Merger control in Central America

ABSTRACTION OF DOCUMENTARY CREDIT: THE SPANISH CASE

MERGER CONTROL IN CENTRAL AMERICA

Merger control has gained key importance in Central America. The region’s Legislatures have enacted competition and consumer protection laws with policies to deal with combinations, merges and acquisitions between companies, better known as “economic concentrations” or simply “concentrations”, in order to guarantee free competition. For an overview of concentration control rules applicable in Central America please visit http://www.iclg.co.uk that contains articles authored by Nassar Abogados that appeared in the 2008 edition of The International Comparative Legal Guide to: Merger Control; published by Global Legal Group Ltd, London.

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ABSTRACTION OF DOCUMENTARY CREDIT: THE SPANISH CASE

Lic. Henry Rodriguez

The foregoing comment aims to briefly examine the abstraction of documentary credit, a typical banking instrument, in the light of the Spanish experience.

Spain was selected as reference not by chance but instead for a specific interest: to show how to approach abstraction, even in professional and traffic-intensive environments like banking, in countries with cause obligations, as is the case in Latin America and in Europe (like France and Italy), which are civil law systems, strongly influenced by the 19th Century codes.

Documentary credit is regulated by whatever the parties themselves agree and, if they so decide, by the Documentary Credit Rules and Uniform Uses of the International Chamber of Commerce, Pub. 500 (hereinafter RRUU), applied globally today. To determine the efficacy of these norms to obligate the parties involved, Decision 357-2000 of April 7 of the Tribunal Supremo Español (Spanish Supreme Court) (hereinafter STS) provides that such efficacy depends on the enforcement, particularly, of the principle of free will consecrated in Articles 1091 and 1255 of the Civil Code (although under this interpretation such norms are clearly not part of the Spanish code of laws –STS 14-4-75 and STS No. 899-1997 of 9-10-97).

Article 1091 of the Spanish Civil Code provides that “obligations arising from contracts are binding for the parties thereto, and must be fulfilled accordingly.”  Number 1255 indicates that “contracting parties may establish whatever pacts, clauses and conditions they may deem convenient, provided these are not in contravention of the law, the morale, or public order.”  In this sense, it is worth mentioning that, at least in principle, the RRUUs would not be contrary to law unless those that specify the rights of the arrangee and the beneficiary, and those that exonerate the Bank of liability, are considered abusive in an adhesion contract, and would therefore be subject to the Law on General Contracting Conditions and, eventually, considered null.  At least in Spain, the Courts have avoided using this criterion to date since they understand, a priori, how this would harm banking and, consequently, mercantile traffic.

This introduction is relevant to examine the abstraction of documentary credit, as RRUUs are responsible for making documentary credit work in an abstract manner.  This has become jurisprudence due to the contractual effectiveness awarded to RRUU when the parties bring them into a banking transaction.

Now, since these norms are usually included in the documentary credit contract terms, and in order to analyze the abstraction, we must recall Article 3, in its latest version, which, in essence, indicates that, because of their nature, credit operations are completely separate from sales contracts or any other type of contract, and, therefore, banks are not affected or bound by them.  Additionally, bank commitments under this type of operation are not subject to claims or exceptions by the arrangee caused by a relation with the issuing bank or the beneficiary.  In no case may the latter use the contractual relations between the banks or between the arrangee and the issuing bank.

Numeral 4 must be added to this article of the RRUU as a regulating element which really reinforces the abovementioned abstraction.  It indicates that parties to a credit negotiate with documents, not with goods, services or other considerations mentioned in such documents.  This norm supports the fact that the Issuing Bank, or any secondary bank in the operation, remains, in principle, foreign and somewhat unconcerned with events that do not develop or result from the documents submitted to them as instructed (a documentary analysis which is merely of appearance and formality).

In documentary credit, the issuing bank commits its own credit.  Therefore, if the documents submitted are in conformity, the issuing bank is bound to pay, without links or conditions to the rights and obligations of the parties to the underlying contract.

Since 1942, the relevant Spanish jurisprudence has interpreted abstraction as the independence of credit from the substantiating contract, where banks are totally foreign to, in principle, and are not involved in conditioning the relations that give rise to the debt (STS 27-10-1984).

