A bank guarantee has been called: must the bank pay, and how can the applicant stop payment or recover the money, under the Civil and Commercial Code, URDG 758 and the Thai Supreme Court cases

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Last updated October 30, 2026 · Content owner: Eksiam Chaisorn, Legal Consultant · Statutes read in the latest revised edition of the Office of the Council of State and Supreme Court judgments read on the Supreme Court's search system as of the update date · ฉบับภาษาไทย

Which law governs a bank guarantee in Thailand

A bank guarantee is a contract of suretyship under section 680 of the Civil and Commercial Code, by which the surety binds itself to the creditor to perform when the debtor fails to perform. The parties may, however, agree that the bank will pay immediately on receipt of a written demand without proof of breach, because no provision prohibits it and it is not impossible, under Supreme Court Judgment No. 8131/2561 (2018). The ICC's URDG 758 apply only when the guarantee states that it is subject to them.

A bank guarantee transaction has three layers of contract, like a letter of credit. The first is the underlying contract (the contract of employment, the sale contract or any other contract that the guarantee secures) between the bank's customer and its counterparty. The second is the application (also called the counter-indemnity, the contract between the customer as applicant and the bank, which sets the fees, the security and the duty to reimburse what the bank pays). The third is the guarantee itself, the bank's undertaking to the beneficiary (the counterparty entitled to claim payment under the guarantee). When the beneficiary is abroad, a Thai bank usually issues a counter-guarantee (a guarantee issued by one bank to another so that the second bank issues its own guarantee to the beneficiary in its country), which adds a further layer of relationships.

The Civil and Commercial Code has no provision specific to bank guarantees. The provisions that apply are those of Title 11, Suretyship, beginning with the definition in section 680.¹

Civil and Commercial Code, section 680 (the firm's translation)

“Suretyship is a contract by which a third person, called the surety, binds himself to a creditor to satisfy an obligation in the event that the debtor fails to perform it.

A contract of suretyship is not enforceable by action unless there is some written evidence signed by the surety.”

The words “in the event that the debtor fails to perform it” make suretyship under the Code a secondary obligation (an obligation that arises only when the principal debtor defaults). The surety therefore has the debtor's defenses under section 694 and is released when the debtor's obligation is extinguished under section 698. Most bank guarantees in international trade, however, are drafted to remove this character: the bank pays on receipt of a written demand stating that the debtor is in breach, whether or not that is true. Whether such an agreement is valid under Thai law was answered clearly by the Supreme Court in Judgment No. 8131/2561 (2018).²

The judgment lays down three rules that businesses should remember. First, a demand guarantee (also called an on-demand bond, a guarantee under which the bank pays on receipt of a demand in the prescribed form without proof of breach) is valid under Thai law. Second, the Supreme Court relied on the practice of financial institutions in international trade, which is consistent with section 368, under which a contract is interpreted according to the intention of the parties in good faith, having regard to ordinary usage.²⁹ Third, an applicant that signs an application waiving any objection to payment is bound by it, even if it later contends that it was not in breach of the underlying contract.

The suretyship provisions of the Civil and Commercial Code were substantially amended by the Act Amending the Civil and Commercial Code (No. 20) B.E. 2557 (2014) and (No. 21) B.E. 2558 (2015) to protect sureties who are natural persons. The amendments affect bank guarantees in two ways. First, section 681, paragraph two, requires a suretyship for a future obligation to state the purpose, the nature of the obligation, the maximum amount and the period within which the obligation is to be incurred, and paragraph three limits the surety's liability to the obligation or contract specified.³ A bank guarantee that clearly identifies the underlying contract, the amount and the expiry date already complies with this provision. Second, section 681/1, paragraph one, makes void any agreement that the surety is liable as a joint debtor, but paragraph two, added in 2015, exempts sureties that are juristic persons.⁴

Civil and Commercial Code, section 681/1 (the firm's translation)

“Any agreement that makes the surety liable in the same manner as a joint debtor, or as a joint debtor, is void.

Paragraph one does not apply where the surety is a juristic person that consents to bind itself to be liable in the same manner as a joint debtor or as a joint debtor; in that case the surety that is a juristic person has no rights under sections 688, 689 and 690.”

