Foreign Currency Obligations - Lawful Alternative Means to Acquire Foreign Currency – Non-Mandatory Nature of Section 765 of the Civil and Commercial Code

On December 3, 2015, the First Division of the Civil and Commercial Court of Appeals of Bahía Blanca, Province of Buenos Aires (hereinafter, the “Higher Court”), confirmed the ruling issued in judicial proceedings “Carpo, Elena Nora vs Peralta, Ceferino Víctor Alberto in re Contract Compliance” (file No. 144,785), which sentenced the defendant to pay the plaintiff the sum due in US dollars plus a daily fine in the same currency.

The seller of a property located in the city of La Plata judicially claimed forced compliance of the payment of the balance of the unpaid price, fine and agreed interests in US dollars, according to the purchase agreement executed between the parties on January 6, 2012.

The debtor, inter alia, alleged impossibility of acquiring North American currency due to not having been granted the authorization by the tax authority (AFIP), which at that time was an unavoidable requirement for foreign exchange operations due to the provisions of the Central Bank which restricted access to the foreign exchange market and remained applicable at that time. He argued that for that reason he had been forced to offer the payment of the balance of the price in Argentine pesos at the official exchange rate, but the creditor refused to accept it.

The respondent appealed the ruling of the lower Court that sentenced him to pay in the agreed currency. For the case of not being granted the right to pay in Argentine pesos, he requested the unconstitutionality of the exchange restrictions of the Central Bank which constituted the so-called “Exchange Blockage” (cepo cambiario) be declared, in order to be able to acquire the US currency at the official price and thus pay off his debt. In a subsidiary manner, he claimed that the conflict be resolved by applying the doctrine of shared effort provided at the time by the Law No. 25,561, by means of an equitable adjustment of the contract.

On her side, the plaintiff also appealed the ruling regarding the determination of the date of notice of default, which establishes the starting point of the calculation of the penalty agreed upon in the contract.

The Higher Court understood that the dispute between the parties and the appeal raised must be resolved by the rules of the repealed Civil Code of Vélez Sarsfield. Its argument is based on the fact that even when “non-compliance persists at the time of the entry into force of the new legislation, the very fact of it was consummated instantly upon the due date provided for in the contract to the effect, notwithstanding the notice of default to the debtor, which was also carried out prior to the entry into force of the Civil and Commercial Code”, consequently “the consequences of the already consolidated situation of default and non-compliance should be judged in the light of the previous regulations”. To support its position, the Higher Court availed itself of the doctrine of the Supreme Court of the Province of Buenos Aires (Ac. 60,659 S 10-III-1998; C 87,841 S 12-XII – 2007, vote of Dr. Hitters, Ac. 78,397 s 23-12-2003) concerning Section 3 of the former Civil Code, on which formula is based current Section 7 of the new Argentine Civil and Commercial Code (hereinafter “CCCN”) on temporary effect, i.e., the validity and enforcement of the laws, which it quotes: “... the Section 3 of the Civil Code does not enshrine the retroactive application of the new law but the immediate application even to the consequences of existing legal relations or situations; meaning that the new law applies to the facts that are in fieri in course of development at the time of their enactment and not for the consequences of past acts, which are subject to the previous law, because the notion of legal consumption applies."

In addition, the Higher Court stated that, given that supplementary laws are not applicable to contracts, the right granted by Section 765 of the CCCN to cancel with Argentine pesos obligations agreed in foreign currency is not applicable, while Sections 617, 619 and 740 of the former Civil Code apply, under which the creditor may not be compelled to receive a different thing than that which he is owed and the debtor fulfills the obligation by giving the designated species.

On this matter, the Higher Court referred to the recent ruling of Division F of the National Court of Appeals on Civil Matters dated August 25, 2015, in proceedings “Fau, Marta Renée vs Abecian, Carlos Alberto and others in re Consignment” (file No. 79,776/2012) and “Libson, Teodoro and others vs Fau, Marta Renée in re Foreclosure” (file No. 76,280/2012) (see “Foreign Currency Obligations – Blue-Chip Swap Transactions” in Marval News No. 154, September 30, 2015). This ruling stated that Section 962 of the CCCN provides that the legal rules concerning contracts are supplementary of the will of the parties, unless their expression, contents or context show that they are mandatory, and that Section 7 of the CCCN sets forth that the new supplementary provisions do not apply to contracts in course of execution, consequently the supplementary regulations in force at the time of the execution of the contract should apply.

Pursuant to the above, the Higher Court stressed that Section 765 of the CCCN is not of public order nor is it mandatory, therefore it is not applicable to the case, which is governed by the will of the parties as agreed in the contract and the defendant must comply with the obligation assumed in the agreed form.

The vote of one of the three judges of the Higher Court, Dr. Ribichini, disagreed with both central arguments put forward by the majority to confirm the ruling sentencing the respondent to cancel his debt with US dollars. His disagreement referred to Dr. Castagno and Dr. Peralta Mariscal’s votes who argued that (i) the facts which gave rise to the dispute are prior to the enactment of the CCCN, whereby the effects that linger after its entry into force should be considered consequences of past acts and must be judged in accordance with the regulations in force at the time they occurred, and (ii) in the framework of contracts, the rule is that regulations are supplementary and therefore new laws do not apply (except for consumer contracts), being Section 765 of the CCCN a rule which may be modified by the parties, since it is neither mandatory nor imperative.

Moreover, the three judges of the Higher Court referred expressly to the existence of alternative lawful means to acquire foreign currency, validated by repeated jurisprudence of that Higher Court Division as the “stock exchange dollar” and operations known as “Blue-Chip Swap Transactions” which quotation is higher than that of the official rate of exchange, being public and notorious knowledge that the latter did not reflect “real value” of the US dollar. In this regard, reference was made to the ruling of March 11, 2015, of Division B of the National Criminal Court of Appeals in Economic Matters, in proceedings “BBVA Banco Francés S.A. in re Breach of Law No. 24,114” that validated the mechanism of “Blue-Chip Swap Transactions”, through which Argentine pesos were used to buy bonds denominated in US dollars with local and foreign trading, which are then sold locally or abroad for US dollars, as a licit alternative to acquire US dollars. This demonstrated the feasibility of acquiring such currency in accordance with law and is thus disproved the alleged impossibility due to sovereign acts, fortuitous or force major case alleged by the debtor. Therefore and for other reasons set out in the ruling, the Higher Court decided that it is not pertinent to consider the declaration of unconstitutionality of the foreign exchange regulations proposed by the debtor.

Furthermore, the Higher Court decided to reject the request of the debtor to apply the doctrine of shared effort, regulated at the time by Law No. 25,561, since it was intended for situations governed by emergency regulations that are not applicable to the case, and the appellant did not question the applicability of the previous Civil Code on which provisions the ruling was founded.

Consequently, the Higher Court upheld the ruling of first instance that sentenced and imposed costs on the respondent.

This ruling, in the same line with those it expressly quotes, validates again the criterion established by jurisprudence according to which the contractual obligation assumed in foreign currency must be complied with in the currency agreed, while Section 765 of the CCCN is not applicable since it is not a rule of public order but discretional for the contracting parties, i.e., supplementary of their will and on which the parties may agree to the contrary.