Don't let the flood make your business stagger and sway

Times of crisis require swift and decisive action and for Thai companies this obligation falls to senior management and the board of directors.

Some factories have been submerged by recent floods and are unable to continue operations, other factories are not flooded but are prevented from operating as they cannot obtain supply chain materials sourced from factories that are now flooded, however in each case the result is the same: through no fault of the company, the factory cannot continue operations and there is no work for factory employees.

Flood-affected companies should consider three essential points:

Employees: Suspending payment of wages for employees is not risk-free. Frequent reports in the media have stated that companies affected by force majeure are not required to pay wages to employees, but companies can be exposed to claims for severance pay by not paying wages during a cessation of business operations and directors can become personally liable both civilly and criminally. Not all directors' and officers' insurance policies will cover this liability or the costs of defending claims.

Force majeure is defined in Thailand's Civil and Commercial Code (CCC) and is also referred to in the Labour Protection Act (LPA), but there is no clear legislative provision that entitles a company to unilaterally suspend payment of wages without being required to pay severance pay.

The LPA requires employers to pay severance on termination of employment, including where an employee has not worked and has not been paid, due to the inability of the employer to continue business. Severance pay varies from 30 days' salary, for employees with more than 120 days' service, to 300 days for employees with more than 10 years' service.

The LPA enables a company to pay its employees 75% of wages if the company has had to suspend operations for reasons other than force majeure _ this would not be termination as wages are being paid as required by law.

However, if the employer is unable to continue business operations and chooses not to pay employees any wages at all, the Labour Courts are likely to regard this as termination.

One example was considered by the courts in 2002: Water and electricity had been cut off to an employer's building and the employees were not able to access the building. This triggered termination of employment under the LPA because the employees could not work and were not paid and the employer was unable to continue its business.

The provisions of the CCC relating to force majeure do not entitle an employer to avoid its obligation to pay severance and the courts have previously ruled that an employer would be required to pay severance on termination of employment even in the event of force majeure.

Authorized directors come within the definition of "Employer" in the LPA and can be exposed to civil and criminal liability (such as claims for unpaid salary, six months' imprisonment and penalties of 100,000 baht) if the company suspends payments to employees, and managing directors of companies can also be held criminally liable.

Directors and officers should review their directors' and officers' insurance policies to determine whether they are covered before taking steps to suspend wage payments.

Any proposal to suspend wages should be discussed with employees and any agreement should be carefully documented, rather than being unilaterally implemented, to address concerns of duress and undue influence and show it was done in good faith.

Contractual obligations: As a result of disruption to factories, many companies are not able to fulfil contracts for manufactured goods.

Thai law can relieve a company from performance that becomes impossible, but not all contracts are subject to Thai law and companies should review the terms of their contracts to determine which law applies to the contract and obtain foreign legal advice if foreign law applies.

Some contracts impose content and timing requirements for notices and it is important to comply with these requirements; otherwise companies risk being subject to liabilities that would not have been imposed if the notice provisions had been properly observed.

Insurance: Disruption to manufacturing premises typically results in several types of damage:

- damage to buildings;

- damage to machinery and equipment;

- damage to inventory and raw materials;

- loss of profits as a result of interruption to business activities; and

- legal claims from third parties for failure to deliver manufactured goods.

Companies should assess the damage and review their insurance policies to determine which types of damage are covered by particular policies, and in particular, to determine whether the policies cover damage caused by flooding.

Insurance policies are not all worded equally; what is regarded as a flood under one policy may not necessarily be regarded as a flood by another insurance policy. A careful review of defined terms will be necessary.

Insurers should be promptly updated on developments and where the situation changes, these changes should also be promptly reported. 

This includes evacuation orders, changes to flood control management plans that affect your property or operations, and police, military or government orders and directions.

If in doubt, consult your broker or seek legal advice.