This content is from: Local Insights

Colombia

The Colombian Supreme Court of Justice (Corte Suprema de Justicia) has carried out an analysis of the legal nature and characteristics of performance bonds between private parties (by means of Decision No 6785 of May 2 2002). In the Decision, the court established that the bonds were initially regulated by Law 225 of 1938 which set out the legal regime for management and performance bonds with the purpose of assuring compliance with obligations derived from laws or contracts. Law 225, in the opinion of the court, is still in force. The bonds are generally conceived as an insurance by which a creditor is covered against any economic loss that may derive from the eventual breach of their debtor's obligations, transferring such risk to a third party (an insurance company) which assumes it as its own obligation in exchange for the payment of a premium.

The purpose of Law 225 was expressly to authorize the issuance of the bonds since insurance principles in Colombia have not permitted the assumption of risks that depend on the sole consent of the obligor. The court ratified the validity of the bonds and stated that on legal and ethical grounds an insurance company that charges a premium for the issuance of the bonds cannot argue that they are null or void, based on the fact that they depend exclusively on the sole consent of the debtor, taking into account the fact that Law 225 modified the uninsurable rule provided under Article 1055 of the Code of Commerce.

So the bonds continue to be governed by Law 225 and by special regulations, including Article 203 of the Financial Organic Statute, which due to their special nature oppose the general regulations of the insurance contract set out in the Code of Commerce.

Another important feature of the bonds is their irrevocability by both the creditor and debtor, which reflects their special nature consisting in the assurance of contractual performance, as opposed to general insurance where any of the parties can in principle terminate the insurance contract unilaterally. The court brought up a significant reference to the Statute of Public Contracting contained in Law 80 of 1993. According to Article 25, section 19 of Law 80 the bonds will not expire in the event of unilateral revocation.

Finally, a key question arises from the Decision: are bonds issued during the execution of public contracts governed by Law 80, subject to Law 225? At present, these bonds are regulated partially by Law 80, its regulatory decrees, by specific general provisions adopted by the insurance companies in Colombia, and subsidiarily by the general provisions of the insurance contract set out in the Code of Commerce. The effect of the Decision would be that these type of bonds would additionally be regulated by Law 225 because this law did not distinguish between the performance of private or public contracting. However, it seems likely that a decision from the Council of State (Consejo de Estado), Colombia's highest court in contentious administrative matters, would be necessary to confirm this interpretation.

Instant access to all of our content. Membership Options | One Week Trial