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2 Drafting & Interpreting Contracts in Latin America February 9th, 2012 Presented By: ARIFA Crowell & Moring LLP Lloreda Camacho & Co. Association of Corporate Counsel 2

3 INTRODUCTION (Colombia) American style contracts are becoming used more frequently in the whole world and Colombia is no exception. This type of contracts are more complete and thorough than Colombian style contracts. You do not have to finish the meaning of a sentence with the law nor imply other rules not in the contract. The exercise that is made by the Colombian party in going through the whole American style contract is quite useful. This type of agreements help to educate Colombian companies into the extent and consequences of the transaction. The later also because Colombian style contracts usually leave the breach consequences to be determined by the law. 3

4 Choosing the adequate template is the first step for an efficient and less troublesome negotiation: ü Parties to a contract must choose the template with the simplest English language and the one that is adapted to the type of transaction. ü It is also advisable to choose a template that has been already discussed with a Civil law party. The role of the Colombian counsel will also be discussed in this Webcast. The counsel must: ü Know its client and its needs ü The way the client makes business 4

5 This should be understood by the counsel because he must translate the needs and interests of its clients into provisions that will work under Colombian law and jurisdiction. What works in the US does not necessarly work in Colombia. One key aspect to consider: Enforcement in Colombia is very different than in the US. The Colombian counsel must also advice the foreign client as to the characteristics of the Colombian company. The Colombian counsel has a feel that the foreigner cannot have unless he or she has been in Colombia doing business. Advise on the choice of law and jurisdiction provisions should also be in the top priorities of the Colombian Counsel. 5

6 The Counsel will also be able to reach an agreement with the client into using certain legal mechanisms that may be strange or unfamiliar from an American perspective. The Foreign company is better served when the counsel explains the benefits of certain structures. Language is also a key aspect when drafting an agreement that is going to be applied in Colombia: ü Use plain English ü Do not use Synonymous Strings ü Use clear, straight-forward language ü Contracts need to be translated to be enforced before local courts 6

7 Legal English terms may have a different meaning for American courts and indeed the drafting of agreements has been guided most of the time on decisions by American or English courts. Those legal terms do not have the same meaning in Colombia or in Colombian law (e.g. delegation ) Take into account that although US-based contracts privilege the individual s autonomy, under Colombian laws there are certain public order norms that cannot overruled by agreement of the parties (e.g., procedural laws, condoning of wilful misconduct) The most important rule to interpreting agreements governed by Colombian law is that once the court discovers the intention of the parties, such intention is binding even if the agreement establishes something different. An example: Real Estate sale price lesión enorme. 7

8 I. CHOOSING THE ADEQUATE TEMPLATE American Style Contracts: The are recommendable because they are more complete to every type reader. Review all provisions and verify that they are applicable in the manner that you intend them to be, and that they are enforceable under Colombian law. Recitals: Typical Colombian contracts do not use them, but they are becoming more common because they are very useful. The real intention of the parties will be the courts main focus even if the words and sentences say otherwise. If recitals are complete they may mitigate the effects of a confusing provision on the contract. 8

9 Representation and Warranties: Useful contribution of American type contracts to Colombian legal practice. They can complement statutory provisions that are vague or broad, in order to extend, limit or exclude certain warranties. But the remedies of the breach of the Reps and Warranties must be expressed in the contract because the law is not clear as to the amount of even the possibility of claiming. Legal Representative: Under Colombian law, the legal representative is the person that according to the bylaws of the company may validly act on behalf or bind the company. 9

10 II. ROLE OF COUNSEL IN DRAFTING THE CONTRACT What does the client expect of the contract?: Be familiar with the way of thinking of American lawyers in order to reach as much as possible the same objectives sought by the American or foreign company. It may work in the USA but not necessarily in Colombia: Advise your client that if the contract worked in the US, it does not necessarily work in Colombia. Example: Interests on late payments can not go beyond a certain percentage established from time to time by the Superintendence of Finance. Enforcement must be a priority when drafting agreements: Enforcement is very different in Colombia than the USA. Courts can take a considerable amount of time (4 years or more). Arbitration may also take up to 1 year and a half. 10

11 (continued) Enforcement: There are two types of commercial lawsuits for enforcing a contract: ü ü Ordinary lawsuits Summary Collection lawsuits. **Should penalty clauses or a promissory note be introduced in all contracts? Know your counterpart: Does it have a good reputation? Is the other party known? Has the client verified the Clinton List? Choice of Law and Jurisdiction Provisions: ü All contracts performed in Colombia must be governed by Colombian Law 11