A bank is a juristic person. A bank guarantee under which the bank is liable as a joint debtor is therefore valid, and the bank cannot require the creditor to proceed first against the debtor under sections 688 to 690. At the same time, section 685/1 makes void any agreement that differs from section 681, paragraphs one to three, section 686, section 694, section 698 and section 699.⁵ A question the firm is often asked is whether a demand guarantee, which removes the debtor's defenses under section 694, conflicts with section 685/1. The summary of Judgment No. 8131/2561 (2018) does not say whether the guarantee in that case was issued before or after the amendment, and the Supreme Court reasoned only that no provision prohibits such an agreement. In the author's view the rule still applies to guarantees issued after the amendment, because a demand guarantee is not an agreement that “differs from” section 694 in the sense of stripping a surety of a right the law seeks to protect; it is a different kind of undertaking, which the bank chooses to give knowingly and for a fee, and the purpose of the amendment was to protect sureties who are natural persons, not financial institutions, as the exceptions in section 681/1, paragraph two, and section 700, paragraph three, show. The author has not, however, found a Supreme Court judgment deciding this point directly for a guarantee issued after 2015. Drafters should therefore use wording that makes clear that the bank undertakes to pay on demand as a primary obligation of its own, not merely that the debtor's defenses are waived.

A further layer of rules is the Uniform Rules for Demand Guarantees (URDG 758, the ICC's rules, which apply when the guarantee states that it is subject to them), which do for guarantees what UCP 600 does for letters of credit. Article 5 lays down the independence principle, under which the guarantee is separate from the underlying contract and from the application, and article 19 requires the guarantor to examine the demand on the basis of the documents alone.⁶ Guarantees that Thai banks issue to domestic beneficiaries usually do not refer to the URDG, but counter-guarantees issued to foreign banks and guarantees in international projects usually do. Reading the first page of the guarantee to see whether it refers to URDG 758 is therefore the first step in the analysis of every matter.

The two forms of guarantee: conditional and on demand

Under a conditional guarantee the right of claim arises only when the debtor is actually in breach; the Supreme Court treats it as part of the underlying contract and may prohibit the bank from paying until an arbitral award, under Judgment No. 3263/2554 (2011). Under a demand guarantee the bank pays on receipt of a demand in the prescribed form, and the English courts presume that an instrument issued by a bank in a cross-border transaction with an undertaking to pay on demand is of the latter kind.

This distinction decides almost everything about the outcome, but the title of the document does not reveal it. A guarantee that uses the word “unconditional” may be conditional in substance if the next sentence requires the bank to pay “in the event that the contractor causes damage,” because that wording ties the bank's duty to actual damage. The Supreme Court met wording of this kind in Judgment No. 3263/2554 (2011).⁷

Placing Judgment No. 3263/2554 (2011) beside Judgment No. 8131/2561 (2018) shows that the different results come from the wording of the guarantees, not from conflicting legal principles. In the first case the bank's duty was tied to actual breach, so the court held that the body with authority to decide the dispute must decide first. In the second the bank's duty was tied only to receipt of the written demand, so the court let the bank pay and left the parties to fight over the underlying contract separately. A beneficiary that wants its money quickly wants the second form; an applicant that wants the dispute decided before it loses money wants the first; and the bank wants a form under which it can examine documents without deciding facts.

The English courts have developed tools for reading such wording that Thai courts may usefully compare. In Marubeni Hong Kong v Mongolian Government, the English Court of Appeal held that a letter from the Mongolian Ministry of Finance using the words “unconditionally pledges” and “simple demand” was still a true guarantee, because it required payment only of amounts unpaid “when the same becomes due” and the issuer was not a bank; the absence of banking-instrument wording in a transaction outside the banking context created a strong presumption against reading it as a demand guarantee.⁸ Seven years later, in Wuhan Guoyu Logistics v Emporiki Bank of Greece, the Court of Appeal reversed the trial judge and held that a payment guarantee for shipbuilding installments, issued by a Greek bank to a Chinese shipbuilder, was a demand guarantee, applying the presumption in Paget's Law of Banking that an instrument relating to a transaction between parties in different jurisdictions, issued by a bank, containing an undertaking to pay “on demand” and containing no clause limiting a guarantor's defenses “will almost always be construed as a demand guarantee.”⁹

That presumption matches the reasoning of the Thai Supreme Court in Judgment No. 8131/2561 (2018), which relied on the practice of financial institutions in international trade. The author therefore proposes the following reading rule for guarantees issued by Thai banks. If the guarantee provides for payment on receipt of a written demand stating that the debtor is in breach, without any other evidence, and contains a waiver of objections or states that the bank is liable as a principal debtor, treat it as a demand guarantee. If the guarantee provides for payment “in the event that” the debtor causes damage or is in breach, without stating that the beneficiary's demand is sufficient evidence, treat it as conditional, following Judgment No. 3263/2554 (2011). Many guarantees in the standard forms of Thai government agencies fall in between: they use the word “unconditional” but tie payment to damage. A drafter who wants a certain result should choose wording that fits one form or the other.

