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Legal Stability Contract – Translated For the First Time

October 12, 2009

What is a “legal stability contract”?  As I have discussed in other articles here (click on the “Legal Stability Contracts” category, to the right), the concept is borrowed from government concession contracts that protect the concessionaire from adverse regulatory action that undermines the concession.  In a fairly novel application of this concept, to promote investment, Colombian government agencies will sign a contract with investors of more than (currently) about $1.8M to prevent adverse changes to listed legal standards governing the investment, in exchange for a premium and accomplishment of the investment and its jobs and other objectives.  The legal standards that are stabilized by the contracts vary, of course, as do the investor’s obligations — the amount of investment, the legal stability premium, the number of jobs anticipated, and so forth.  According to my study, however, they are mostly tax-related provisions.

How does a legal stability contract actually work?   For those interested in reviewing one in English, there has not been any publicly available English translation — until now.

GYPLAC, S.A., a plasterboard manufacturer, is building a manufacturing facility at the Mamonal Free Trade Zone in Cartagena, Colombia.   It signed Legal Stability Contract No. 1 of 2009, which I have chosen at random to provide a relatively recent example of a stability contract. 

This is not a certified translation (rely on your friendly local Colombian lawyers to get the details right), and I have taken the liberty of adapting the “legalese” to conform to what readers of American contracts might expect. I have also changed the format by adding line breaks to improve readability.


Ministry of Trade, Industry, and Tourism
Republic of Colombia
Liberty and Order

Legal stability contract EJ – 01/2009

Entered into Force Between the Nation — MINISTRY OF TRADE, INDUSTRY, and TOURISM – and GYPLAC S.A.

            Among the undersigned, namely, LUIS GUILLERMO PLATA PAEZ, identified with citizenship card No. XXXXXXX of Bogota, in his capacity as Minister of Trade, Industry, and Tourism, appointed by decree No. 057 of 15 January 2007 [Act of Possession] No. 1359 of January 16, 2007, and those acting on behalf of the representation of the NATION – Ministry of Trade, Industry, and Tourism, pursuant to provisions of Decree Law 210 of 2003, and in consideration of paragraph (f) of Article 4 of Law 963 of July 8, 2005, hereinafter referred to as the “NATION,” the party of the first part, and as the other party, Mr. LAZARO FELIPE MONTES TRUJILLO, of legal age, residing in Manizales, identified with the Citizenship Cedula No. XXXXXXXX, in his capacity as General Manager and acting on behalf of GYPLAC S.A., a company identified with the NIT. No. XXXXXXXXX-X, constituted by public deed No. 2983 of the Second Notary of Manizales entered on April 28, 2007, recorded on the Trade Register on March 26, 2008, under the number 53099 of Book IX, all of which constitutes the certificate of legal existence and representation and issued by the Chamber of Commerce of Manizales on September 17, 2008, hereafter referred to as the “INVESTOR,” we have agreed to conclude this contract of legal stability, upon the following considerations:


1.         Law 963 of July 8, 2005 (the “Law”), Decrees 2950 of 2005 and 1474 of 2008, and CONPES Documents 3366 of August 1, 2005 and 3406 of December 19, 2005, permit legal stability contracts with the purpose of promoting new investment and/or expanding existing investments in the country.

2.         As provided by paragraph f) of Article 4 of the Law, such contracts must be signed by the minister of the portfolio in which the investment will be made. 

3.         The contractual commitment made by the nation through this document does not create any budgetary obligation for the State.

4.         The investor is not ineligible on grounds of incapacity or incompatibility as described in Article 91 of Act 963 of 2005, or those contained in General Contracting Act 80 of 1993 and the rules that implement, modify, or supplement it.

5.         The investor has duly certified its compliance with the obligations under the Integrated Social Security System, family compensation systems, SENA, and ICBF, in accordance with all requirements of Article 23 of Law 1150 of 2007.

6.         By means of communication received at the Ministry on March 12, 2008, the investor presented its request for legal stability contracts.

7.         The Committee for Legal Ministry on August 23, 2008 analyzed the application and Evaluation Report of the Technical Secretariat, and decided to authorize the application for a legal stability contract with the company GYPLAC SA, by its official Act No. 07 of the same date.

8.         In the same meeting, the Committee directed that due to the nature of the economic activity that is the objective of this investment, this contract for legal stability should be signed by the Minister of Commerce, Industry and Tourism in a non-delegable fashion.

9.         The investor is not listed in the Fiscal Responsibility Bulletin of the Comptroller General’s Office.

10.       The National Government issued Decree 1474 of 2008 which ruled that legal stability contracts would not require a guarantee of compliance.

In accordance with the foregoing, this contract shall be governed by the following clauses:

FIRST CLAUSE:     Purpose of the Contract.  The purpose of this contract is the realization by the investor of the project consisting of installing in the Zona Franca in Mamonal – Cartagena, a production plant for plasterboard – carton for use in construction, as described in the application filed by the company GYPLAC SA, for which purpose the NATION ensures the legal stability of the standards identified as critical for the investment mentioned in Clause Four of this contract.

For all purposes, the phrase “legal stability” means guarantee that NATION extends to the investor to continue to operate under the legal norms for the duration of the contract, in case of any adverse change. 

