Contracts form a critical part of any commercial operation, allowing businesses to enter into agreements with the suppliers, customers and distributors that drive their operation. Commercial contracts can be complex and highly bespoke, covering a range of eventualities and containing a wide range of clauses designed to protect both parties in the event of breach.
That complexity usually increases when the contract is cross-border and must encompass different legal systems and cultures. Attempting to use standardised contracts from one jurisdiction in another can cause huge problems in the event of a dispute, particularly when it is unrecognised by a court or deemed unenforceable under a legal system.
1- What are the three most common errors you see in commercial contracts drawn up in your jurisdiction?
In our opinion, the most common mistake is not to properly settle the terms of termination, governing law and arbitration clauses. Unfortunately, our judicial system lacks celerity and suffers from problems similar to many other jurisdictions. Thus, the parties (most likely foreign plaintiffs) find themselves in an endless process that do not match the expectations pre-established in their minds to try collect their credit or claim.
Second is requirements. Under Panama law, the general rule is that all contracts are consensual, which is to mean that they are perfected by the mere consent of the parties. By the same token, commercial contracts are not subject for their validity to special forms. Any form or language utilized in the execution of said contracts will obligate the parties in the manner and under the terms which appears that they wanted to be obligated. The exception to this general rule would be those contracts that pursuant to the Commercial Code or special laws, must be executed in a notarial deed or require certain additional formalities for their validity.
The last one is formalities. In Panama, there are multiple contracts that by law are required to be notarized and/or registered meaning that the rights and obligations thereof arise from the registration. The following are contracts that must be notarized and/or recorded at the Public Registry -
For example, it is very common for two foreign parties to enter into a pledge governed by Panama law, based on their knowledge of foreign legislation, missing some important formalities required by the Panamanian law, resulting in a legally questionable agreement.
2- What best practices should professionals adopt in your jurisdiction to ensure contracts are viable and legally binding?
First of all, always consult local legal experts before beginning any contractual relationship. Conduct an appropriate review of the terms of the agreement. Followed by a responsible due diligence process in order to ascertain a laundry list of items to enter into and execute an agreement.
It is highly important to establish rules of disclosure in order to initiate a trustworthy relationship in which both parties have properly shown valid documents or deeds that allow them to act on behalf of their companies, trusts, LLCs or any other vehicle.
As mentioned on our previous answer, it is highly important to legalize the signature of an agreement, by stamping the approval of a notary in which it is correctly established the recognition of each signature of each party to an agreement.
Since Panama is an international jurisdiction with a legal system that has produced multiple vehicles such as corporations, trusts, private foundations, LLCs and others that operate and own assets globally, these vehicles are often involved in international transactions subject to foreign laws, and it is often overlooked that the entity entering into the transaction is Panamanian, and subject from many legal angles to Panama law.
3- How easy is it to enforce judgments in your jurisdiction? Any examples?
In comparison with other judicial processes in Panama, taking into consideration the duration of a standard lawsuit, procedural and evidence requirements, this process is relatively easy and fast in Panama.
The recognition and enforcement of a foreign judgement, as it is called in our jurisdiction, is a non-contentious process that in most of the cases only requires complying with appropriate documentary legalization required by law. Of course, there are certain limitations, and as many countries do, Panama applies the rule of international reciprocity and thus reserves the right to deny the enforcement of any judgement from a country that denies the recognition of any judgement that rules over any matter or in certain direction that is not legally admissible in accordance with the Panamanian legislation.
There are many tactics applied by penalized parties to avoid payment. The important part of this discussion is the effectiveness of those tactics here in Panama. Our response will depend on the time and preparation of those tactics before the legal claim of enforcement. For example, a well prepared asset protection plan, executed years before the plaintiff´s action might be very hard to breach. In Panama, the law on private interest foundations (which are very similar to trusts) states that contributions of assets to the foundation have a statute of limitations of 3 years, meaning that after such time, creditors cannot successfully attack the transfer of assets.
The Republic of Panama is a signatory of the Convention of Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters of 1971 as well as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 – the New York Convention - and the Panama Convention on 1975 both related of recognition and enforcement of arbitral decisions.
4- How are damages dealt with in commercial contracts in your jurisdiction? Are liquidated (pre-agreed) damages common?
Normally, damages are included in commercial contracts as penalty clauses. Nonetheless, depending on the matter disputed, and the damages caused by the party who breached the contract or that incurred in actions that could be considered by a Judge as a defaulting conduct, damages are added to claims in order to force a favourable scenario from which they will be able to negotiate a suitable settlement of the case.
For a Judge to grant damages in a judicial process in Panama is very common. We would even say that is the rule. The exception would be a case in which the Judge recognizes the good faith of the party that lost the dispute, which is not very common. On the contrary, if the Judge deems it appropriate due to his perception of bad faith of the party that lost the dispute, exemplary damages could be granted in favour of the affected party.
Our Judicial Code establishes a special procedure to liquidate damages recognized by the court´s judgement. If this procedure is not executed, the judgement will have to be executed through a separate process and subject to a statute of limitation.
5- Is there anything special or peculiar about commercial contract law in your country that clients should be aware of?
Due to the aforementioned requirements of Panama law for the validity of contracts, certain agreements require additional formalities depending on their nature.
Real estate can be acquired by purchasing the shares or ownership interests of a corporation or any other entity owning real estate. This is done through a private share purchase agreement. A due diligence of the legal entity must be satisfactorily completed before purchase, as the purchaser will become responsible for all prior actions and debts of the legal entity, and will become the beneficiary of all assets owned by such legal entity.
Panamanian tax laws establish that the buyer must withhold a capital gains tax of 5 per cent of the share purchase agreement price and pay these monies to the Ministry of Economy and Finance. The tax is levied on the capital gains of the seller of the legal entity, but the buyer must act as its withholding agent. The buyer, seller and the corporation purchased are solidarity responsible for payment of the tax. The tax authority requires the buyer to submit a copy of the share purchase contract in Spanish at the time of payment of the tax. If the contract is signed in English, an official translation must be presented. If the contract is signed outside of Panama, the signatures must be authenticated by apostille or by the Panamanian Consulate or Embassy at the country of signature.
However, under the particular tax system in force in Panama which is called “Territorial”, foreign sourced income is not taxable. This means that a Panama corporation may own a manufacturing facility in the US, Europe or Asia, but upon the sale or leasing of such facility, the income arising from such transaction is not taxable in Panama.
Panamanian law also contemplates the possibility of execution of a general pledge of assets (called a floating charge in the UK) located outside of Panama. The general pledge of assets may be governed by a foreign law and must be registered at the Public Registry in Panama to be valid against third parties. This type of pledge would only affect assets situated outside Panama.
One final piece of advice is that Panama is a signatory of several Free Trade Agreements with different countries such as the United States, Canada, Peru, Singapore and others, and these FTAs contain their own rules regarding agreements and dispute resolution for commercial, financial, investment or trade transactions. Furthermore, Panama is a signatory of Bilateral Investment Agreements with approximately 30 countries providing additional rules and protections on bilateral investments. These agreements are international treaties that prevail over Panama law.
*This is a reprint from an article contributed to a legal journal.
Pardini & Asociados
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