Applying Force Majeure to Contractual Obligations During the COVID-19 Crisis

The COVID-19 outbreak is, without doubt, a human tragedy that has affected hundreds of thousands of people not only in Thailand but also around the world. Declared a pandemic by the World Health Organization on 11th March, COVID-19 has wreaked havoc on the global economy as a result of supply chain disruptions and weakened business confidence, leading many embattled enterprises to suspend their operations and let go of their staff. The uncertainty surrounding the situation has led many to look for answers regarding what should be done to address ambiguities surrounding contractual obligations on employment, rent, and business transactions.

This article is intended to provide various stakeholders, including businesses, employees, customers, lessors, lessees, and others with a legal perspective on how obligations can be addressed amid the COVID-19 crisis. While the situation may continue to evolve in the coming days, the viewpoints covered in this article are based on legal information that is available as of the time it has been drafted.

Definition of force majeure under Thai law

Thailand’s Civil and Commercial Code defines force majeure as “an event or pernicious result that could not be prevented despite efforts by the affected person to take appropriate care as may be expected from them in such a situation” Historically, force majeure has been invoked during natural disasters, particularly in 2011 when floods ravaged much of Thailand, as well as during times of political crises. However, given the novelty of the situation surrounding the COVID-19 pandemic, legal practitioners have been cautious in applying the concept of force majeure to the outbreak.

While ambiguities currently exist, there are circumstances where force majeure would apply depending on the type of contract, the rights of the parties involved, and the losses suffered by all parties when an extraordinary situation takes place. Some of the most pressing matters that have emerged as a result of the outbreak have pertained to employment contracts between employers and employees as well as lease agreements between lessors and lessees.

It is also worth noting that even if force majeure is not explicitly outlined in a contract, regardless of whether it is an employment contract or a lease agreement, it is implied by Thai law that force majeure would apply if circumstances highlighted by the definition are satisfied.

How does force majeure apply in an employment contract?

Employment contracts in Thailand are governed by the provisions of the Labor Protection Act (“LPA”) which currently does not highlight matters about force majeure. Nonetheless, the LPA states under Section 75 that employers who need to “temporarily suspend their business operations, partially or as a whole, for whatever reason that affects their business to the extent that the employer is unable to carry out normal operations”[3] are required to pay at least 75% of the wages the employee was earning before the suspension during the time business operations are ceased. It should be noted, however, that this provision is applied in situations that are considered normal or ordinary.

Nevertheless, the extraordinary nature of the COVID-19 outbreak may allow for special considerations. Given the order issued by the government earlier in March regarding the closure of schools, entertainment venues, pubs, malls, and places of leisure, employers involved in these sectors will not be liable to pay 75% of the wages as required by the LPA due to force majeure. This was justified by the Social Security Board because the closure and/or suspension of businesses occurred as a result of a direct order from the government, giving employers no control over the continuity of business operations. Employers, however, must still take into account that terminating employees will still be subject to the provisions outlined in the LPA, particularly concerning giving advanced notice and severance pay.

To address the needs of employees affected by the order, the Social Security Board has stated that it will provide additional benefits. Employees who are required to undergo a 14-day quarantine will receive 50% of their wages or salaries for a period of 180 days, though the maximum wages or salaries are capped at 15,000 a month. Likewise, employees whose work has been temporarily suspended by the order will receive the same 50% of their wages or salaries albeit for up to 90 days. Thus, monthly Social Security benefits will range between 5,000[4] and 7,500 Baht, depending on the affected employee’s wages or salaries. However, as of the time this article was written, the resolution is still awaiting approval from the Cabinet.

Additionally, the Social Security Board has stated that employees who opt to resign from their place of employment will receive 45% of their wages or salaries for a period not exceeding 90 days; again, with calculated wages and salaries being capped at 15,0000 Baht. If employees are terminated by their employer, they will receive 70% of their wages or salaries for a period of 200 days.

On the other hand, businesses that were not specifically affected by the order, but still face difficulties as a result of the economic ramifications caused by COVID-19, cannot invoke force majeure for any suspensions to business activities. They must, therefore, adhere to Section 75 of the LPA which will require them to pay employees 75% of their wages throughout the time business activities are suspended. If the need for this should ever occur, the employer must notify their employees as well as the Labor Inspectors at least three days before they cease operations.

