News Detail

Decision issued by the constitutional Chamber The Supreme Court – Validity of obligations in foreign currency

Of important significance is the recent ruling issued by the Constitutional Chamber of the Supreme Court, on November 2nd, 2011, which, in Extraordinary Appeal for Review stated the nullity of the Decision Nr. 000602-2009 which had been issued on October 29th, 2009, by the Civil Cassation Chamber of the same Supreme Court that dismissed the cassation appeal filed by MOTORES DE
VENEZUELA, MOTORVENCA, C.A., against the judgment pronounced on November 19th, 2007, by the Civil and Commercial Banking Eight Superior Accidental Court with National Jurisdiction and venue in the city of Caracas, which had declared as invalid the Deposit of payment at Court consigned by MOTORVENCA in favor of BANK DE VENEZUELA, S.A., UNIVERSAL BANK, by virtue of having entered the amount of Bs.377,490,928.00, as equivalent in bolivars at the official exchange rate for the date of the offer, of the amount of $ 228,413.55, instead of such amount of foreign currency as had been contractually agreed by both of the parties.

In the annulled Decision, the Civil Cassation Chamber of the Supreme Court had shared the view of the Superior Accidental Court in the sense that the debtor should have recorded the amount in that foreign currency in which the obligation was incurred, but not its equivalent in bolivars at the time of payment, based on the following reasons:
1) That the offeror company expressly assumed the obligation to repay the loan granted to it by the bank offeree, in U.S. $ as payment money.
2) That notwithstanding the existence in the country of an exchange control regime, the debtor company offeror, had legal alternative means to obtain the foreign currency required for the purposes of complying with the obligation to pay in foreign currency, assumed by it
3) That the offer of payment of the debt owed by the company was made by the offeror in Bolivars, establishing the amount due in foreign currency, through the equivalent in national currency according to the rate at the date of the offer
4) That, in accordance with Article 1264 of the Civil Code, obligations must be fulfilled exactly as they were incurred and, as established by Article 1290 of the same Code, the creditor cannot be bound to receive something different from what is owed, although the value of the thing offered were equal or even greater than that, so the offeree could not be obliged to accept the payment that had been offered through this procedure because the debtor offeror did not the payment in the currency that was forced to pay -dollars of the United States of America, but in a different currency -Bolivars; and consequently stated that, as having the debtor the burden of complying with the obligation to pay in foreign currency had also implicitly assumed the burden of purchasing the required foreign currency for these purposes, which could make through the mechanisms provided in the exchange regulations.

According to this latest ruling of the Constitutional Chamber -of mandatory compliance by the other Courts of the Republic- it is clearly established that the introduction of a foreign currency as means of payment, it must be necessarily considered as an accounting currency but not as a payment currency; that is to say, the debtor may not be forced to pay in the currency that was contractually
stipulated, and he is freed to make the payment by delivery of the equivalent in bolivars at the time it takes place, and, moreover, it is definitely clear that establishing obligations in foreign currency exchange is not an exchange crime.

In confirmation of the above, we would like to transcribe highlights excerpts of the decision:

"It should be noted that the exchange control regime in force since February 5th, 2003 by which it is set requirements for natural persons and public or private institutions to request foreign currency before CADIVI to comply obligations agreed in foreign currency, does not impede that, in contracts, a foreign currency could be used as a payment reference of contractual obligations, it does not
contain any unlawful, because the bolivar is legal tender, but not a compulsory tender between individuals. This is declared" (omissis)

“ From all which it follows that in Venezuela it is not expressly prohibited pacts which compliance were stated in foreign currency, as long as they adapt to the existing exchange frame under whose operation is explained above. The wording of Article 14 of the Exchange Crimes Act published in Official Gazette No. 38,272 of October 14th, 2005, does not follow a general prohibition from bidding or contracting in foreign currency provided these are not contrary to law, specifically to agreements signed by the Republic, the exchange regulations or laws applicable thereto, which itself comes to be a guiding principle in this type of contract is that, if payment is made in the Venezuelan territory , to have liberatory effects it should be done in Bolivars which is the legal tender, and its amount should be determined according to the official exchange rate in force at the time of payment, and not upon the contract signature time; since all foreign currency physical entering into the national territory must be sold to the Central Bank of Venezuela“ (omissis)

“ In short, the entry in force of the new currency system involved, from the outset and by virtue of their immediate application, a substantial modification to those contracts between private parties in which there have been stipulated payment in foreign currency in the country, although such a modification only for the purpose of fulfilling the obligation does not extinguish the contract or becomes unlawful its object, as contractual obligations remain valid except that, supervenedly, a strange cause not attributable to the parties doctrinaire known as "Act of the Prince", has legally changed the way that have to be fulfilled said contractual obligations“ (omissis)

“Moving the practical implications of doctrinaire references to the case, and considering that the exchange regulations are designed to protect international reserves through foreign exchange market consolidation, it is considered that the inclusion of exchange rate policies does not invalidated the contracts agreed to be paid in foreign currency within the territory of the Republic, but changed its enforcement. So that, in these cases the currency which was initially prescribed as a payment currency becomes an accounting currency in terms of the rate set at the date when the payment is made.” (omissis)

This decision meets the criteria that we have expressed on previous occasions to some of our clients in the sense that, in our current legislation is perfectly valid to contract obligations in foreign currency, and that does not violate exchange regulations in force: debtor may choose to pay in the stipulated foreign currency, if it were possible, although he cannot be forced to it but to pay the
corresponding equivalent in bolivars.

Obviously, there remain many questions on the economic reality facing the hideous exchange control, but it is unquestionably the legality of the covenant of the obligation in foreign currency.