Making a call: in time, in the prescribed form, and what the bank must do within five business days

The beneficiary must deliver its written demand to the bank within the validity period of the guarantee and in the prescribed form. A term requiring the claim to be notified within the validity period is enforceable under Supreme Court Judgment No. 1451/2524 (1981). Under a guarantee subject to URDG 758, the demand must state in what respect the debtor is in breach, the bank has five business days to examine it, and a rejection must be made by a single notice listing every discrepancy.

The mistake that most easily costs a beneficiary its rights is a late demand. Almost every guarantee has an expiry date, and many also require the beneficiary to notify its claim to the bank in writing by that date or within a period after it. The Supreme Court has treated such terms as valid since Judgment No. 1451/2524 (1981).¹⁰

In practice this means that the expiry date of the guarantee is the deadline for delivering the demand, not the deadline for suing. A beneficiary that delivers its demand within the validity period may still sue the bank within the ten-year prescription period, but a beneficiary that lets the guarantee expire without a demand loses its rights against the bank even if the debtor is clearly in breach. When a project is running late and the expiry date is near, the beneficiary should make an “extend or pay” demand (a demand that the bank extend the validity of the guarantee or otherwise pay immediately), which URDG 758 article 23 recognizes, allowing the bank to suspend payment for up to thirty calendar days so that the parties can negotiate.¹¹

The form of the demand matters no less than its timing. A demand guarantee usually requires the demand to be in writing, signed by the beneficiary's authorized signatory, delivered to the bank at the branch specified, and to state in what respect the debtor is in breach. URDG 758 article 15 (a) makes that last statement mandatory unless the guarantee excludes it. A beneficiary that sends only a letter saying “we call on the guarantee” without identifying the breach risks rejection on documentary grounds, and if the guarantee expires before a new demand is delivered it loses everything. Conversely, a bank that receives a demand has five business days to examine it under article 20, and if it considers the demand non-complying it must send a single notice of rejection listing every discrepancy within the same period under article 24. A bank that does not do so is precluded from claiming that the demand does not comply. This is the same mechanism as UCP 600 article 16, which the firm explains on its page Letters of credit: discrepant documents and refusal to pay, and the advice given there to exporters whose documents are refused applies equally to beneficiaries under guarantees: check the notice of rejection before correcting the documents.

For a conditional guarantee that does not refer to the URDG, the governing provision is section 686, which since the 2014 amendment requires the creditor to give written notice to the surety within sixty days from the date of the debtor's default.¹²

Civil and Commercial Code, section 686, paragraphs one and two (the firm's translation)

“When the debtor is in default, the creditor must give written notice to the surety within sixty days from the date of default, and in no case may the creditor call on the surety to perform before the notice reaches the surety; this does not bar the surety from performing when the obligation falls due.

If the creditor fails to give notice within the period in paragraph one, the surety is released from liability for interest, damages and the charges incidental to the obligation that arise after that period has expired.”

The consequence of failing to give notice within sixty days is not a complete release, but a release from the interest, damages and incidental charges that arise after the period expires; the principal amount guaranteed can still be claimed, and section 685/1 makes void any agreement that differs from section 686. A beneficiary under a conditional guarantee therefore faces two overlapping deadlines, sixty days from the debtor's default under the statute and the expiry date under the guarantee, and must meet both.

The bank has already paid: what the applicant should do

A bank that pays in accordance with the conditions of the guarantee performs its obligation in good faith and has a right of recourse against the applicant under the application and section 693. An applicant that later proves it was not in breach recovers the money from the beneficiary as undue enrichment under section 406, according to Supreme Court Judgment No. 8012/2568 (2025), not from the bank.

The “pay now, argue later” principle means for the applicant that the money leaves its account before the dispute under the underlying contract is decided. Judgment No. 8012/2568 (2025) explains the path of the money after that more completely than any other judgment the author has found.¹³

Civil and Commercial Code, section 406 (the firm's translation)

“Any person who, through an act performed by another person for the discharge of an obligation, or in any other way, obtains something to the prejudice of that other person without legal ground, must return it to that person. An acknowledgment that an obligation exists or does not exist is also deemed to be an act performed for the discharge of an obligation.

This provision applies also where something has been obtained on a ground that has not come into existence, or that has ceased to exist before the thing was obtained.”

