Commercial application of civil penalty to knowingly pay for wrongdoing

On October 30, 2019, the Supreme Court of Justice (the "CSJ"), with Quiroz Monsalvo presiding, resolved the cassation appeal filed in the proceeding initiated by Ecopetrol S.A. and others against Fernando Londoño Hoyos and others, in connection with the Invercolsa case. According to Dr. Londoño's cassation, the Superior Court of Bogota had erred in the application to a commercial business of the sanction provided by Article 1525 of the Civil Code (the "CC"), according to which, "one may not [request the return of] what has been given or paid for an object or cause knowingly unlawful", since sanctions in law cannot be applied by analogy. Faced with this approach, the CSJ argued that the Court should apply such penalty, not by analogy, but by the express reference to the CC. made by Article 822 of the Code of Commerce (the "CC"). Let us see.

In December 1996 the National Government decided to privatize the shares of Ecopetrol and others in Invercolsa, following Article 3 of Law 226 of 1995. According to this article, there would be special conditions of sale in favor of the active and retired workers or former workers, among other related parties, of the entity being privatized or of the entities in which the latter had a majority participation. In this sense, the privatization of State-owned companies would have a general regime under normal market conditions for interested third parties and a special regime with preferential conditions for individuals with labor ties to the companies involved in the privatization.

To guarantee the effectiveness of this limitation, Article 14 of the same law provided that "if at any time it is determined that the acquisition was made in violation of these provisions or those that regulate it for each particular case on the beneficiary or actual acquirer, the business will be ineffective". The ineffectiveness referred to in said article, in terms of article 897 of the Cco, implies that the act of transfer of the shares does not produce effects or it is as much as if it had never been celebrated. In other words, acquiring shares of Invercolsa under special conditions, without being an employee, pensioner or former employee of Invercolsa or of the company that had the majority shareholding in it, implied that the contract in which that business was embodied did not produce any effect nor was it born for the legal world.

Dr. Londoño was the legal representative of Invercolsa through a service contract entered into by the latter with the law firm he presided. Both the Labor Chamber of the CSJ, in a labor proceeding initiated by Dr. Londoño, and the Council of State, in a popular action initiated against him, and the Civil Chamber, on this occasion, considered that it could not be affirmed that he was an employee, pensioner or former employee of Invercolsa or of its majority shareholder, in spite of which, he acquired a package of the privatized shares under special conditions. Consequently, the sanction of ineffectiveness provided by Law 226 of 1995 referred to above was applied and decisions were taken to achieve similar effects as if the transfer of such shares had never taken place.

Now, in order to show that the contract for the transfer of the shares was never executed, the jurisdiction should order, on the one hand, the return of the shares in favor of Ecopetrol and others, together with the profits that they had generated (paid in money and more shares), undo the business that Dr. Londoño had executed on said shares, and, on the other hand, order that he be returned the price that, at the time, he paid to acquire them, so that each party would be left as it would be without the business having been carried out. All the former was indeed ordered, and Ecopetrol and others recovered the shares, together with their profits, free of the business that Londoño had entered into with respect to them. But the jurisdiction refrained from ordering that Dr. Londoño be reimbursed for the price he paid for the shares.

To this effect, the CSJ considered: the provisions of article 1519 of the CC, according to which, "there is an illicit object in everything that contravenes the public law of the nation"; the fact that the provisions of Law 226 of 1995 constituted "public law of the nation" and, therefore, its contravention implied an illicit object; the fact that article 1525 of the CC. sanctions whoever incurs in an illicit object with knowledge of doing so, by stating that it is not "possible to [request the return of] what has been knowingly given or paid for an illicit object or cause"; and that, in this case, Dr. Londoño knew or should have known that he did not comply with the condition of worker, former worker or pensioner of Invercolsa that would enable him to acquire the shares as he did.

But this sanction is foreseen in the CC. for civil business, so how is it possible to apply it to commercial business such as the one entered into by Dr. Londoño?

The Superior Court of Bogotá had applied it, supposedly, by analogy, which is prohibited in matters of sanctions. This situation was alleged by Dr. Londoño's lawyer seeking to overturn the second instance sentence. But the CSJ found that, although the application of the sanction did not proceed by analogy, it could proceed by express reference, by virtue of the provisions of Article 822 of the Civil Code, according to which, "the principles governing the formation of acts and contracts and civil law obligations, their effects, interpretation, mode of extinction, annulment or termination, shall be applicable to commercial obligations and legal business, unless otherwise provided by law".

Thus, Dr. Londoño had to return the shares and his profits to Ecopetrol to others, without being reimbursed the price he paid. This leaves us with the conclusion that it is possible to apply in commercial matters the sanction of the one who knowingly pays an illicit object.