Problems of Bank Guarantee under Thai law

Abstract

Bank guarantee or demand guarantee is a basic financial instrument issued by a bank under the commitment to pay maximum amount money arising merely upon making a demand for payment in a stipulated form and presenting documents as prescribed in the demand guarantee within the validity period. It means that even if the parties of the underlying contract cannot specify that there is a default under the underlying contract, the bank still has a duty to pay if proper complying documents are presented.

While the rules of guarantee under the Civil and Commercial Code which arethe accessory guarantee or the suretyship, are inconvenient and disadvantageous to a creditor because the guarantor (the surety) can invoke not only his defenses but also the principal debtor’s defenses against the creditor. Whereas banks shall not act as accessory guarantors since it is difficult to determine in which situations they should pay. In addition, the bank may involve in a dispute between the parties under the underlying relationship.

There are many ICC rules concerned with the demand guarantees; UCP 600, ISP 98 and URDG 758. Under such rules, the demand guarantees are independent undertaking from the underlying contract, and they are paid on demand (primary undertaking) with no proof of default. However, these rules are extremely different from the rules of guarantee under the Civil and Commercial Code of Thailand.

At the present, Thailand has no direct law or regulation concerning with the demand guarantee. So when the Courts judges decide a case concerning bank guarantee, the Courts have to decide a case by trying to adapt the rules of guarantee under Thai law. Therefore, this thesis focus on the proposed solution to issue bank guarantee comply with ICC regulations by specifying essential conditions of bank guarantee under the doctrine of freedom of contract and autonomy of will, including Section 150 of the Civil and Commercial Code.