The judgment teaches four lessons. First, the bank is not the right defendant. When the bank pays in accordance with the conditions of the guarantee, it performs its obligation in good faith under section 5 and has a right of recourse under the application and section 693.¹⁵ An action against the bank for paying when it should not have will succeed only if the applicant proves that the demand did not comply with the guarantee, for example because it was delivered after expiry, signed by a person without authority, or lacked the statement the guarantee required. Second, the right defendant is the beneficiary that received the money without being entitled to it; the cause of action is undue enrichment, and section 406, paragraph two, covers the case where the ground for receiving the money ceased to exist afterwards, as when a court later decides that the contractor was not in breach.¹⁴ Third, the Supreme Court treated the contractor as the person “prejudiced” from the day the bank debited its account to satisfy the guarantee; the right to recover therefore arises once the applicant has reimbursed the bank. Fourth, the money paid under the guarantee is separate from the unpaid contract price claimed in the action on the underlying contract, so a judgment in that action does not automatically cover it; the contractor must sue to recover it in a separate action or include the claim in the same action from the outset.

As for the bank's rights after payment, section 693 gives a surety that has performed a right of recourse against the debtor for the principal, interest and damages, and subrogates it to the creditor's rights. Judgment No. 6950/2551 (2008) confirmed the subrogation of a guarantor bank under section 693, paragraph two, read with section 229 (3), in a case where the bank paid customs duty on behalf of an importer.¹⁶ In practice banks rarely need this provision, because the application requires the applicant to reimburse immediately with default interest and allows the bank to debit deposit accounts or enforce its security, as appears in Judgment No. 8012/2568 (2025) and in Judgment No. 8131/2561 (2018), where the contractor's personal guarantors and the mortgaged property were pursued as well. An executive who signs a personal guarantee for a company's guarantee facility should therefore understand that his liability arises the moment the bank pays, not when the company loses the case on the underlying contract.

From the other side, a beneficiary without a valid claim must not only return the money it received but also return guarantees it has not yet called. Judgment No. 1792/2565 (2022) held that where the contract of employment was terminated without the contractor being liable to the employer, the employer could not use the guarantees to call on the bank and had only the duty to return them to the contractor.¹⁷ A claim for the return of the guarantees should therefore be a standard prayer for relief whenever a contractor sues an employer, because as long as the guarantee remains in the employer's hands the contractor's credit line with its bank stays blocked and the fees keep running.

Asking a court to stop the bank from paying: the fraud exception and what Thai courts accept

Under a demand guarantee, the English courts restrain a bank from paying only where there is clear fraud of which the bank has notice; the Singapore courts add unconscionability; and United States law sets four conditions in UCC § 5-109. The Thai Supreme Court has not laid down a fraud exception for bank guarantees directly, but for a conditional guarantee where the dispute must go to arbitration, the court may prohibit payment in the meantime under Judgment No. 3263/2554 (2011).

When a court may stop a bank from paying is the question that determines the value of bank guarantees as a whole. If courts stop payment easily, foreign beneficiaries will not accept guarantees from Thai banks, and Thai businesses will have to deposit cash instead. The English courts recognized this as early as Edward Owen Engineering v Barclays Bank International, in which Lord Denning held that a performance guarantee stands on a similar footing to a letter of credit, that the bank must pay according to its guarantee on demand without proof or conditions, and that the only exception is clear fraud of which the bank has notice.¹⁸ The facts of that case are instructive: the Libyan buyer was itself the party that had failed to open the letter of credit required by the contract, yet the court still declined to restrain the bank, because the dispute over who was in breach was a matter between the parties, not for the bank.

The United States has codified the exception in UCC § 5-109 for standby letters of credit (letters of credit used in place of guarantees in the United States), providing that a court may enjoin the issuer from paying only where the forgery or fraud is material, the applicant is more likely than not to succeed, and the persons who may be adversely affected are adequately protected, while protecting those who have already given value in good faith, such as a confirming bank.¹⁹ Singapore goes further. In BS Mount Sophia v Join-Aim, the Singapore Court of Appeal confirmed that unconscionability is a ground distinct from fraud and upheld an injunction restraining a developer from calling a contractor's performance bond until the arbitral award, on a strong prima facie case drawn from the whole of the circumstances.²⁰ The Singapore approach has been criticized for reducing the certainty of guarantees, but it reflects the reality that in construction contracts employers often use guarantees as bargaining tools rather than as security for actual loss.³¹

For Thailand, the author has not found in this search a Supreme Court judgment that lays down a fraud exception for demand guarantees directly. The closest judgment comes from the law of letters of credit, Judgment No. 6793/2543 (2000), which held that an order attaching the funds and prohibiting the bank from paying must be considered with the greatest care, because it affects the credibility of banks in international trade.²¹ Read together with Judgment No. 8131/2561 (2018), which accepted that the bank must pay without considering whether the debtor is in breach, the author's view is that Thai courts are more likely to follow the English line than the Singapore line: payment may be restrained only on clear evidence that the demand is a fraud by the beneficiary itself, for example a demand made in the knowledge that the underlying contract was terminated without loss and has been fully settled, or a demand bearing a forged signature. An argument that the debtor was not actually in breach, however strong, is not enough, because that is precisely the dispute that this form of guarantee is designed to have decided after payment.

