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Effects on Creditors’ Exercise of their Rights and Debtors’ Payment of Debts

Tilleke & Gibbins, a Corporate Member of the Thai-Norwegian Chamber of Commerce has kindly shared the following legal opinion on a number of issues linked to the COVID-19 situation. In this article, Tilleke & Gibbins is providing insight into the impact of the pandemic for creditors and debtors, written by Associate Professor Dr. Munin Pongsapan, Dean of the Faculty of Law, at Thammasat University.

Due to the outbreak of COVID-19, government agencies have set out and implemented necessary measures to prevent and control the spread of the virus. The severity of the situation and these legal measures could affect creditors’ exercise of their rights and debtors’ performance of their obligations. My observations about the status of the rights and obligations of creditors and debtors during the ongoing outbreak of the COVID-19 are as follows:

Although no one knows how long this pandemic will last, it is certain that it will eventually end. It is therefore certain that the relationships between creditors and debtors continue to exist, unless it is agreed otherwise. Debtors are still obliged to pay their debts, while creditors are still entitled to demand payments. In most cases, debtors cannot use a disease outbreak as an excuse to refuse a debt payment. This is because a disease outbreak is temporary and therefore when the situation returns to normal, debtors will have to  resume their performance of obligations, obligations which continued to exist throughout and despite the existence of the outbreak.

However, while creditors’ rights and debtors’ obligations remain intact, the public health crisis has resulted in the implementation of legal measures that restrict movement and business activities, prohibiting many  people in Bangkok and other large cities from living normal lives. Such legal measures, such as government-mandated closures or a general societal lockdown,  affect debtors’ performance of their obligations and exercise of their rights. If an illness or quarantine resulting from the pandemic or a legal measure implemented by the government does not allow a debtor to perform its obligation as scheduled, it is possible that such debtor may not yet be in default. This is because the current situation could be considered a temporary circumstance, of no fault of the debtor, which prevents performance of an obligation, according to Section 205 of the Civil and Commercial Code. Hence, the debtor may not be liable to the creditor for damages incurred from the late performance of the obligation. For example, if a debtor agrees to produce goods for a creditor but said production can only be performed at the debtor’s factory which is located in a lockdown zone, and it is impossible for the debtor to move production from the factory to another location, then if the debtor is late in the delivery of goods, the debtor is not legally liable for the delay and the creditor is obligated to accept the late delivery.

In the case of debts, generally the law considers that a debtor can always pay a debt, even during a disaster or economic crisis, because money is always available in an economic system. In other words, a disaster or economic crisis does not make it impossible to pay a debt. According to Supreme Court Judgments, a debtor’s inability to pay a debt due to not having enough money in itself is not an event that temporarily prevents the performance of an obligation under Section 205. However, if the debtor’s business  is closed because of a law or a government order, making the debtor unable to pay the debt as scheduled, this could be considered an event that temporarily prevents the performance of the obligation, which may be raised by a debtor as an excuse for default. (See Supreme Court Judgment No. 16469/2557.) In short, a debtor’s inability to pay a debt  caused by a temporary event such as the current COVID-19 outbreak, might exempt the debtor from being in default for payment of either the principal amount or interest. Hence, the debtor may not be liable for default interest or damages. However, for how long a debtor can be exempted under Section 205 depends on the overall outbreak situation and the debtor’s financial status.

Closure of several private places, such as department stores and markets, is a necessary measure to contain the spread of COVID-19. However, the closures cause business operators to lose income and makes them unable to pay rentals. In this case, the lessees will not be legally obligated to pay rentals to the lessors, because the situation had rendered it impossible for the lessors to perform their duty of enabling the lessees to use the leased space pursuant to their lease agreements. Because the lessors are unable to perform their duty, the lessees are, in turn, not obligated to pay rentals in exchange. This is based on the principle of bilateral agreements under Section 369 of the Civil and Commercial Code. This applies even though it is agreed in the lease agreement that the lessee is obligated to pay rentals although the lessee cannot use the leased space, because this contractual clause may become unenforceable or enforceable only to the extent that it is fair, pursuant to Section 4 of the Unfair Contract Terms Act. In cases where it is considered that a lease agreement is made between a business operator and a consumer, or is a standard agreement, which is not governed by the Unfair Contract Terms Act, it is my opinion that this clause should become void because it is contrary to public order and morality, under Section 150 of the Civil and Commercial Code. Once the situation returns to normal and the lessees are able to use the leased space, the lessees will be obligated to make full rental payments according to their lease agreements. (Rental payments are exempted only during the time when the lessees are unable to use the leased space.)

Regarding agreements for services, such as hotel reservation, air transportation, etc., if the service providers are unable to perform their obligations under the agreements because, for example, their places of business are ordered to be closed, making it impossible to provide services normally, the customers should not be obliged to pay charges for the services that cannot be delivered, based on the principle of bilateral agreements. If service charges are paid in advance, the service charges should be returned, or the customers should be allowed to use the services later (e.g. in the case of hotel reservations). If a customer wants to cancel a hotel reservation or is unable to stay at the accommodation because he is infected with COVID-19 or because he is concerned about exposure to COVID-19, although this is the customer’s viewpoint and it is not that the place of business is ordered to be closed or the service provider is not ready to provide the service, the customer should be able to raise the change of circumstances as an excuse for non-performance of his contractual obligation. This is because at the time when the debtor and creditor enter into the agreement, both parties intended to perform their contractual obligations under normal circumstances. This current situation is not under normal circumstances, and is unprecedented and unexpected. Although the principle in this regard under Thai law is not as clear as foreign law, the principle of bona fides broadly prescribed in Section 5 and Section 368 of the Civil and Commercial Code provides sufficient legal grounds for non-performance of obligations by customers in the above situations.

Whether a debtor can successfully argue late or non-payment according to the above legal provisions will be subsequently judged by the court. One certain thing is the economy will impact creditors’ exercise of their rights and debtors’ performance of their obligations to some degree. As such, creditors and debtors may negotiate to loosen certain contractual obligations and defer payments until a future agreed time (e.g. after this crisis ends). For the reasons stated above, strict enforcement of debts at this time may be counterproductive. Debtors may become bankrupt and the creditors would be unable to gain anything from the debtors. Formal legal proceedings also require a lot of money and take years before they become final.

If you have any queries about the legal implications of COVID-19, or any other matters, please contact [email protected] or call +66 2056 5555.