Liquidated Damages in Thailand: How the Penalty Clause Rules Work

For how debts between the same two parties cancel each other, see our guide to set-off in Thailand.

A secured creditor may also look to pledged business assets, as the Business Collateral Act in Thailand describes.

Related reading: a guarantee contract in Thailand can also cover unpaid damages, under section 683 of the Civil and Commercial Code.

What are liquidated damages in Thailand?

Liquidated damages in Thailand take the form of a penalty under Section 379 of the Civil and Commercial Code. The debtor promises a sum, or another performance, that the creditor receives on default. A Thai commentary treats clauses that set damages in advance as penalties, and a regional litigation guide notes that Thai law draws no line between a penalty and liquidated damages.

Section 379 describes two triggers. First, if the debtor fails to perform, or fails to perform properly, the debtor forfeits the penalty once it is in default. Second, if the obligation is to refrain from an act, the debtor forfeits the penalty when it does the act in breach. In addition, the regional guide reports that a breaching party may have to pay the full stipulated amount even where no actual loss occurred, subject to reduction by the court. Our article on force majeure in Thailand covers default and the excuses for non-performance.

When does a penalty become payable under Sections 380 to 382?

The answer depends on the kind of default. For total non-performance, the creditor may demand the penalty instead of performance (Section 380). For improper performance, such as late or incomplete performance, the creditor may demand both performance and the penalty (Section 381). Section 382 covers a penalty that is not a sum of money.

Total non-performance under Section 380

Section 380 applies where the debtor promised a penalty for not performing at all. The creditor chooses between performance and the penalty. After the creditor tells the debtor that it will claim the penalty, the creditor can no longer demand performance. Moreover, where the creditor has a claim for compensation, the penalty works as a floor, because the creditor may rely on it as the minimum and may prove that its loss was greater.

Late or incomplete performance under Section 381

Section 381 applies to improper performance. Here the creditor may claim performance and the penalty together. However, the third paragraph adds a condition. If the creditor accepts performance, it may claim the penalty only when it reserved that right at the time of acceptance. A creditor who accepts a late delivery without a reservation therefore falls outside the text of that paragraph.

Penalties that are not money under Section 382

Section 382 deals with a penalty that consists of something other than a payment, for example a transfer of property or the handing over of work. The rules of Sections 379 to 381 apply to it. However, a creditor that claims such a penalty loses the right to claim further compensation, according to the Thai commentary reviewed.

Can a Thai court reduce liquidated damages in Thailand?

Yes. Under Section 383, if the forfeited penalty is excessive, the court may reduce it to a reasonable amount. The power is discretionary. To decide what is reasonable, the court considers all lawful interests of the creditor, not only financial or property interests. Once the penalty has been paid, however, the right to ask for a reduction ends.

The last paragraph of Section 383 extends the same approach to a penalty promised for doing, or refraining from, an act. Two commentaries report a Supreme Court example in which the court reduced a penalty that exceeded the contract price (Decision 10720/2553). Reduction is not automatic, because the Code says that the court “may” reduce. Consequently, a figure that is high relative to the creditor’s lawful interests falls within the reach of Section 383. The same section also appears in our analysis of terminating a distributor in Thailand.

How does a penalty differ from a deposit?

A deposit is something given when the contract is made. Under Section 377, it evidences the contract and secures performance. Under Section 378, unless the parties agree otherwise, a deposit returns to the depositor or counts toward the price, and the recipient may forfeit it if the depositor fails to perform. A penalty, by contrast, is a promise to pay on default under Sections 379 to 385.

A Thai commentary states that the Civil and Commercial Code has no provision for reducing a deposit, and that Section 7 of the Unfair Contract Terms Act fills that gap. An English-language commentary describes the Section 7 test as narrower than the Section 383 test.

Do liquidated damages in Thailand survive an invalid obligation?

No. Under Section 384, if the agreed performance is invalid, the agreement on a penalty is invalid as well, even if the parties knew that the underlying term was invalid. A penalty clause therefore cannot rescue an obligation that the law does not recognise.

Section 385 allocates the burden of proof. If a debtor contests the forfeiture by saying it has already performed, the debtor must prove the performance. This rule does not apply where the obligation is to refrain from an act.

What does the Code leave unanswered?

Three provisions pull in different directions. Section 380, paragraph 2 lets the creditor treat the penalty as a floor and prove a greater loss. Under Section 383, the court may cut an excessive penalty. Finally, Section 381, paragraph 3 makes the penalty depend on a reservation at the moment of acceptance.

Read together, the creditor’s position turns on three points: the amount fixed in the clause, what the creditor says when it accepts performance, and the timing of payment, because payment ends the right to seek reduction. The text of the Code does not state how a court combines Section 380, paragraph 2 with Section 383 where a creditor proves a loss greater than the penalty. The sources reviewed do not address the point, so it should be confirmed against current Supreme Court authority for the contract in question.

Frequently asked questions

Liquidated damages in Thailand: conclusion

Liquidated damages in Thailand rest on Sections 379 to 385 of the Civil and Commercial Code. The debtor forfeits the penalty on default, the creditor’s options differ between non-performance and improper performance, and the court may reduce an excessive amount until the penalty has been paid. Finally, a penalty cannot outlive an invalid obligation.