A conditional guarantee is a different matter. Judgment No. 3263/2554 (2011) shows that where the beneficiary's right arises only on the debtor's actual breach, and the underlying contract makes an arbitral tribunal the body that decides who is in breach, the court may grant interim relief prohibiting the beneficiary from receiving and the bank from paying until the award (the related provisions listed by the Supreme Court's search system are sections 11 and 16 of the Arbitration Act B.E. 2545 (2002)). An applicant holding this form of guarantee therefore has a tool that the holder of a demand guarantee lacks: it can apply to the court for interim relief and commence arbitration as soon as it receives the notice of termination, before the beneficiary delivers its demand to the bank.

The last matter under this heading is forged guarantees. A beneficiary that receives a guarantee should verify its authenticity with the issuing bank directly before starting work or delivering goods. Judgment No. 6404/2560 (2017) convicted of fraud a contractor who presented to an employer a guarantee that the bank had not issued, and held the offense complete even though the contractor later performed the work.²² But a conviction does not give the employer the money under the guarantee, because the bank was never bound. Verification with the bank through the channel the bank prescribes, not through contact details supplied by the person presenting the guarantee, is the cheapest way to prevent every loss described on this page.

The bank's defenses, and the effect of extensions of time, reductions of the debt and amendments to the underlying contract

A bank that has issued a conditional guarantee may raise the debtor's defenses against the beneficiary under section 694, and is released when the debtor's obligation is extinguished under section 698, when the creditor grants the debtor an extension of time under section 700, or when the creditor causes the bank to lose its right of subrogation under section 697. A financial institution may, however, consent in advance to extensions under section 700, paragraph three. A demand guarantee removes almost all of these defenses.

Where the guarantee is conditional, the bank is in every respect a surety under the Code, and the applicant benefits indirectly from the bank's defenses. The first defense is in section 694.²³

Civil and Commercial Code, section 694 (the firm's translation)

“In addition to the defenses that the surety has against the creditor, the surety may also raise all the defenses that the debtor has against the creditor.”

The bank may therefore contend that the contractor was not in breach, that there was no loss or a smaller loss than claimed, or that the employer was itself in breach, and section 685/1 prohibits any agreement differing from this section. In practice, however, banks do not wish to enter their customers' disputes; most pay once the demand matches the wording of the guarantee and leave the customer to recover from the beneficiary. An applicant that wants the bank to raise defenses must therefore deliver its evidence and a letter of reservation to the bank before the five business days expire, or apply to the court along the lines of Judgment No. 3263/2554 (2011). A telephone call asking the bank to hold off has no legal effect.

The second defense is the right under sections 688 to 690 to require the creditor to proceed first against the debtor, against the debtor's property, or against other security.²⁴ Almost every bank guarantee removes this right by making the bank liable as a joint debtor, which section 681/1, paragraph two, permits for juristic persons; the beneficiary can therefore claim from the bank at once without first suing the debtor. The third defense is an extension of time under section 700, to which employers in international construction projects should pay particular attention.²⁵

Civil and Commercial Code, section 700 (the firm's translation)

“Where the suretyship is for an obligation to be performed at a definite time and the creditor grants the debtor an extension of time, the surety is released, unless the surety has agreed to the extension.

An agreement made by the surety in advance, before the creditor grants the extension, which has the effect of consenting to the extension, is unenforceable.

Paragraph two does not apply where the surety is a financial institution or gives suretyship for remuneration in the ordinary course of business.”

