THE IMPACT OF THE AMENDMENT TO THE PRINCIPLE OF SURETYSHIP UNDER THE CIVIL AND COMMERCIAL CODE AMENDMENT ACT, (NO.20 AND NO.21), ON THE SECURITY FORMS UNDER THE CONSTRUCTION CONTRACT FOR LARGE PROJECT

Abstract

A guarantee, which is given by any third party, is one of the important securities required under a construction contract for large projects. Throughout the terms of construction contract, the contractor has many duties, responsibilities and obligations which are executed in accordance with the terms and conditions thereunder. Significant duties of the contractor are (i) the duty to complete the construction work within the schedule, which can be divided into sub schedules, called milestones, and (ii) the duty to achieve all guaranteed figures of the construction work. If the contractor fails to make the construction work in accordance with their duties, the owner shall be entitled to claim the damages from the contractor. In order to ensure that the contractor has capability to pay the damages to the owner, the owner shall require an additional security from the contractor and it is most likely a third party guarantee is one.

There are many types of third-party guarantee which are used in the construction business in Thailand, for instance, a performance guarantee, a retention money guarantee, and an advance payment guarantee, but most of these third-party guarantees, which are used, are subject to the law of suretyship under Thai Civil and Commercial Code (“CCC”). The amendment to significant principles of the law of suretyship in 2014 and 2015 introduced (i) additional duties, for instance, duty to notify the guarantor when the contractor has defaulted or the contractor and the owner have an agreement concerning the reduction of the secured amount, and (ii) the prohibition against an agreement that the guarantor binds himself as primary obligor or grants an advance consent on the time extension, although exceptions thereof were added by the latter amendment.

This research studied (i) the suitability of the third-party guarantee, which is governed by the amendments to the principle of suretyship under the CCC, to be an additional security under the construction contract for large projects and (ii) the possibility of using the guarantees from the third party under international laws or practices, namely a standby letter of credit in accordance with International Standby Practices (“ISP98”) and an independent guarantee and a stand-by letter of credit (“Undertaking”) in accordance with United Nations Convention on Independent Guarantees and Stand-by Letters of Credit (“Convention”), in lieu of this third party

guarantee by comparing the advantages and disadvantages on issues of third-party guarantees.

From the study, it is found that the additional duty of the owner, as a creditor to the construction contract, to notify the guarantor is dissimilar from international laws and practices that the construction contract for large projects mostly has to comply with. Hence, if the third-party guarantee was used in the construction contract, as suretyship, related parties have to educate himself and understand this amended principle to practice accordingly. The research also explored whether the additional duties and prohibitions under the amended principle of suretyship can be relieved by the use of a standby letter of credit covered by the ISP 98 and an independent guarantee and a stand-by letter of credit covered by the Convention, but, either of them also has an issue concerning the application mechanism under Thai Law. If parties to the construction contract wish to use these international laws and practices, such parties have to take this issue into consideration, and apply international laws and practices, whether the ISP 98 or the Convention which is fitted for their fact and situation.