another publication by IMAGE asia

Using strict compliance to damage joint ventures

  Bangkok / Boat Lagoon

Law is supposed to be a servant to the master of the needs of society. The shape of law is formed nationally and internationally in patterns that reflect politics, economics, society and culture. Law becomes irrelevant if its original purpose is overtaken, if the changes in the world are not properly reflected in legal process or outcomes, or if using the law becomes more inefficient than ignoring or violating it.

Foreign parties and domestic parties must assess, at the early stages of conducting business, the risks associated with entering into a joint venture. Their due diligence may be centred around their respective backgrounds, financial standing and reputation. Serious foreign parties will be looking for a reliable, reputable Thai business partner which may be an entity with a skill or knowledge relating to local market conditions. Serious Thai parties will be looking for a foreign business partner that has good financial backing, has expertise that perhaps the Thai party doesn’t have, and can bring into Thailand skills, services or products that are needed in the market and can compete.

One major requirement in the minds of each party will be legal compliance. The foreign party will naturally be cautious about compliance with domestic Thai laws, and instead of incurring inefficient costs, may rely upon the Thai party’s assistance. This may be built into joint venture terms. The Thai party will look at the compliance record of the foreign party, and will wish to ensure that the approach of the foreign party is not to take shortcuts. It will be in the interests of the Thai party that the foreign party remains compliant.

However, the dynamics of the symbiotic relationship can change over the period of a project or doing business together. If the parties enter into a dispute, compliance may be brought forward by one party to damage the other significantly.

During the course of a joint venture, one party may observe the other party’s domestic compliance has a defect. This could be an infringement of a license, an ambiguous labour law regime with protectionist focus on jobs reserved for Thai nationals, or basic compliance with immigration law when agents are often used who may conceal their lack of attention to detail on disclosures or take shortcuts to optimise their profits. It may suit one party to remain silent on compliance, or to represent to the other party that Thailand’s enforcement regime may be loose enough for the non-compliance to be minimal or unimportant.

This type of approach can be a direct deceit and be used to entrap the other party for leverage in a commercial negotiation or dispute in the future.

Upon the commencement of negotiations, the knowledgeable party may contact the authorities and anonymously ‘report’ its joint venture party for an alleged infringement, as a tactic to disrupt the business operations. Whilst this may seem illogical because both parties suffer immediate issues and potential damage, the reporting party may have calculated that the long-term gains from the leverage may exceed the short-term losses of the non-compliance.

Unfortunately, this tactic can be imposed in surprising and extremely hostile circumstances and may often be covered with a veil of insincerity of the reporting party expressing a desire for ‘strict compliance’ with law, when it suits them.

Here are some key examples of this tactic in practice:

  • Foreign workers may be reported to the Labour Department for investigation as to whether or not they are in breach of any minor technical matter relating to their work permits, and further, there may be ambiguity between their work position and a prohibited job. During the investigation, the foreigner will be interviewed, and the directors of the employer may also be interviewed. Even if the party is innocent, the process can be severely damaging to business operations and, we should not forget, to the wellbeing of the foreign worker and their family
  • Foreign workers and employers may be reported to the immigration authorities in conjunction with the labour issue, which is connected to the visa on which the foreign is permitted to stay in Thailand. This can then result in significant issues for the foreigner in relation to doubts over the renewal of their visa.
  • Foreign workers may also, together with the directors of the employer, be reported to the police who will be obliged to investigate infringements. Ultimately if the reporting party applies some pressure and there is at least a case to be answered, notwithstanding the principle of innocent until proven guilty, criminal proceedings may commence
  • The reporting party may then use, combined with legal advice and pressure, these investigations to damage the joint venture party. This can include threats of confiscation of foreign workers’ passports during investigations.

In these types of circumstances, a humane counterparty may give in to the party applying pressure, if they value their workers more highly than commercial wins over their joint venture party. Alternatively, they may embed themselves and commit to a long-term dispute and provide contingencies in their accounts for the expense. They will likely never do business with the reporting party again, and may consider withdrawing business from Thailand altogether based on their experience.

The lessons for all joint venture parties from these types of scenarios are numerous, but here are some samples:

  1. When conducting due diligence on a potential partner, ask them for written disclosure on whether they have ever reported, or caused another person to report, an entity to the authorities to procure ‘strict compliance’ investigations
  2. Ensure that, if the Thai or domestic party has agreed to assist, and has made representations that due to its familiarity with the local legal and business environment, that the scope of duties – and importantly – liabilities, are attributed to reflect this in the joint venture and/or shareholders agreement and articles of association of the company.
  3. Ensure that the joint venture bears the costs of strict compliance, and that the joint venture puts in place a mechanism for reporting alleged infringements in its management structure, to at least try and avoid direct reporting, so that compliance breaches can be remedied promptly before incurring penalties. A fine balance must be achieved between remedying breaches and not concealing breaches from investigators.

Of course, when Thai investors invest in other jurisdictions, they face similar issues. However, in the context of Thailand and a general policy of trying to attract foreign investment, with appropriate conditions and protections for the economy, society and culture, if the behaviour of domestic parties is given freedom to abuse laws and reporting procedures for opportunistic commercial gains, the strategy will backfire on the entire market as foreign investors will learn from their experiences and invest less money to reflect the risk or seek more secure markets where the risk premiums can be properly assessed.

Strict compliance is a dangerous weapon to bear in commercial quarters due to both its narrow and wide ramifications. Investors should be aware of the issues and attune their risk analysis and behavioural patterns to take these issues into account.

By Desmond Hughes, Senior Partner of Hughes Krupica.
Hughes Krupica is a law firm which specialises in Dispute Resolution; Corporate Transnational and Domestic Law; Real Estate; Hospitality; Construction Contract Support; Transnational Structuring and Compliance; Transnational Commercial; and Litigation, operating in Bangkok and Phuket, servicing clients in relation to their business activities in Thailand and in other regions of Asia

 Contact info:

Hughes Krupica Consulting (Bangkok) Co. Ltd

Phuket Office:
23/123-5 Moo 2, Kohkaew Plaza, 
The Phuket Boat Lagoon, Tambon Kohkaew, Amphoe Muang, Phuket 83000
Tel:+66 76 608 468 

Bangkok Office:
179 Bangkok City Tower, Fifth Floor,
South Sathorn Rd, Sathorn, Bangkok 10120
Tel: +66 2 872 173

[email protected]

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