The section has three layers. Paragraph one releases the surety when the creditor grants the debtor an extension without the surety's agreement. Paragraph two, from the 2014 amendment, makes an advance consent unenforceable. Paragraph three, added in 2015, exempts financial institutions and professional sureties from paragraph two. The result is that a bank guarantee stating that the bank consents to the beneficiary extending time to the debtor without notice to the bank remains enforceable, and the bank is not released when the employer extends the time for completion; but if the guarantee contains no such wording and the employer extends the completion date without the bank's consent, the bank is released under paragraph one. This is why banks issue an amendment to the guarantee every time the underlying contract is extended, and why employers should obtain that amendment before approving the extension, not after. In addition, section 691, as amended in 2015, provides that an agreement made after the debtor's default extending the time for performance is not an extension of time under section 700, so an extension before default and one after default have different effects.

The remaining defenses are section 697, where the creditor causes the surety to lose its subrogation to other security; section 698, where the debtor's obligation is extinguished; and section 701, where the surety tenders performance and the creditor refuses it.²⁶ All of these defenses have very limited application to demand guarantees, because the bank's undertaking under that form is not tied to the debtor's obligation. A bank issuing such a guarantee protects itself by an application that requires the customer to reimburse it in every case, and by strict examination of the wording of the demand, not by the suretyship provisions of the Code.

Prescription, jurisdiction and governing law

A claim under a bank guarantee has no specific prescription period and is therefore subject to the ten-year period in section 193/30, running from the day the right could be enforced, but the demand itself must be delivered within the validity period of the guarantee, which is much shorter. Cases on guarantees issued to secure international sales, services or carriage fall within the jurisdiction of the Intellectual Property and International Trade Court, and a guarantee subject to URDG 758 is governed by the law and the courts of the country of the issuing branch unless it provides otherwise.

The prescription period for a claim under a guarantee is often confused with the time limit for delivering the demand. Judgment No. 1451/2524 (1981) separated the two: the time limit for the demand is a condition of the right, while prescription concerns the bringing of an action. As the Civil and Commercial Code prescribes no specific period for contracts of suretyship, the ten-year period in section 193/30 applies.²⁷ Judgment No. 6950/2551 (2008) applied a ten-year period to the Customs Department's right to call on a guarantor bank, citing section 193/31, the provision for the State's claims for taxes and duties; a private beneficiary falls under section 193/30 with the same ten-year result. As for the bank's right of recourse against the applicant under the application, it is not the claim of a person performing work for remuneration under section 193/34 (7), on the reasoning the Supreme Court adopted for an issuing bank under a letter of credit in Judgment No. 266/2546 (2003), which the firm explains on its letter of credit page. In the author's view the same reasoning applies to guarantees, but no judgment deciding the point for guarantees directly has been found.

Jurisdiction depends on the underlying contract. Section 7 (5) of the Act on the Establishment of and Procedure for the Intellectual Property and International Trade Court gives that court jurisdiction over civil cases concerning the international sale of goods, the international provision of services, international carriage and other related juristic acts, and (6) extends it to guarantees relating to such activities.²⁸

Act on the Establishment of and Procedure for the Intellectual Property and International Trade Court B.E. 2539 (1996), section 7 (5) and (6) (the firm's translation)

“(5) civil cases concerning the international sale or exchange of goods or financial instruments, the international provision of services, international carriage, insurance and other related juristic acts;

(6) civil cases concerning letters of credit issued in connection with the activities in (5), the remittance of money into or out of the Kingdom, trust receipts, and guarantees relating to such activities;”

A guarantee issued by a Thai bank to secure a construction contract abroad, an international sale of goods or an international contract of carriage is therefore a juristic act related to the activities in (5), and the bank's recourse action against the contractor in Judgment No. 8131/2561 (2018) was a case on a guarantee issued for a contract of employment abroad. A guarantee issued for a purely domestic contract falls within the jurisdiction of the ordinary civil courts, as Judgment No. 8012/2568 (2025), which began in the Thonburi Civil Court, shows. Choosing the wrong court costs months in transferring the case, so the point should be checked before the demand letter is sent.

In the international dimension, URDG 758 articles 34 and 35 provide that the guarantee is governed by the law, and subject to the courts, of the country of the guarantor's branch that issued it, unless the guarantee provides otherwise. A guarantee issued by a Thai bank through a foreign branch, such as the Doha branch in Judgment No. 8131/2561 (2018), may therefore be governed by the law of that country in the relationship with the beneficiary, while the application between the Thai customer and the Thai bank is governed by Thai law. The United Nations Convention on Independent Guarantees and Stand-by Letters of Credit of 1995 has only eight States parties, and Thailand is not among them.³⁰ Where the guarantee is silent, the law governing an international guarantee must still be determined case by case under the Act on Conflict of Laws B.E. 2481 (1938).

