Impact of violations of foreign exchange regulations on contractual validity

The central issue in dispute was whether the transaction should be deemed null and void due to an unlawful object or cause, given that it contravened the foreign exchange regulations in force at the time. The analysis also involved the application of Article 1525 of the Colombian Civil Code, which establishes that no restitution shall be granted for anything delivered or paid for an unlawful object or cause, when the illegality was known by the parties involved.

The Court’s reasoning was structured around the following key points:

1.     Unlawful object of the contract due to violation of foreign exchange regulations

The Court concluded that “both parties were fully aware of the foreign exchange regime then in force in Colombia (Decree Law 444 of 1967), and of the legal obligation to register foreign credit transactions with the Exchange Office. Their conscious decision to disregard this requirement constituted a breach of public order, which rendered the agreement null and void due to the illicit nature of its object (article 1519 of the Civil Code)”.

The Chamber emphasized that the registration requirement was not a mere formality, but rather an essential legal element of the transaction at that time.

2.     Inadmissibility of restitution when the illicit nature of the transaction was known

Given the unlawful nature of the contract, the Chamber held that article 1525 of the Civil Code applied: "no restitution may be claimed for anything given or paid for an unlawful object or cause, if its illegality was known”. It was proven during the proceedings that both parties were aware of the obligation to register the transaction, as it was subject to mandatory foreign exchange regulations.

3.     Expected standard of diligence for financial institutions

The Court also considered it significant that both parties were financial institutions. As such, “they were expected to act in accordance with the highest standards of ethics, security, good faith, technical knowledge, diligence and care, always within the bounds of applicable law”.

In this regard, the Chamber found it unacceptable for “financial entities—or any institution authorized to operate in this field—to claim ignorance of the legal framework governing their professional activities. Such ignorance was deemed intolerable, considering the specialized and public nature of their roles”. The Court noted that, in the case of financial institutions and companies engaged in management, investment, placement, collection, or allocation of financial resources, the concept of “knowledge of illegality” is inherent to their professional expertise.

To conclude, the Court found that there had indeed been a breach of foreign exchange regulations. Both parties, as financial professionals, failed to comply with the legal obligation to register the transaction with the Exchange Office—whether due to negligence or deliberate omission—thus activating the sanction set out in article 1525 of the Civil Code. Accordingly, the recovery of the funds loaned was not legally admissible.

This ruling must be approached with caution, as it involves foreign exchange rules that preceded the current legal framework. Nevertheless, it sets an important precedent regarding the treatment of transactions subject to exchange control. As demonstrated in this case, non-compliance with such requirements may render a transaction invalid and bar the parties from recovering funds delivered in furtherance of an unlawful object.

At the very least, this decision serves as a clear precedent illustrating how violations of foreign exchange regulations can result in the definitive loss of loaned amounts, where the unlawful nature of the contract affects both its enforceability and the possibility of restitution.