Using strict compliance to damage joint ventures

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