Volume 6, Number 20, Page 1

The Letter Of Intent In Venezuelan and Mexican Law

By Alfredo Romero

In this article we will look at the specific legal process of some developing countries for the approval of State indebtedness.1 The debt one government administration contracts today will probably be paid by the next administration or administrations--- and at the end of the day are paid for by all citizens of the country.

Therefore, some laws limit the government to acquiring finance by requiring authorization from different entities such as the Parliament and by establishing ceilings on the amount of indebtedness to be contracted and executed in the annual budget exercise. In some countries the Constitution establishes the conditions and restrictions to obtain government financing; in other countries besides the Constitution, specific Indebtedness Acts control government financing.2

In the case of Mexico, there is a Federal Public Debt Act which establishes the legal framework for obtaining sovereign financing. In most cases, the law requires that a “foreign borrowing controlling agency” (“FBCA”) authorize and control any public indebtedness.3 For instance, any Mexican federal public entity before officially or informally negotiating any international finance must obtain the authorization of an FBCA which in that specific case is the Public Credit Secretary (Secretaria de Hacienda y Credito Publico).4 The Public Credit Secretary will also control the correct utilization of the funds provided by public indebtedness.5 On the other hand, before any annual fiscal period commences the federal government must present to the Parliament an Income Act which reflects the expected national income of the specific year. Accordingly, this Act must express the amount of “net indebtedness” needed--- either external or internal--- to finance the national budget of that year.6

In the case of Venezuela, indebtedness is much more restricted than in Mexico.7 The Constitution provides a general regulation for public indebtedness 8 and as in Mexico the Public Credit Act requires the authorisation of an FBCA (the Ministry of Finance) and establishes that the government must request Parliamentary approval of the net indebtedness to be needed for the year. However, there is also an Indebtedness Act which obliges the government to request authorization from the Central Bank, the Congress and the Council of Ministers for each specific credit to be obtained on behalf of the State.9 The Venezuelan Indebtedness Act is an annual Act subordinated to the Public Credit Act, which lists all projects and programs with the amounts to be financed by public debt. The Public Credit Act on the other hand, establishes the legal process of authorizations which must be obtained by the Ministry of Finance before contracting any internal or external debt.10 In the case of Venezuela, a tedious bureaucratic procedure is required before the Mandate Letter is given.

It is important to notice that in Venezuela, after the date on which the Indebtedness Act becomes legally valid, there is a maximum period of two years to sign the loan agreement. If after this time the loan agreement is not signed the authorization is lost and a new authorization must be obtained in the next Annual Indebtedness Act— the whole process starts again from the beginning. From my working experience at the Ministry of Finance, I can say that the authorization process in Venezuela takes approximately ten months before the loan agreement can be signed. Suppose that the whole process is completed and the mandate letter is given. The designated arranger says that he or she has given their best reasonable effort and it has not been possible to raise the funds. The normal action that a typical borrower will take is to request another bank to arrange financing for him or her. Nevertheless, in the case of a sovereign borrower such as Venezuela, when the designated arranger decides to abandon the transaction, there is often not enough time to go through the whole process over again. Moreover, the indebtedness authorization will be lost with the possibility of higher financial costs for the project or program.

At this moment, the sovereign borrower would look at the letter of intent. It would find at first glance that there is no contractual obligation in connection with the letter of intent because there is a ‘subject to contract’ provision which conditions the enforceability of the agreement until a formal contract is signed. When the borrower looks for a firm commitment in order to claim specific performance and/or damages it discovers that the lender or arranger is only promising a credit on the basis of ‘best endeavours’ or ‘best efforts’. Does it mean that there is no cause of action for the borrower?. In order to analyse this situation we will focus on the legal nature of the letter of intent and consider several issues in connection with the wording of this document.

Alfredo Romero is an attorney with Gimon Troconis Romero Abogados in Caracas, Venezuela. The Inter-American Trade Report is proud to welcome the firm as new members of the Editorial Board. Alfredo Romero may be contacted at alfredoromero@cantv.net

1 In this respect, see some borrowing countries’ representatives points of view: Papanicolaou, p 47-52 (Greece); Soliven, p 326-349 (The Philippines); Garcia-Trevino, p 389-395 (Mexico).

2 See Padazis Karamanolis. The Legal Implications of Sovereign Syndicated Lending. London: Oceana Publications Inc, 1992. p 42-45. See also Trevino in Bradlow, p 389-390. For an specific explanation of the Venezuelan law see A.R. Brewer-Carias. Contratos Administrativos. Caracas: Editorial Juridica Venezolana, 1992, p 75-97. For an analysis of similar public credit restrictions in Spain see E. Garcia de Enterria & T.M. Fernandez. Curso de Derecho Administrativo. Vol. 1. Madrid: Editorial Civitas, S.A, 1986. p 650-651.

3 See Gurria-Trevino in Bradlow, p 389.

4 See Article 6 of the Federal Public Debt Act (Ley de Deuda Publica Federal)

5 See Idem Art. 7.

6 Idem. Art. 10

7 See generally James Otis-Rodner S. La Inversion Internacional en Paises en Desarrollo, Caracas: Editorial Arte, 1993, p 403-404. See also Brewer-Carias, p 75-96.

8 See Article 231 of the Constitution of the Republic of Venezuela.

9 See Brewer-Carias, p 78,85,87,91.

10 See Articles 3,19,29,30,48,50 of the Venezuelan Public Credit Act (Ley Organica de Credito Publico) Official Gazette # 35,077 of October 26, 1992.