12 ü ü ü Exceptions: When one of the parties is not Colombian and the contract has an international arbitration clause Is always a foreign jurisdiction advisable? If a foreign jurisdiction is chosen, the enforcing of a foreign award must go through exequatur 12

13 III. LANGUAGE OF THE AGREEMENT Plain English: English has become Lengua Franca of international business. If a Colombian company enters into an agreement with a french party most likely English and not french nor Spanish will be used. Use simple english. Synonymous Strings: We do not use them in Colombian legal practice, they tend to be redundant and misleading. Consider whether each term conveys a meaning that is both sufficiently distinct from any accompanying terms that would be justified in keeping in. Language of the recitals: Use simple narrative prose. Do not use expressions such as witnessth, whereas.they can lead to confusion. In Spanish, verbs are very often used in passive voice, pay attention to it s English translation. 13

14 For example the following phrase: In no event will XYZ Company be liable for any direct or indirect, special, incidental, consequential or punitive damages or loss of profits arising in connection with. whatever the contract indicates This phrase is plagued with difficulties when trying to enforce it in a Colombian Court I would suggest the following wording: Except in cases of XYZ s willful misconduct or gross negligence, XYZ shall not be liable to ABC for any direct or indirect damages nor any lost of profit arising in connection with. whatever 14

15 The date of the agreement: Always stamp at the top of the contract the date that it became effective Do not use numeral dates Identification of the parties: ü ü ü ü Spelling Abbreviations Identification Numbers Grouping of Parties Signatures: The notion of delivered ( executed and delivered ) is not in Colombian law, nor in practice 15

16 Some very important clauses: ü ü ü ü Indemnify and Hold Harmless Termination Limit of Responsibility Force Majeaur 16

17 Drafting and Interpreting Contracts in Panama Presented By: Arias, Fábrega & Fábrega Panama 17

18 Drafting Style in Panama The drafting style of contracts in Panama is increasingly patterned on the US-style of drafting. This is particularly true in certain types of transactions: o Loan transactions o M&A o Project finance 18

19 Many standard clauses that were not previously included in Panamanian contracts are now common place, such as: o The use of definitions to identify terms throughout the contract o Reps and warranties o Closing/pre-closing/post-closing conditions and deliverables o Indemnity provisions o Covenants (in addition to reps and warranties) o Governing law and jurisdiction clauses 19

20 International arbitration clauses are permitted under Panama law and are becoming increasingly common: o Often will refer to arbitration under ICC or UNCITRAL rules, but may also refer to local arbitration board (Center for Conciliation and Arbitration of the Chamber of Commerce, Industry and Agriculture) o The local arbitration board has its own rules of procedure which may be used; alternatively, the parties to the dispute may agree to use ICC, UNCITRAL or any other international regulations. 20

21 o Panama is a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards o Arbitration rulings under an international arbitral body are enforceable in Panama (only issue is that a local judge may not be familiar with the rules and procedures, but this will generally not prevent recognition/enforceability) 21

22 Under Panama law, limitations may be placed on liabilities for breach of contract, but liability for gross negligence and intentional misconduct cannot be limited. Statute of limitation provisions under Panama law may, and often are, extended, but may not be reduced. Fines and penal clauses are not frequently included but there is no prohibition against them; in addition, specific performance and injunctions can be obtained under Panama law. o It should be noted that damages are more common than specific performance. 22

23 Role of Parties Original Intention in Interpreting a Contract 23

24 Where there is doubt as to the meaning of a contract, courts will always look to the circumstances surrounding the signing of the contract. As a general rule, terms that are unclear in the contract are to be interpreted in such a way as to prevent the frustration of the contract. 24

25 Intent is considered essential under Panama law and the consideration of intent in interpreting a contract is specifically contained in the Panamanian Civil Code. The Panamanian Civil Code also stipulates that the behavior of the parties in executing the contract and in its implementation and performance after its signature are to be considered in interpreting a contract. 25

26 Importance of Local Formalities (public deeds, notarizations, filings, etc) 26

27 Registration in the Public Registry Local formalities are particularly important in certain types of transactions where the transfers must be executed in Public Deeds filed with the Public Registry. o Real estate transactions o Registration of title and mortgages over ships and aircraft o Chattel mortgages Note that registration fees, which are generally based on the value of the contract, can be substantial. 27

