Foreign Currency Obligations - Blue-Chip Swap Transactions

On August 25, 2015, Division F of the National Court of Appeals in Civil Matters confirmed the rulings issued in judicial 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), modifying the latter in terms of the applicable interest rate.

The obligation to pay in US dollars assumed by a contracting party was subjected to judicial decision by the debtor, who initiated a lawsuit to deposit Argentine pesos with which she sought to cancel her debt.

Creditors, in turn, began foreclosure for the payment of their credit in US dollars, under the loan agreement with a mortgage guarantee which they executed in that currency with the debtor, on February 15, 2012.

The arguments put forward by the debtor consisted of the alleged impossibility of achieving the agreed foreign currency to make the committed payments, due to the so-called “Exchange Blockage” (cepo cambiario), which she considered a case of force majeure derived from an act of public authority. On this basis, she sought to cancel her debt with local currency, in the equivalent amount converted to the value of the official foreign exchange rate.

The decision of the lower Court which rejected the lawsuit and ordered the foreclosure to be carried out was appealed by the debtor and the case was solved by the judges of the Division F of the National Court of Appeals in Civil Matters (hereinafter, the “Higher Court”).

The Higher Court analyzed the provisions of the Civil and Commercial Code, which entered into force on August 1, 2015 (hereinafter “CCCN”), to determine if these would be applicable to ongoing contracts. With that goal, it considered Section 7 of the CCCN which establishes that the new supplementary provisions do not apply to contracts in course. With respect to supplementary provisions, the Higher Court pointed out that Section 962 of the CCCN stipulates that the legal provisions concerning contracts are supplementary of the will of the parties, unless their expression, contents or context show that they are mandatory.

Taking into account the exception provided for in Section 962 of the CCCN, the Higher Court decided to clarify that Section 765 of the CCCN, which allows cancelling the obligations agreed in foreign currency by paying in local currency, is not a rule of public order. Therefore, since it is not an mandatory provision, the Higher Court resolved that there would be no inconvenience if the parties, using their free will, agreed that the debtor must deliver the corresponding amount in the designated currency.

By virtue of the non-mandatory nature of Section 765 of the CCCN, the possibility that the debtor could release from her debt by delivering the equivalent in currency of legal tender, is not applicable to the contract in course at the time of the entry into force of the CCCN.

This contract is governed by the rules applicable at the time of its execution, which in this case is the Civil Code (text according to Law No. 23,928) and it provides that the debtor must fulfil the obligation by giving the currency designated (article 619). That means that the debtor could only comply by paying in US dollars.

Regarding the impossibility of obtaining foreign currency, the Higher Court understood that the existence of dispositions issued by public authorities is not enough to prove it, since it is be possible to acquire foreign currency by means of “foreign exchange and stock market operations that enable persons, by means of the acquisition of certain bonds, that exchanged enable the acquisition of United States Dollars necessary to cancel the obligation assumed”.

The Higher Court made reference to “exchange operations” as an alternative to the purchase of US dollars but did not explain to which operations it referred. It must be borne in mind that the only foreign exchange transactions allowed by law are those made through an entity qualified to such effect in the Official Foreign Exchange Market. From the date on which the loan agreement under dispute was executed, Argentine residents have not been legally empowered to purchase foreign currency to cancel a domestic operation, for which reason we are not able to determine to which exchange operation the ruling refers.

With respect to the “securities transactions”, we understand the Higher Court referred to operations known as “Blue-Chip Swap Transactions” in which Argentine pesos are used to buy bonds denominated in US dollars with local and foreign trading, which are then sold locally or abroad for US dollars. The Higher Court validated this mechanism as a legitimate alternative to acquire dollars, in line with the criterion already sustained in the ruling dated March 11, 2015 issued by 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”.

In view of the above, the Higher Court rejected the plaintiff’s lawsuit and ordered the foreclosure to be carried out until full payment of amounts due in US dollars. However, it reduced the interest rate to what it considered to be a reasonable value, according to the judges provided by Section 960 and 1004 of the CCCN, clarifying that the latter is a rule of public order.

This ruling sets a criterion of utmost importance for those who seek contractual obligations be fulfilled in a foreign currency.

The judgment leaves the doors open to the use of (i) the so-called “Bonex Clauses” through which parties may establish an alternative way to obtain the foreign currency agreed for the payments, when its purchase in the local exchange market faces restrictions, or (ii) exchange rates other than the official one in the case that the creditor would be obliged to receive Argentine pesos.

On the other hand, the ruling clears the doubts that may arise with respect to the interpretation of Section 765 and its discretional nature for the contracting parties, unless prohibited by law in any specific case.

This means that if the jurisprudence maintains the criterion set forth by the Higher Court, Section 765 of the CCCN will not be applicable to contracts in course before its entry into force, unless the parties agree otherwise. Also, the established discretional nature of this provision will allow the parties to freely agree if Section 765 CCCN applies or not to contracts executed after the entry into force of the CCCN.

By deciding that it is not a rule of public order, this judgment also enables parties to agree on different laws applicable to their contracts, insofar as non-discretional rights are not involved, and as long as the chosen foreign law does not lead to solutions incompatible with the fundamental principles of public order of the Argentine legal system.