POSITION PAPER ON ARBITRATION IN THAILAND

The American Chamber of Commerce in Thailand October 2009

BACKGROUND For over half a century, Thailand has demonstrated that it is an arbitration friendly state by embracing and promoting arbitration as a method of resolving commercial disputes. Indeed, Thailand was among the earliest parties to adopt the 1958 New York Convention on the Uniform Enforcement of Arbitral Awards (New York Convention), adopting the New York Convention in December of 1959. Successive governments policies and legislation have supported this internationally accepted method of dispute resolution. The success of domestic and international trade and investment depends on several core issues, one of which is the method by which participants can resolve commercial disputes quickly and effectively. In this regard, it is widely acknowledged that those engaged in trade and investment often prefer to resolve their disputes by arbitration. Arbitration is considered to have many advantages compared to litigation, and businesses are therefore often more willing to trade with and invest in states where arbitration is supported as an effective procedure for resolving commercial disputes. Recognizing this, most states reciprocate by providing the underlying parties with the option to choose arbitration in order to resolve any disputes they may have. The business community in Thailand represented by [insert names of organization] strongly wishes to encourage trade and investment with and in Thailand. As part of this goal, we hope to see Thailand continue to develop as an arbitration friendly state, and to build on the achievements of past and present governments demonstrating that Thailand embraces and supports arbitration as a method to resolve commercial disputes. To that end, we offer our comments and seek to inform the government of the issues that merit close consideration in the business communitys opinion if arbitration in Thailand is to develop in line with modern, widely accepted international principles. RECENT DEVELOPMENT Since the beginning of the year, there have been several bills proposed to the government that involve arbitration, such as the bill on the Amendment of Thai Penal Code and the bill on the Amendment of the Arbitration Act. On July 28, 2009, the Cabinet passed a Resolution expanding the 2004 Cabinet Resolution to restrict the use of arbitration in all types of contracts between a governmental organization and a private company. BUSINESS COMMUNITY REACTION The business community in Thailand is extremely concerned about the negative implications that could easily flow from the Cabinet Resolution of July 28, 2009. We share similar concerns with regard to the draft legislation. Given the current global economic situation, amongst a number of domestic challenges, it is critical that we do everything possible to maintain investors trust and confidence. Unintended consequences may otherwise result and could worsen the situation, such as dislocating commercial activities or deterring investment. With the utmost respect, we urge the Royal Thai Government to consider the matters below, which we believe are most critical to Thailand and for which we would like to request your immediate consideration. We believe that the Cabinet resolution of July 28th is a major setback to the governments great initiatives and efforts to restore investor confidence in the country and may undermine critical economic policies. The investors and trade partners are looking for market places that provide and ensure access to a sound legal infrastructure, reliable judicial system, and supportive governmental policies. Alternative dispute resolution is well accepted internationally as an efficient and effective means to resolve commercial disputes and is a

POSITION PAPER ON ARBITRATION IN THAILAND

The American Chamber of Commerce in Thailand October 2009
standard requirement for financing by most financial institutions. Simply stated, arbitration clauses are expected by foreign businesses when they enter into a contract with a host government. Thai businesses share this expectation when they invest abroad. The presence or absence of an arbitration clause often is critical for investment decision-making and to engender and maintain confidence of investors and lenders. Restricting the parties freedom to contract how they will resolve private disputes operates to inhibit Thailands efforts to promote trade and investment. As a result, we believe it will make Thailand less competitive locally and in the international marketplace. THE ADVANTAGES FOR THAILAND Arbitration has many advantages compared to litigation within the judicial process. Significantly these benefits flow to all parties, not only to the private investor. By embracing and promoting arbitration within Thailand, we strongly believe the country will gain and greatly benefit from these advantages: 1) Preventing forum shopping: Without an arbitration clause, any party can file a claim in any court that potentially has jurisdiction over the matter, which often results in forum shopping. As the Thai government has assets and representative offices worldwide, this opens up the possibility of a counter-party filing a claim against the Thai government in a forum that may not be convenient for or preferred by Thailand. In contrast, where a contractual arbitration agreement is in place, foreign parties cannot refer their disputes to foreign courts. In this way, an arbitration clause can help give the Thai government control of and thereby certainty over where disputes will be resolved. 2) Preventing duplicative lawsuits: When arbitration is not available, disputes often lead to dueling court proceedings. One party files a lawsuit in one jurisdiction (say, the U.S.), and another files a lawsuit in another jurisdiction. This obviously adds significantly to the expense and uncertainty of dispute resolution proceedings. The absence of an arbitration clause does not ensure that a dispute will be resolved in a particular court; rather it can create perverse incentives for multiple lawsuits in different courts. Since arbitration clauses provide that disputes must be resolved through arbitration, it prevents the parties from multiple lawsuits in different courts around the world. The reasons behind a prohibition on arbitration could be wrongly interpreted in some quarters, thereby reducing foreigners underlying confidence in the impartiality of the Thai judicial process which could arguably lead to an increase in the number of lawsuits filed in foreign countries. 3) Same setting as a Thai court: The Thai government as a party can ensure that the arbitration proceeding will provide the same equity and fairness as in a court of law. It is a similar vehicle, but gives the parties freedom to customize the proceeding to the specific circumstances of the matter in dispute. For instance, the parties can select arbitrators who have desired qualities and competencies, and who could be a court judge or trained legal expert. The parties can also select the most efficacious procedural rules, which could be some or all of those embodied in the Thai code of civil procedure. Arbitration is flexible enough to allow the parties to agree on meaningful modifications to procedures that might otherwise be unnecessarily cumbersome for the case at hand. 4) Neutrality: It is important that the final resolution of a dispute is fully accepted by all parties involved including general observers, locally and elsewhere. Arbitration is widely recognized as a neutral means of dispute resolution because it is designed by and has been agreed to by the parties in advance. While a court judgment might produce the same outcome, it can easily be viewed as being a result of favoritism to a host country where the government is a party. This is true of any host country court. 5) More efficient means: The parties can have an expert in the subject matter of the dispute serve on the tribunal, something which arguably is not possible in the judicial process. This helps make the decisionmaking more efficient, as the parties are not required to produce expert witnesses to educate the decisionmaker about technicalities with which he or she might be unfamiliar, especially given the complexity of many

