When the Unfair Contract Terms Act B.E. 2540 (1997) (the “Act”) came into effect it signified an important development in Thai contract law by limiting the traditional principle of freedom of contract with considerations of fairness. The Act empowers the Thai courts to review contractual provisions that confer an unreasonable advantage upon one party. Key to this Act is section 4, which creates a statutory test for identifying unfair contract terms and empowers courts to enforce such terms only to the extent that they are fair and reasonable in the circumstances. Since its enactment, section 4 has become the focal point of judicial interpretation concerning the balance between contractual autonomy and the protection of weaker contracting parties. This article examines several important judicial decisions interpreting section 4 of the Act, by detailing relevant facts, the decision of the relevant court including its reasoning.
Case Number 2139/2565
Facts of the Case
On October 13, 2017, the plaintiff contacted the defendant to reserve two plots of land with houses: a LUXURIA model, Plot D1, priced at THB 9,300,000, and an ALTUS model, Plot D2, priced at THB 7,000,000, with a combined property value of THB 16,300,000. The plaintiff paid a total deposit (earnest money) of THB 200,000 and a contract execution fee of THB 300,000, bringing the total amount paid to THB 500,000.
Subsequently, the plaintiff alleged that the defendant had breached the contract by failing to repair the wooden floors, staircase surfaces, and widen the staircase as agreed. The plaintiff therefore issued a notice of contract termination on January 9, 2018, and requested a refund. On January 22, 2018, the defendant responded with its own notice of termination and forfeited the entire THB 500,000.
The Court’s Reasoning and Opinion
Both the Regional Court of Appeal, Division 2, and the Supreme Court consistently ruled that the plaintiff was the party in breach of contract, and this issue was therefore settled.
This case is notable for the Supreme Court’s clear distinction between “earnest money (deposit)” and a “penalty clause.” Earnest money, when the party who provided it is in breach, may be forfeited by the other party in full. A penalty clause, however, may be reduced by the court to a reasonable amount if it is found to be disproportionate to the actual loss suffered.
Issue 1: Whether the reservation contract constituted an unfair standard-form contract?
The Supreme Court held that the reservation contract did not possess the characteristics of an unfair contract. Its contents were consistent with those of an ordinary reservation agreement, and contained no clause imposing liability or burdens on the plaintiff beyond what the law prescribes. Although the amount actually paid exceeded what was stated in the price quotation, the Court viewed this as a permissible adjustment made by mutual agreement between the parties, consistent with common commercial practice. The contract therefore did not meet the criteria for an unfair contract term under Section 4 of the Unfair Contract Terms Act B.E. 2540 (1997).
Issue 2: Whether the deposit (earnest money) of THB 200,000 could be forfeited in full?
The Supreme Court held that the deposit of THB 200,000 represented less than 2% of the combined purchase price of both properties and was therefore not disproportionately high. Since the plaintiff was the party in breach, the defendant was entitled to forfeit the full amount of the earnest money in accordance with Section 378(2) of the Civil and Commercial Code.
Issue 3: Whether the contract execution fee of THB 300,000 could be forfeited in full?
The Supreme Court held that the contract execution fee was not earnest money, but rather a penalty clause, as it constituted a partial payment of the purchase price that the contract allowed the defendant to forfeit upon the plaintiff’s breach. Having considered all interests of the defendant, the Court found that the penalty of THB 300,000 was excessive, since the defendant’s actual loss was limited to a temporary loss of opportunity to sell the properties to other buyers. The Court therefore exercised its power under Section 383, paragraph one, of the Civil and Commercial Code to reduce the penalty to THB 30,000, and ordered the defendant to refund the remaining THB 270,000 to the plaintiff, together with interest at 5% per annum from the date of the Supreme Court’s judgment until fully paid.
Case No. 10300/2559
Facts of the Case
On March 1, 2003, Defendant No. 1 (a Honda motorcycle manufacturer) entered into a dealership appointment agreement with the Plaintiff, authorizing the Plaintiff to sell motorcycles, spare parts, and provide maintenance services under the “Honda” trademark. The agreement had a one-year term and renewed automatically each year unless either party gave notice of non-renewal. The Plaintiff invested in constructing business premises in accordance with the standards prescribed by Defendant No. 1 and continued operating until 2008, when a new dealership agreement was executed to replace the original one. Clause 8.1 of the new agreement provided that either party had the right to terminate the renewal of the agreement without any breach of contract, provided that written notice was given at least 90 days in advance of the contract expiry date.