Again, the COVID-19 outbreak does not absolve employers from any other obligation specified in the LPA, particularly those surrounding terminations. Any changes in employment conditions, including the reduction of salaries or changes in job titles that are detrimental to the employee, are not permitted by the Thai Labor Relations Act. An alternative for employers would be to ask employees to take days off or unpaid leave.

If a company were to fail amid the crisis, it must be mindful of its obligations to its stakeholders, namely its creditors, employees, and corresponding government authorities. Thailand’s Civil and Commercial Code, under Section 253 and 257 outlines that during liquidation, outstanding payments to employees and creditors with preferential rights such as tax authorities are to be disbursed first. Proceeding this are outstanding payments owed to secured creditors followed by balances owed to unsecured creditors which are last to be settled during liquidation.

Can force majeure apply to lease agreements?

It is important to take into account the causal connection between the pandemic and the lessee’s inability to meet their obligations as this would play a pivotal role in determining how the parties should proceed from a legal standpoint. For commercial leases in Bangkok, there have been cases of injunctive relief provided by lessors in the form of 10-35% reductions in rental fees as well as postponements in payments as necessary. Although there are currently no legal requirements to do so, parties often enter these agreements to establish goodwill and ensure business continuity. This is similar to debt relief packages offered by financial institutions amid the economic downturn caused by the outbreak to offset defaults on debt repayments.

Nonetheless, invoking force majeure to fully discharge a lessee of their obligation under a lease agreement would be difficult as this puts an unfair burden on the lessor, making fee reductions or deferments a more beneficial solution to both parties. If indeed force majeure is triggered by extraordinary circumstances, Thai courts would likely settle disputes by reducing rental fees rather than waiving them altogether.

Failing to deliver on contractual agreements due to the COVID-19 outbreak, particularly the payment of rental fees, may be considered by the Civil and Commercial Code as “the performance [of the contract] becoming impossible”[6] to execute, though these cases will be viewed on a case-by-case basis. For example, if a company is ordered by the government to shut down or temporarily cease operations, they will be relieved from performing their obligation as stated in Section 219 of the Civil and Commercial Act given that they cannot meet their obligations due to circumstances that are out of their control.[7]

Yet again, awaiting court decisions to settle the inability of a lessee to fulfill their obligations may be too time-consuming. Therefore it would be a better option for both parties to negotiate a deal that would be beneficial for them. It would also be prudent for the Thai government to provide written guidance over these matters to prevent confusion.

Closing remarks

The economic crisis that ensued following the outbreak of COVID-19 has caused confusion and mayhem in the global economy. In Thailand, many are seeking legal guidance over how they can continue to meet their obligations to employees, lessors, and others, and whether force majeure can be invoked to justify the inability to meet obligations. While there are currently no definite ways to address these issues in the face of the pandemic, considerations are being made to accommodate those who are facing difficulties in these trying times.

For more information or assistance regarding the matters discussed, please contact us at info@silklegal.com.

 

[1] WHO Director-General’s opening remarks at the media briefing on COVID-19 (11th March 2020), (available at https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—11-march-2020).

[2] Thailand Civil and Commercial Code (1st January 1925) (available at http://www.thailandntr.com/en/trade-in-services/laws/organization/download/8?file=Law_TIS_10_EN.pdf).

[3] Section 75 Labor Protection Act (12th February 1998) (available at http://web.krisdika.go.th/data/outsitedata/outsite21/file/LABOUR_PROTECTION_ACT_B.E._2541.pdf).

[4] Minimum wage varies throughout Thailand, with minimum monthly wages in Bangkok averaging at around 10,000 Baht (source: https://www.boi.go.th/index.php?page=labor_costs).

[5] How does the retail store help tenants? On the day that COVID-19 was still plagued (10th March 2020) (available at https://marketeeronline.co/archives/150950).

[6] Thailand Civil and Commercial Code (1st January 1925) (available at http://www.thailandntr.com/en/trade-in-services/laws/organization/download/8?file=Law_TIS_10_EN.pdf).

[7] Thai Supreme Court Case No. 3506/2546 and No. 4968-5050/2543.