Trade and Commercial Law Assessment - Honduras - Economic ...

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TRADE AND COMMERCIAL LAW ASSESSMENT DECEMBER 2004 HONDURAS IV. CONTRACTS A. INTRODUCTION Although it is not difficult to enter into contracts in Honduras, problems lie in the absence of legal provisions for novel contract types and in inadequate supporting institutions. Modern contracts, such as leasing, franchising, factoring, and electronic contracts, are not addressed by the current legal framework for contracts. Distribution agreements are unfavorably regulated on behalf of local distributors. Powers of attorney granted in a foreign country, including other Central American countries, are not valid unless they pass through a complicated process of legalizations and permits. Contract enforcement is complicated, slow, and expensive. The judicial system is ill prepared to deal with international business. Although the Supreme Court was recently appointed through a transparent mechanism, public concerns remain that reforms may meet resistance. Alternative dispute resolution mechanisms for contract enforcement are neither widely present nor widely utilized. Lawyers, in general, are not well trained in international business principles. B. LEGAL FRAMEWORK The Civil Code provides the main legal principles for contracting. This code allows parties to form contracts on anything, provided it is not expressly prohibited or contrary to public order or custom. 24 If the parties to the contract are companies or businesspeople, or the contract pertains to commercial matters, the Commercial Code applies accessorily to the Civil Code. To form agreements that are not explicitly covered by law, such as leasing, franchising, factoring, and electronic contracts, parties devise custom-made contracts. Without explicit law, the potential for enforcement of such customized contracts is dubious. Electronic commercial transactions are at risk of not being recognized because there is no legal certainty as to when an electronic contract has formed, and about the legality of electronic signatures. There is fear that fraud could be committed electronically in the course of commercial transactions given the absence of legal protection. There are references to leasing in the Law on Financial Institutions and the Law on Sales Tax; however, there is no comprehensive law governing these contracts. There is a Law on Sell by Installment without Transferring Title through which a person can buy a movable asset such as a car by paying in installments. In these cases, property can be used during payment, but title is not transferred until the entire price is paid. Such contracts differ from leasing contracts because, in the latter, there is no commitment to transfer property. If an asset is returned in a Sell by Installment without Transferring Title, the buyer can receive a portion or sometimes the complete payment. 24 CdCom. Art. 1564. IV-1
TRADE AND COMMERCIAL LAW ASSESSMENT DECEMBER 2004 HONDURAS Although the system is formalistic in many regards, parties are free to assign any name to a contract. A contracting party will sometimes disguise a contract by assigning a name that would enhance that party’s rights, but courts are supposed to look at the nature of the agreement rather than its assigned name to determine the contract’s effect. For example, it is common for landlords to disguise rental agreements as not-for-payment loans supplemented with letters of credit to facilitate eviction of a tenant. Such contracts should not be honored by a court if it is proved that the nature of the contract is that of a rental agreement. Distribution and representation contracts are subject to a special law passed in the 1970s, which is disproportionately protective of the interests of local distributors. 25 To validate such a contract, parties must register the contract at the Industry and Trade Ministry. If the contract is terminated by the foreign company, the local distributor is entitled to compensation equal to the average annual net income it has received over the last 5 years of the contract’s life. In addition, in cases of unilateral cancellation, the local distributor can obtain an injunction to prohibit further distribution of the products it was distributing before the contract was terminated. Similarly, distribution contracts are not subject to foreign jurisdiction and cannot be governed by foreign entities. As a result of these conditions of distribution and representative contracts, many foreign companies are reluctant to introduce their products in the Honduran market. In general, contracts do not require notarization. But certain kinds of contracts, such as sale of real property and mortgages, do require authentication. Entering into oral contracts is nominally possible for amounts of less than $10. Such a low threshold serves to make the allowance of oral contracts irrelevant. Powers of attorney are required whenever someone is authorized to undertake an activity on behalf of another party. In Honduras, powers of attorney must be authenticated by a public notary. Because Honduras is not a signatory of the Inter-American Convention on the Legal Regime of Powers of Attorney Abroad, a power of attorney granted in a foreign country, even a Central American country, must be legalized by the Honduran consulate in the foreign country and then authorized by the Ministry of Foreign Affairs. The process of authenticating foreign powers of attorney is long, tedious, and expensive and tends to discourage their use. If a power of attorney is to be used abroad the authentication process is even more tedious. First, the statement of power of attorney between parties must be notarized. It then must be taken to the Supreme Court for approval and notarized by a notary recognized in Honduras. Next, the document must be taken to the Ministro de Gobernación to verify the authorization of the Supreme Court. The document must then be ratified by the Ministry of Foreign Affairs. Finally, the power of attorney is taken to the consulate of the foreign country for approval. The Law on Government Contracts governs contracts with the government for sale or purchase of goods and services. Under the terms of this law, government contracts are subject to special requirements, such as a public bidding process. In some cases, the bidding process has been perceived by interviewees to be corrupt. Suits can be filed against an allegedly unfair bid, but the risk of being blacklisted because of such actions is so high that no suit has ever been brought 25 See the Law of Agents, Distributors, and Representatives of National and Foreign Enterprise, Ley de Representantes, Distribuidores y Agentes de Empresas Nacionales y Extranjeras. IV-2
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