Regarding the Plaintiff’s performance, it was found that the Plaintiff received a service quality assessment score of only 42 points in 2005 and 29 points in 2006, while the national average among all Honda dealers stood at 80 and 83 points respectively. From 2007 onward, the Plaintiff’s motorcycle sales figures declined continuously. Furthermore, the Plaintiff had not sent any technicians for training since 2005 and had not requested a service standard inspection since 2007.
On November 5, 2010, Defendant No. 1, acting through Mr. Theeraphat, its Sales Management Director, issued a written notice of non-renewal 90 days in advance, with the agreement set to expire on February 4, 2011. On January 1, 2011, Defendant No. 1 disabled the Plaintiff’s electronic ordering system, rendering the Plaintiff unable to place orders. The Plaintiff subsequently brought an action claiming damages in excess of 44 million THB.
The Court’s Reasoning and Opinion
This case establishes an important principle that a non-renewal clause granting equal rights to both contracting parties, coupled with reasonable advance notice, does not constitute an unfair contract term under the Unfair Contract Terms Act B.E. 2540 (1997). Furthermore, where a dealer’s performance has consistently fallen below the prescribed standards over an extended period, the appointing party has reasonable grounds not to renew the dealership agreement, and such non-renewal is lawful.
Issue 1: Whether Defendant No. 1’s termination of the dealership agreement was lawful?
The Supreme Court held that Clause 8.1, which granted either party the right to terminate the renewal of the agreement without a breach of contract, had been in place since the original 2003 agreement and applied equally to both parties. The clause was not a provision allowing termination of the agreement before the expiry date without reasonable cause; rather, it merely expressed the intention of either party not to renew the agreement upon its expiration. Since Defendant No. 1 gave the required 90 days’ advance notice, the termination was therefore lawful. The Supreme Court disagreed with the court of first instance, which had ruled that the termination was unlawful.
Issue 2: Whether Clause 8.1 constituted an unfair contract term?
The Supreme Court held that Clause 8.1 did not constitute an unfair contract term, for the following reasons. First, the Plaintiff was not placed at a disadvantage, as it held the same right to terminate the renewal of the agreement. Second, the Plaintiff had prior experience in this business, was aware of the contractual terms from the outset, and had accepted this clause continuously since 2003. There was therefore no element of coercion or compulsion. The clause did not impose obligations or burdens upon the Plaintiff beyond what a reasonable person would ordinarily expect, nor did it give Defendant No. 1 an undue advantage within the meaning of Section 4 of the Unfair Contract Terms Act B.E. 2540 (1997).
Issue 3: The Plaintiff’s allegation of deliberate obstruction
The Supreme Court rejected the testimony of Mr. Dusit, who alleged that Mr. Theeraphat had deliberately obstructed the Plaintiff’s business by allocating motorcycle quotas unfairly. The Court found that the Plaintiff’s sales figures had already been declining since 2007, which predated the alleged complaint raised at the dealers’ meeting in 2008. The testimony was therefore inconsistent with the established facts. Moreover, the Court reasoned that had Mr. Theeraphat deliberately obstructed the Plaintiff, such conduct would inevitably have harmed Defendant No. 1’s own business as well, for which Mr. Theeraphat, as Sales Management Director, would have been directly accountable — a proposition the Court found illogical and unpersuasive.
Issue 4: Jurisdiction of the Court
The Supreme Court declined to consider the issue of jurisdiction raised by Defendant No. 1 on appeal. Since Defendant No. 1 had raised no objection to the court’s jurisdiction during the proceedings, had confirmed its intention to call witnesses, and had actively participated in the trial to its conclusion, it was deemed to have implicitly accepted the court’s jurisdiction. Defendant No. 1 was therefore precluded from raising this issue on appeal pursuant to Section 38 of the Act on Establishment of and Procedure for Intellectual Property and International Trade Court B.E. 2539 (1996), read together with Section 226 of the Civil Procedure Code.
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