POSITION PAPER ON ARBITRATION IN THAILAND

The American Chamber of Commerce in Thailand October 2009
commercial disputes. 6) Finality: Because the judge and proceedings are jointly designed by the parties, there is no need for further screening. The arbitration award can only be challenged on very narrow, limited grounds such as certain procedural deficiencies. To have the dispute resolved expeditiously without the prospect of lengthy, multitiered appeals results in greater efficiency and is more economical for both parties. 7) Local procedural constraints: Thai civil procedure was primarily designed as a means to resolve mainly local disputes. It does not provide the desired flexibility to accommodate international transactions, especially where there is a foreign party or context. There are a number of constraints, such as a requirement that court proceeding be conducted in the Thai language and rules of evidence that require all documents to be translated into Thai. These restrictions often prove to be administratively burdensome and sometimes can lead to inaccurate results. They are also costly, and those costs will be reflected in the higher pricing of bids. In an arbitration, the parties can agree on the language of the proceeding and the documents. This enhances the effectiveness of the proceedings and helps ensure the integrity of the outcome. 8) Confidentiality: Arbitration is recognized as providing greater transparency in international disputes. At the same time, arbitration allows the parties to keep the nature of the dispute and any relevant proprietary information confidential, whereas litigation does not. 9) Reducing court caseloads: Use of arbitration helps alleviate the backlog of court cases, as it has proven to be well-suited for the resolution of commercial disputes. In particular, disputes involving shipping and insurance issues can often be privately resolved through arbitration without burdening the judiciary. 10) Enforcement limitations: A local court judgment can only be enforced effectively within the Kingdom. To enforce a Thai courts judgment against a party abroad, a maze of complicated procedures often must be overcome, and often the laws of a foreign country will not recognize a judgment rendered in another country or will only allow enforcement where reciprocity of treatment is granted by the courts of the country where such judgment was rendered. As for Thailand, Thai courts will generally not enforce a foreign court judgment, thus resulting in a Thai courts judgment simply not being recognized or enforced in those jurisdictions operate on a reciprocal basis. Such an outcome could be a real disadvantage to the Thai government in cases where the defaulting party it has contracted with maintains all of its assets outside of Thailand. In such a case, the Thai government would have little or no redress against a contracting party's breach when attempting to enforce a Thai court judgment in the defaulting partys country. On the other hand, the Thai government can enforce an arbitration award (even a local one) by seizure of the assets and other remedies in the defaulting partys home country if it is a signatory to the New York Convention (which almost all countries now are). 11) Reduction in of project financing: Most major lenders, particularly multilateral ones such as the World Bank, OECD, and ADB, require the project contract to have an arbitration clause as the means for dispute resolution. In the absence of an arbitration clause, they are not prepared to make available funds that would otherwise be available. This limits the availability of financial resources and can have a negative impact on the investment climate. 12) Price risk: Businesses would like to quantify and have greater certainty of the magnitude of the risks for disputes. If there is no arbitration clause in contracts, the tendering party would normally price the risk of referring potential disputes to the Thai courts, thus increasing costs. Sometimes, they would simply decide not to tender at all and therefore may interrupt the supply chain.

POSITION PAPER ON ARBITRATION IN THAILAND

The American Chamber of Commerce in Thailand October 2009
CONCLUSION The successive Thai governments are to be commended for their support of arbitration; however, it is regrettable that certain developments since 2004 (and now in 2009) have led to restrictions on the use of arbitration in contracts between the state and private entities, although this is reversible. The business community in Thailand believes that any restriction on the availability to resort to arbitration to resolve commercial disputes will have a negative effect on the business environment, investment potential within Thailand [and the nation of Thailand], and on the ability of the nation to effectively pursue complex development projects in the public interest. With respect to the governments concerns about the arbitration process, we recommend that rather than limit the use of arbitration, the government should instead keep arbitration open and available as a viable choice. This will be seen by the business community as a further positive step forward by the government to improve the business environment within Thailand. Further, if the government strengthens and supports the use of arbitration, it will demonstrate Thailand will be in the forefront of others for its commitment to a fair and open market environment. We would be glad to provide any assistance as may be required in formulating a policy or procedures that will promote arbitration within Thailand. ###