Comparative law: England, Singapore, the United States and Thailand

All four systems accept that a demand guarantee is an independent undertaking that the bank must honor on receipt of a demand in the prescribed form. The difference lies in the exceptions: England accepts only clear fraud, Singapore adds unconscionability, the United States has set out the conditions in UCC § 5-109, and Thailand has upheld the validity of this form of guarantee but has no Supreme Court judgment on the exception directly, and still applies the suretyship provisions of the Code to conditional guarantees.

Comparing the four systems, Thailand differs from the other three in having both forms of guarantee in the market at once without a clear line in the wording. Many Thai government agencies and employers use a form that ties payment to loss, which the Supreme Court treated as part of the underlying contract in Judgment No. 3263/2554 (2011), while foreign employers use the demand form upheld in Judgment No. 8131/2561 (2018). The English courts solved this problem with the presumption in Wuhan Guoyu, which gives weight to a bank issuer and a cross-border transaction.⁹ In the author's view the Thai courts should adopt that presumption as a tool of interpretation under section 368, because it fits the reasoning on the ordinary usage of financial institutions that the Supreme Court already applies, and it would let drafters predict the result.

The second difference is the legal basis of the exception. England relies on case law since Edward Owen,¹⁸ the United States on statute,¹⁹ and Singapore on case law that has widened the exception.²⁰ Thailand has different tools: section 5, which requires rights to be exercised in good faith, and section 406, which allows recovery of undue enrichment. In the author's view the path the Supreme Court chose in Judgment No. 8012/2568 (2025), letting the bank pay first and the applicant recover from the beneficiary as undue enrichment, is a middle way between the English and Singapore lines, because it preserves the certainty of the guarantee at the payment stage and corrects unfairness after payment instead. Its limitation is the risk that a foreign beneficiary has no assets in Thailand against which to enforce, which is why an applicant in an overseas project should assess the enforcement of a judgment or award in the beneficiary's country before providing the guarantee.

Law and economics, and legal philosophy: why the bank pays first and argues later

A bank guarantee shifts the cost of assessing and monitoring the debtor to the party that can do it most cheaply, the bank that already holds the customer's credit information. The pay-now-argue-later principle is a rule, in the sense used in law and economics, that removes the cost of proof from the payment stage and determines which party must bear the risk of litigating while the dispute is pending.

Avery Katz analyzes the guaranty contract as a way of managing asymmetric information (a situation in which one party knows its own risk better than the other) and moral hazard (the incentive to take more risk when someone else bears the loss). A surety that is close to the debtor and can assess or control the debtor's conduct more cheaply than the creditor takes on that task in return for a fee.³² A bank is the surety that fits this model best, because it already holds the customer's accounts, credit history and security. A foreign employer that does not know a Thai contractor agrees to contract when a bank guarantee is provided, because the bank has assessed the contractor on its behalf and accepted a risk the employer cannot assess.

The pay-now-argue-later principle is a rule in the sense used by Louis Kaplow, who distinguishes rules, whose content is fixed in advance, from standards, which leave the decision to the person applying the law afterwards. Rules are cheap to apply and suit conduct that recurs in large numbers.³³ If a bank had to decide before paying whether the debtor was actually in breach, it would need experts in construction, carriage or commodity sales for every transaction; that cost would come back as higher fees, and the beneficiary would not get the certainty it wants. The demand guarantee therefore sets a rule: the bank examines documents only, the applicant bears the risk of an unjustified demand, and the courts correct the unfairness after payment. The conditional guarantee chooses a standard instead, requiring the adjudicator to assess first whether there was a breach, which gives less certainty but better protection against unjustified demands.

In terms of legal philosophy, the question is who should hold the money while the dispute is undecided, and who should be the plaintiff. A system in which the bank pays first makes the applicant the plaintiff, who must prove that it was not in breach and that the beneficiary was not entitled to the money; a system that examines first makes the beneficiary the plaintiff, who must prove the breach. Neither system is just in itself. The choice is a matter of risk allocation that the parties agree and price. A contractor that agrees to provide a demand guarantee wins work that a contractor that refuses does not; the price is becoming the plaintiff when a dispute arises. The unfairness the law should correct is therefore not that the bank pays, but that a beneficiary uses the bank's undertaking knowing that it has no right to do so, which section 5, section 406 and the fraud exception each address from a different angle.

What applicants and beneficiaries should do

Applicants should know from the day of issue which form their guarantee takes, negotiate for the demand to require a statement and supporting documents, track the expiry date so as to ask for the guarantee back, and on being called send a letter of reservation to the bank at once while preparing the recovery action. Beneficiaries should verify authenticity with the bank, make their demand in the prescribed form and before expiry, and obtain an amendment from the bank every time the underlying contract is extended.

