Section 383: Judicial reduction of disproportionate penalty

Supreme Court decisions interpreting this section

1. Supreme Court Judgment No. 3811/2562 (2019)

   A front-end fee payable on the day the credit agreement is signed is consideration for the use of the facility and depends on that agreement coming into existence; signing it is a condition precedent and, under section 366 paragraph 2, the parties are taken to have intended the written credit agreement to be decisive. If it is never signed the lender has no right to the fee at all. But a separate part of the fee, payable on signing the letter of acceptance and forfeitable if the borrower fails to perform, is a promise to pay a sum on doing or not doing something - a penalty within section 383 paragraph 2, which the court may reduce to a reasonable amount. A lender that forfeits under such a clause exercises a contractual right, is not in default, and owes no interest on the part it is later ordered to return.

   A bank approved a 656,000,000 baht facility on terms requiring a front-end fee of 13,120,000 baht on the day the credit agreement was signed, of which 9,560,000 baht was payable on signing the letter of acceptance and forfeitable if the borrowers failed to perform. The borrowers could not get their directors to sign the credit agreement within the extended deadline. The Supreme Court held the front-end fee was consideration for use of the facility and that signing the credit agreement was a condition precedent, the parties intending the written agreement to be decisive under section 366 paragraph 2, so without it the bank had no right to the fee. The 9,560,000 baht already paid was, however, a penalty under section 383 paragraph 2, and the Court of Appeal had properly reduced it to 2,000,000 baht: the bank claim to have lost interest by not lending the money elsewhere was unsupported, and preparing the credit analysis was its staff ordinary work. Finally, because the forfeiture was a lawful exercise of the bank contractual right it was never in default, so it owed no interest on the 7,560,000 baht it had to return, and that part of the order below was set aside.

   Read the full decision (deka.in.th)

2. Supreme Court Judgment No. 11379/2556 (2013)

   A freely negotiated penalty clause is not automatically an unfair contract term but remains reviewable under Section 383 if disproportionate.

   A contractual penalty of 2% per month for breach was freely agreed and constituted a penalty clause; the court held it was not an unfair contract term under the Unfair Contract Terms Act but remained subject to reduction if disproportionate under Section 383.

   Read the full decision (deka.in.th)

Curated decisions with case numbers verified against the Supreme Court database. English renderings are the firm's editorial translation for study.