Contracts in Guatemala: Exploring the scope of agreements drafted in English, governed by foreign laws and jurisdictions

It is very common in Guatemala that, when entering into a contract between two local entities, the parent company of one of them is foreign and, therefore, requires that the contract be executed in another language (usually English), that it be subject to the laws of the jurisdiction of the referred parent company and subject to the courts of the jurisdiction of such parent company.

Therefore, the question arises as to whether it is valid to enter this type of contract in Guatemala.

Regarding the first point (the possibility of the contract being drafted in English), Article 671 of the Guatemalan Commercial Code establishes that:

Article 671. Formalities of contracts. Commercial contracts are not subject, for their validity, to special formalities. Whatever the form and language in which they are entered, the parties shall be bound in the manner and in the terms in which it appears that they intended to be bound. Contracts entered into in the Guatemalan territory, and which are to take effect therein, shall be drawn up in the Spanish language. (…)”.

Therefore, although there is freedom to enter contracts in the language determined by the parties, if the same are entered into in Guatemalan territory and are to take effect in the same, they must necessarily be in the Spanish language.

However, if a contract written in Guatemala in English has effects in the country, it could run the risk of being challenged for absolute nullity.

In this regard, Article 1301 of the Guatemalan Civil Code states that:

“Article 1301. There is absolute nullity in a legal business, when its object is contrary to public order or contrary to express prohibitive laws, and by the absence or non-concurrence of the essential requirements for its existence. Businesses that suffer from absolute nullity do not produce effect nor are they realizable by confirmation.”

To avoid the risk of the contract being challenged for absolute nullity, one option that we normally offer to our clients in relation to this issue, is that the contract is concluded in two columns (Spanish-English), clarifying that in any case the column drafted in Spanish language prevails.

Now then, in relation to submitting the referred contract to foreign law, article 31 of the Law of the Judiciary of Guatemala stipulates that:

“Article 31. Submission agreement. The legal acts and business are governed by the law to which the parties have submitted unless such submission is contrary to express prohibitive laws or public order”.

In other words, the agreement of submission to foreign law is valid, as long as such submission is not contrary to express prohibitive laws or public order.

Now, considering the above mentioned, the following questions arise:

  1. Are there any laws in Guatemala that expressly prohibit the submission to foreign law of a contract entered between two Guatemalan entities and which is to take effect in Guatemala?
  2. Would it violate public policy to subject to foreign law a contract entered into between two Guatemalan entities, and which is to be effective in Guatemala?

For the first question, there are no known norms or general laws that prohibit these acts, however, the Law of the Judiciary of Guatemala, in its article 35, regulates the case of the application of foreign law by the Guatemalan courts, when appropriate, being one of the applicable cases, when the parties have voluntarily submitted a contract to foreign law.

However, to the judge that is submitted to hear any conflict related to the contract, it would be necessary to explain the reason for the submission to foreign law, even though the same was entered into between two Guatemalan entities and that its effects are in Guatemala.

If the above is achieved, it would mean that it would not be evading or avoiding a rule that would otherwise be applicable, whether of public policy.

As for the public policy exception, it would exist, above all, in the case of the application of a foreign rule that could violate the local law, which could be determined up to that moment.

Of course, at some point it could also be alleged the fraud of law, regulated as follows in Article 4 of the Law of the Judiciary of Guatemala:

“Article 4. null acts. (…) The acts carried out under the protection of the text of a norm that pursue a result prohibited by the legal system, or contrary to it, shall be considered executed in fraud of law and shall not prevent the due application of the norm that had been tried to evade.”

Finally, as to submitting to foreign courts the resolution of any conflict arising from the contract, Article 2 of the Guatemalan Code of Civil and Commercial Procedure establishes the following:

“Article 2. Submission agreement. The parties may expressly or tacitly submit to a judge other than the competent one by reason of territory, the knowledge and decision of a specific matter. (…)”

In other words, in principle there is no limitation to submit to foreign courts the knowledge of conflicts arising from a contract executed in Guatemala between two Guatemalan entities and subject to foreign law.

However, the court before which such disputes are submitted will have to review, according to its own laws, the possibility of hearing such disputes (forum non convenient analysis).