On Monday March 2nd, the Thai Minister of Energy declared a national energy crisis, followed by orders including an export ban on oil, the recommissioning of coal-fired power plants, and an immediate ramp-up of production of all hydrocarbon assets.
The hostilities in Iran and the Middle East region will have far-reaching consequences for various sectors in Thailand, including energy, health, and tourism. The ongoing conflict will also raise inevitable questions about the invocation of force majeure (“FM”) provisions in Thai contracts.
Applying Force Majeure Clauses
Under Thai law’s freedom of contract principle, the definition of, and risk allocation for, FM is commonly addressed through contractual agreement.
There are usually five key elements for relying on a FM provision:
a) An unforeseeable event; b) That is beyond the control of the affected party; c) That could not be avoided or overcome; d) That affects the performance of an obligation by a contractual party; and e) Provided that the affected party notifies the non-affected party in accordance with the contractual requirements.
An act of war or unilateral acts by governments often qualify as a FM event between commercial parties. For example, QatarEnergy has already declared FM and ceased production at its LNG plant following attacks by Iran, on the basis that such attacks were beyond its control and have rendered it unable to fulfil its obligations. Notably, however, it is also common for government contracts to exclude wars initiated by the government counterparty itself.
FM provisions are common in Thai contracts in the energy sector, particularly in the projects and oil and gas space. Power purchase agreements, supply agreements, and construction contracts will typically contain FM provisions, along with limited exceptions to such provisions.
In a typical industry-standard LNG Sale and Purchase Agreement, FM events may include:
- Depletion of reserves or deliverability problems affecting the buyer or the seller;
- Delay in the construction of facilities or vessels
- Breakdown of facilities belonging to the buyer or the seller;
- FM that excuses performance by sellers:
- Wars and civil disturbances;
- FM events under other contracts;
- Acts of government;
- Loss or damage to the LNG vessel.
The following scenarios are often carved out of the definition of FM:
- Financial hardship or inability to make a profit;
- Loss of, or damage to, the reserves;
- Breakdown in equipment due to normal wear and tear;
- Loss of customers, market share, or reduction in demand for gas; and
- Any law which is discriminatory to a party.
Each type of project has its own unique FM risks. Therefore, it is crucial that care is taken when drafting to ensure that a contract’s FM definition reflects the risks of each project. Additionally, given the interconnected nature of different contracts within a project or value chain setting, care should therefore be taken to ensure consistency of drafting across contracts. Otherwise, performance may be excused for FM under one contract but not another, exposing parties to the risks of inexcusable non-compliance, default, or even termination.
Force Majeure at Law
Where a contract is silent, parties may be able to rely on legal rights and remedies available under the governing law of the contract.
Under Thai law, where the contract is silent, force majeure or ‘เหตุสุดวิสัย’ (hate sood visai) is defined in Section 8 of the Civil and Commercial Code of Thailand (“CCC“) as follows:
“Any event the happening or pernicious result of which could not be prevented, even though a person against whom it happened or threatened to happen were to take such appropriate care as might be expected from him in his situation and in such condition.”
Under the Supreme Court Decision No. 842-844/2553, the court ruled that FM is an event that is not attributable to the non-performing party and that could not have been reasonably prevented, even though such person has taken appropriate care to mitigate such situation or condition.
Although the definition is broadly worded, Thai courts often take a conservative view when determining whether an event is foreseeable or should have been mitigated. Thus, best practice is to define ‘Force Majeure’ properly in your contracts and outline exactly how risks should be allocated in the event of FM. This ensures clarity as to what does and does not constitute a FM event.
Under the CCC, a debtor is not in default for non-performance caused by a reason not attributable to the debtor’s fault (including FM)[CMH1.1] (Section 205, CCC). Where performance is rendered completely impossible due to circumstances beyond the debtor’s control, the obligation is extinguished (Section 219, CCC).
