the assistance of a contract lawyer for drafting or reviewing a contract in Thailand, do not hesitate to leverage our knowledge and long-standing experience to safeguard your interests. Email us at [email protected] to connect with our contract lawyers specializing in Thai law.