Over time, this abstraction has taken on different shades and forms, such as the following:

a-) Documentary credit constitutes an atypical contractual operation that includes multiple businesses, abstract in nature, and separate from the underlying contract;
b-) Documentary credit constitutes a cumulative delegation of debt by the arrangee, where contract-specific debt co-exists with Issuer debt, but is not part thereof (the latter being STS of 11-3-91);
c-) Although documentary credits aim to guarantee the positive outcome of a contractual relation, these are different operations and do not obligate or affect the party banks, which are never part of the underlying contractual relation (STS No. 780-1995 of 20-7 and of 3 and 8 May, 1991), and;
d-) Actions resulting from a contractual base are independent from those resulting from documentary credit, that is, from the sales contract elucidated between buyer and seller, where the Bank is an external third party, and also independent from those arising from the irrevocable documentary credit elucidated between the Bank and the credit beneficiary communicated by the Bank, preventing a transfer that may result in the non-fulfillment of one of the contracts by the other (STS No. 357-2000 of 7 April);

Before analyzing the implications of the term “abstraction” based on the doctrine, it is worth mentioning Decision 557-2001 of 27 November of the Audiencia Provincial de Murcia (Provincial Court of Murcia), which is incongruent and contradictory, as it seems to inadequately address the principle of abstraction it recognizes itself.  This resolution expressly defines abstraction under the same terms as the RRUUs does, and refers to previous statements of the Supreme Tribunal that have expressed and ratified the same.  However, this ruling provides for, and supports, direct Bank intervention to assess, modify and even substitute, at its will, the parties to the underlying relation, expressly ratifying Bank actions, contrary to its instructions, and concerning the incoterm clause, the certificate of origin and the insurance policy.

Clearly, abstraction is a two-way concept, which prevents the parties in the underlying relation from interfering in the documentary credit operation based on exceptions arising there from, but also implies that Banks intervening in the documentary credit cannot overstep their instructions and take actions that influence and clearly amend what the parties had agreed to in their cause relation.  We would then face a rare case of amendment resulting from contract terms by a third party, clearly unacceptable.

DELIMITING THE CONCEPT OF ABSTRACTION

Concerning documentary credit, and based on the abovementioned jurisprudence, there is a disconnection of the cause and basic contract, and a subsequent elimination of cause exceptions and responsibilities resulting there from, that are not contrary to the functioning and operation of documentary credit.

However, such a disconnection must be modulated or softened, in the sense that the abstraction of documentary credit refers to the functional cause, not the essential cause.

This implies that the letter of credit is not an abstract business, lacking a cause, since under Spanish Law (and in that of Latin American countries with their respective norms), pursuant to Article 1261,3 of the Civil Code, there is no contract without cause of the obligation established, but instead functionally abstract.  The Spanish Supreme Tribunal has understood this abstraction, in general, as independence, meaning in practice that, by incorporating the RRUUs to the contract, the parties have agreed that exceptions and actions will be communicated and that the relation will remain solely at the contractual level.

This will of independence would be based on Articles 6,1 and 1255 of the Civil Code, that is, autonomy in the will of individuals and the waiver, which should be voluntary, to use any possible exceptions that arise from the cause contract and the commission, which must be against each other, when they are based on the law, moral or public order.

With this, it could be said that the obligation taken on by the Bank is autonomous and abstract, as it functions independently from the cause, both in the relation of provision that exists between it and its client and in the obligación de valuta obligation that links beneficiary and arranger.  This means that the documentary credit relation is independent from the will of the arranger and the will of the bank.

The abstraction between the reason for business and the executive is not absolute, only in principle.  This exception of indicating “in principle,” which has been used since the STS of 5 January 1942, opens the door to a possible dependence between both relations.

Jurisprudence has also indicated, beyond this assumption “of principle,” that documentary credit and the reason for business are not totally disconnected, and must complement each other (referring to the coincidence of their respective dates of entanglement –STS of 3 May 1991-).

Thus, in ending, the necessary practical complementarity is basically evidenced in three different assumptions:
a-) The challenge of exceptions by the bank, resulting from vicissitudes of the cause contract, when its objective is an illegal consideration.  In this case it is legally supported on Article 1275 (“Contracts without cause or with legal consideration produce no effect.  The consideration is illegal when it is contrary to the law or the morale”) and Article 1276 of the Civil Code (“Declaring a false cause in a contract shall render the contract null if there is no proof it was founded on another true and legal consideration”);
b-) An almost complete match between formalities required for letters of credit and those agreed to by the parties to the underlying business; and
c-) An extension of documentary credit that directly influences the configuration of the reason for business.

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