28 Language Most contracts in Panama may be executed in Spanish or English; however, in the event that it is necessary to take the contract to court, an English contract must be translated into Spanish by an official translator. Contracts registered in the Public Registry or filed with a notary public may be in English and Spanish, but may not be in English only. Costs of translation must be taken into account as they can also be substantial. 28

29 Authentication of Signatures Contracts signed abroad must be notarized in the country of origin and authenticated: o By apostille (in countries that are party to the Apostille Convention) o By the Panamanian consulate in the country of origin (in countries that are not party to the Apostille Convention) 29

30 Stamp Taxes Most contracts signed or enforced in Panama will require that Stamp Taxes be paid ($1 per $1,000 face-value of the contract) Contracts that are executed outside of Panama may delay payment of the Stamp Taxes until it is necessary to present the contract before a local court or government authority. If multiple copies of a contract are signed, all original copies must be stamped. 30

31 Protocolization One option to reduce Stamp Taxes is to file the contract in a Notary Public s protocol ( protocolización or protocolization ) and obtain multiple authentic copies of the notary s protocol containing the contract instead of having separate counterparts signed by the parties. Note that protocolization must be in Spanish (or English and Spanish). Therefore, it is often recommended that each party grant the other an irrevocable power of attorney coupled with an interest authorizing each to protocolize the contract. 31

32 Transaction Taxes In Panama, there are certain taxes to which various transactions will be subject, such as: o Sales of personal property will be subject to local VAT tax (7%) o Real estate transfers are subject to a real estate transfer tax (2%), plus a (3%) tax on the gross purchase price (in lieu of capital gains tax) o There is a 5% withholding on the gross amount of a sale of securities (in lieu of capital gains tax) 32

33 Drafting and Interpreting Contracts in Latin America (Brazil Section) February 9 th, 2012 Henry G. Burnett Crowell & Moring LLP hburnett@crowell.com New York 33

34 I. Boilerplate provisions must not be overlooked Interpretation of boilerplate provisions in Brazil is a twofold issue: o They can or cannot be enforceable depending on the applicable substantive law Civil Code or Consumer Code. o The application of one or another Code depends on the parties involved and their position in the contract. 34

35 Enforceable boilerplate provisions are normally contained in contracts that are regulated by the Civil Code: o Do not involve a consumer relationship; o Were freely discussed and agreed by all concerned parties (despite the existence of the boilerplate provisions); o Can be executed in regard to any obligation not forbidden by law. 35

36 Non-enforceable boilerplate provisions are normally contained in contracts that are regulated by the Consumer Code: o Involve a consumer relationship; o Are usually imposed by one part to another (contract of adhesion); o Provide for the sales of goods or hiring of services. 36

37 Most Common non-enforceable boilerplate provisions in consumer contracts Brazil: o Forum selection clause; o Arbitration clause; o Excessive interests; o Clauses that impose obligations considered abusive to the consumer. 37

38 Boilerplate provision in contracts between private parties and the government in Brazil: o As a general rule, are always enforceable; o Not subject to discussion by private party; o Consumer Code does not apply. 38

39 II. Start Thinking of the Worst Scenario Alternatives for resolution of contract-related disputes in Brazil: o Litigation o Arbitration 39

40 A. Litigation Jurisdiction: o Between private parties and/or involving state or local government: State court o Between private parties and/or the federal government and/or international organizations: Federal court. o International lis pendens accepted. 40

41 Applicable Law: o In relation to the parties legal capacity the law of their original countries should apply; o In relation to the dispute, the law of the place where the contract was executed should apply, however courts tend to favor the application of Brazilian law. 41

42 Clauses drafted under U.S. standard: o Are enforceable in Brazil to the extend they do not infringe Brazilian law; o Will be interpreted in accordance with the public polices. o Judicial remedies available to compel specific performance of the contract; 42

43 o Limitations to damages outside the contract s scope. o No punitive damages for contractual breach. 43

44 B. Arbitration Regulated by the Brazilian Arbitration Law; Brazil is a member of the New York and Panama Conventions; Arbitration-friendly courts; Highly sophisticate arbitration lawyers, arbitrators and arbitral institution. 44

45 B. Injunction and Precautionary Measures Possible either in litigation or in assistance to arbitral proceedings; The general test is: likelihood of the merit and urgency in the measure; Simple and fast proceeding; Subject to immediate appeal 45

46 Questions? 46

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