For applicants. First, read the draft guarantee required by the counterparty before signing the underlying contract, and know whether a demand guarantee or a conditional guarantee is being provided. Second, negotiate for the demand to require a statement identifying the breach, as in URDG 758 article 15, and if possible a copy of a notice previously sent to the applicant; this does not make the guarantee conditional, but it makes an unfounded demand harder and leaves evidence for the recovery action. Third, set the expiry date as early as the counterparty will accept, and record it so as to ask for the guarantee back or have the bank cancel the facility as soon as it falls due. Fourth, on receiving a copy of the demand or learning that a demand has been made, send a letter of reservation to the bank the same day, stating that the applicant is not in breach, asking the bank to examine the demand strictly against the wording of the guarantee, and reserving the right to recover from the beneficiary. Fifth, if the guarantee is conditional and the underlying contract contains an arbitration agreement, apply for interim relief along the lines of Judgment No. 3263/2554 (2011) before the bank pays. Sixth, if the bank has paid, prepare the recovery action against the beneficiary along the lines of Judgment No. 8012/2568 (2025), and include a claim for the return of any other guarantees not yet called, following Judgment No. 1792/2565 (2022).

For beneficiaries. First, verify the authenticity of the guarantee with the issuing bank through the bank's own channels. Second, make the demand before the expiry date, in a letter signed by an authorized signatory, delivered to the branch specified, and containing the statement of breach the guarantee requires, following Judgment No. 1451/2524 (1981). Third, under a conditional guarantee, give written notice to the bank within sixty days of the debtor's default under section 686. Fourth, every time the underlying contract is extended, obtain an amendment to the guarantee from the bank before approving the extension, or the bank may be released under section 700, paragraph one. Fifth, when expiry is near but the dispute is unresolved, make an extend-or-pay demand. Sixth, demand only the amount that is justified, because a knowingly excessive demand must be returned as undue enrichment with interest, and in other legal systems may lead to the whole call being restrained.

Related matters on which the firm also advises include reviewing the underlying contract and its security terms before signature, on our page International contract review, and the bank's mechanism for examining documents and giving notice of refusal, on our page Letters of credit: discrepant documents and refusal to pay.

Review of guarantees, demands and bank guarantee disputes

The firm reviews draft guarantees and applications before signature, prepares demands and letters of reservation, tests the validity of a demand or a notice of rejection against the wording of the guarantee and URDG 758, applies for interim relief, and conducts actions to recover money paid under guarantees in the Intellectual Property and International Trade Court or the civil courts.

1. Review of the draft guarantee before the underlying contract is signed, identifying whether it is a demand or a conditional guarantee and proposing wording for the demand, the expiry date and extensions of time.
2. Review of the application to the bank: the scope of reimbursement, debiting of accounts, security, and the liability of directors as personal guarantors.
3. Preparation of demands for beneficiaries, in the prescribed form and in time, including extend-or-pay demands.
4. Letters of reservation and applications for interim relief for applicants whose guarantees have been called, including commencing arbitration under the underlying contract.
5. Review of the bank's payment or rejection, comparing the demand with the wording of the guarantee and URDG 758 articles 15, 20 and 24.
6. Recovery actions for undue enrichment against beneficiaries, actions for the return of guarantees, and defenses in recourse actions brought by banks.

A 45-minute consultation on one matter costs THB 4,900. It suits a party that has just received a demand or a notice from its bank and wants to know the same day whether the bank must pay, what can be done before the bank pays, and from whom the money can be recovered. For the review of draft guarantees, applications for interim relief and litigation, the firm quotes a fee in writing according to scope before work begins.

Questions before instructing us

Questions that contractors, exporters, importers and finance teams typically ask when a bank guarantee is called, when they must make a demand under a counterparty's guarantee, and before instructing the firm.

Who does the work

Bank guarantee and international finance matters are the responsibility of Eksiam Chaisorn, Legal Consultant, founder and Managing Director of Eksiam & Partners Co., Ltd., who advises on international trade law, including international banking and finance, international construction and procurement contracts, and the resolution of trade disputes.

Education relevant to this work: Master's level · Master of Laws (LL.M.) program, International Trade Law, Faculty of Law, Thammasat University; Master's level · Master of Laws (LL.M.) program, International Law (International Investment Law), Faculty of Law, Chulalongkorn University; and Master's level · Master of Laws (LL.M.) program, Financial and Tax Law, Faculty of Law, Chulalongkorn University. Full profile and qualifications