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The Guarantee Function of the Promise Letter (Part 1)



| By: Caroll Lezcano |

In this first opportunity we will refer to a legal figure widely used in our market. From a very particular approach we will talk about the promise of payment letter in its guarantee function, understood as a viable tool for the execution of contracts.

The letter of promise to pay has become a persistent element in the consumer sector of both real and personal property; It is certain that everyone who has bought a car or a house has related to the figure even if they have not noticed it, it is precisely this omnipresence in some types of commercial transactions that motivates us to touch on a topic that is interesting to me and drives me to share these reflections with others who, like me, seek to break down the legal status of this contract to better understand its role as a guarantee instrument.

To begin with, it is obvious that you have to understand the figure. The promise of payment letter is a guarantee instrument in which three parties intervene, (i) an applicant, who is usually the one who is obliged to pay a price, and who can be approved, for the purposes, as a “guaranteed”, ( ii) an issuer, which becomes a Financial Entity of the market that is the one who guarantees the fulfillment of the obligation, which in this case is to “pay” and (iii) a beneficiary who is the one who generally acts as creditor. In a practical sense, the importance of the promise of payment letter turns out to be undeniable since it makes the perfection of a contract feasible and prevents it from having to be concluded on the basis of simple mutual trust.

Today, the use of the payment promise letter is almost essential when it comes to perfecting a sale since the use of it gives the debtor-buyer the guarantee of not having to make a disbursement in advance of the delivery of the property that it acquires and to the creditor-seller it grants the security of transferring the property that is the object of the sale, with the assurance that it will receive the payment. Between the seller and the buyer, a third party intervenes, the issuer of the letter (a financial entity), which in turn may have the role of financing the purchase. Contrary to what one might think, the use of the payment promise letter is not exclusive to purchase transactions in which it mediates financing.

Since the promise of payment letter is not regulated in our legislation, it is necessary that we assign its legal nature to it. In my opinion, we are facing a contract itself, since there is a certain object, consent and cause, elements that we refer to from article 1112 of the Civil Code, however, since the promise of payment letter exercises a guarantee function, which must comply because its nature requires it, it would have to suffer the same fate of many other guarantee instruments, such as the mortgage or the pledge, that is, its existence necessarily depends on a main obligation, which adds another characteristic to the letter promise of payment, which is its condition as an accessory, therefore the letter of promise of payment is ultimately an accessory contract.

In the particular case of our local market, the promise of payment letter must meet certain requirements, rather dictated by the uses and customs of the market than by law or doctrine. These uses and customs are born from the demands of commercial sectors that become large users of this guarantee mechanism, the real estate sector and the automotive sector.

Based on these uses and customs, the promise of payment letter must be irrevocable, renewable and transferable. The irrevocability characteristic, closely linked to its role as guarantee, means that the issuer cannot refuse to make it effective, nor can any of the parties alone achieve its termination, a characteristic with which it is ensured that the obligation that it guarantees is will end up complying. It must also be renewable, in other words, the promise of payment letter cannot have conditions that prevent its renewal or that make it so difficult that the extension of the coverage period cannot be achieved, although, it is acceptable that the renewal is subject to the approval of whoever issued it. This is mainly due to the fact that in the real estate sector, the owner of a work, needs to be able to assign the letter to the financial entity that in turn finances the construction, that is, the owner or builder as the case may be, uses the letter as a guarantee of payment for the loan obtained for the construction, therefore it must remain valid throughout the duration of the purchase promise. Today, the term of the promise of payment letter is increasing more and more, since the Buyer of a property is required to guarantee payment earlier within the term of the contract, which is a logical consequence of the need. of the Promoter to keep in force the guarantee that his own Bank requires, which brings us to the condition of transferable, since the Promoter is not served with a valid letter but that he will not be able to endorse. Therefore, it is very common to see in the contracts of promise of sale of a real estate unit the requirement of a guarantee by means of an irrevocable promise of payment letter that can be assigned at the option of the seller in promise mode.

Another important point is that the promise of payment letter is not a form of payment. With the promise letter, an obligation is not paid or satisfied, a future fulfillment is guaranteed, in fact, the promise letters of payment require the fulfillment of special conditions for the payment to be executed, so that we are not only facing a guarantee but to a conditional type.

Once the preliminary work is done, we already know that the payment promise letter is a contract in which three parties intervene, which, in our environment, must be irrevocable, renewable and transferable, which now leads us to delve into the main topic: its function in the second part of this article

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