Clients often ask me if the breach of a sale and purchase contract by a customer can lead to immediate foreclosure and debtor’s asset seizure. The answer requires a look into key implicit legal concepts at stake.
The first concept is validity: the existing contract must be part of a legal system. It must have been “accepted” by the system it belongs.
We can check the requirements for validity from the point-of-view of an international purchase and sale of goods, considering the grounds for a legal and strong connection between the client’s legal system and the underlying Convention for the International Sale of Goods (CISG).
CISG states that a contract is formed and valid when its proposal, cumulatively: a) indicates the goods for sale, plus, b) expressly or implicitly fixes or makes provision for determining goods’ quantity and their price, and c) is accepted by the buyer under legal terms (CISG, Art. 14, 1).
The second concept is effectiveness: it is expected that the valid contract will produce all desired effects within the legal system it belongs.
The most desired effect of a contract from a creditor’s perspective is that of direct foreclosure: a contract which can be brought to a court for forced payment without the prior attribution of its legal title by a judge.
A contract with such a level of effectiveness meets requisites which exceed that of a contract’s plain validity.
As an example: Portuguese courts will only accept direct foreclosure of a valid contract if, cumulatively: a) the contract was formally signed and authenticated before a Portuguese notary by the parties involved, b) it provides for the unequivocal constitution/recognition of a specific, determined and enforceable obligation, c) it brings evidence of its practical implementation and/or compliance by the parties (payments, withdrawals, etc.).
In Brazil, the effect of foreclosure does not require that the valid contract be signed before a notary, but law requires that the contract be signed by the debtor and at least two witnesses, in addition to the obligation provided in the document being specific, determined and enforceable.
These requisites show how challenging can it be for a contract providing for an international sale and purchase to be immediately foreclosed in any of these countries in case of default.
My take: when concluding an international contract, intentionally check its applicable law and jurisdiction. Test its validity and its effects in case of breach, particularly direct foreclosure. Professional advice prior to closing a relevant transaction will help fulfil key contractual requirements before it is too late. By not doing so, in case of default a creditor risks the undesired need of a long and oftentimes costly lawsuit before it can effectively recover what is due.