SECOND CLAUSE:     Description of the Investment Project Amount and Term. The investment project which the investor is advancing consists of assembling in the Free Trade Zone located in Mamonal – Cartagena, a production plant for plasterboard – carton for use in construction, with an initial installed production capacity of approximately fifteen million square meters (15,000,000 sq. mts.) of panels a year and, when completed (scheduled for 2017), [a capacity that] will reach a total of twenty-five million square meters (25,000 000 sq. mts.), as described in the application of the Company. The total amount of the investment is One hundred billion three hundred sixty-one million three hundred and ninety-nine thousand Pesos (COP$100,361,399,000.00) between 2007 and 2017, according to the timing [shown in] the third clause.

THIRD CLAUSE:     Partial Investment.  The total sum covered by the preceding clause shall be made in the amounts and given within the years indicated below.
Figures expressed in thousands of pesos:

Year                           Investment
2007 COP 14,120,189
2008 COP 54,803,415
2009 COP 7,961,378
2017 COP 23,476,418
Total COP 100,361,399

The total investments made during the term of the total contract will not be less than the amount stated in the Second Clause of this document.

FOURTH CLAUSE:     Legal Provisions Stabilized.  Under the First Clause, the rules subject to legal stability are the following:

a.         [Following tax provisions]

Taxpayers.  Articles 12, 13 and 14 of the Tax Statute [the “Estatuto Tributario,” or “E.T.”]

Income. Articles. 25, 26, 27, 28, 36, 36 ¬ 2, 36-3, 40, 45, 48, 49 and 50 of the ET.

Costs. Articles 58, 59, 62, 66, 68, 75 and 80 of E.T.

Gross income. Articles 89 and 90 E.T.

Deductions. Articles 104, 105, 107, 108, 108 ¬ 1, 108-3, 109, 110, 114, 115, 117, 120, 121, 122, 123, 124, 124-1, 126-1, 127, 127-1, 128, 129, 130, 131, 134, 135, 136, 138, 139, 140, 142, 143, 145, 146, 147, 148, 158-1 and 158-2 of the ET; DIAN Concepts 28651 of May 22, 2003, 14662 of June 5, 1987, and 007936 of February 1, 2000; Article 1 of Resolution 2996 of 1976 issued by the Ministry of Finance and Public Credit and Article 2 of Decree 4980 of 2007.

Net Income. Article 178 of the ET.

Special net income. Articles 188 and 189 of the ET.

Tariff. 240-1, 245 and 254 of the ET.

Transfer pricing. Article 260-7 of ET.

Property and Property Taxes. Articles 267, 267-1, 269, 270, 273, 280, 281, 285, 287, 292, 293, 294, 295 and 296 of the ET.

Occasional earnings. Articles 300, 311 and 313 of the E.T.

Deduction at source. Articles 366-1, 387-1, 389, 390, 391, 407, 408 and 418 of ET.

            b.         Act 1004 of 2005, items 2, 3, 4 and 9.

            c.          Decree 2685 of 1999, Articles 394, 395 and 396.

All of the foregoing provisions are considered by the investor as determinative of its decision to invest.

FIFTH CLAUSE:     Legal Provisions Excluded.  The following legal standards will not be subject to legal stability hereunder:

1.         Provisions which, notwithstanding their inclusion in the preceding clause, are declared invalid or unenforceable by the competent authority during the term of the contract.  In this case, the guarantee of legal stability shall cease with respect to such standard(s) as of the date on which the corresponding decision has become final. 

2.         Any other provision which, by law or regulation, may not be subject to legal stability.

SIXTH CLAUSE:     Obligations of the Investor. The investor shall:

1.         Make the investment provided for in the second and third clauses of this contract, in the amounts, by the dates, and under the other conditions mentioned there.

2.         Pay to the NATION the premium for legal stability in the amounts and under the conditions indicated in the Eighth and Ninth Clauses of this contract.

3.         Directly generate approximately one hundred and fifty (150) jobs during the term of the contract.          

4.         Strictly comply with all laws and regulations which are or shall be established governing the activity to which the investment relates.

5.         Pay taxes, fees, and other social contributions and other social and labor charges punctually to which the investor is subject.

6.         Faithfully comply with all rules which are or will be established that guide, condition, and determine the conservation, use, management and exploitation of the environment and natural resources.

7.         Contract at its own expense for the audit referred to in the Fourteenth Clause of this Contract, maintain it during the term of the duration of the contract one (1) additional year, and report on March 31 of each year on the results of the audit to the National Planning Department and Committee on Legal Stability.

8.         Reply to requests for information made by any member of the Committee on Legal Stability and/or the nation.

SEVENTH CLAUSE:     Obligations of the NATION. The NATION shall:

1.         Guarantee to the INVESTOR that, throughout the term of the Contract, the legal standards referred to in the Fourth Clause, considered to be the determinants of the investment, shall continue to apply in the event that such standards are modified in any adverse way. 

2.         Extend the guarantee referred to in the preceding paragraph to the total economic activity of the investor.

3.         Ensure that information the INVESTOR provided in confidence enjoys protection under the applicable law.

EIGHTH CLAUSE:     Legal Stability Premium.The INVESTOR shall pay to the NATION, Ministry of Finance and Public Credit, Account No. XXXXXXXX to the National Treasury Department – “Other Fees, Fines and Contributions Not Specified,”Code 333, at the Bank of the Republic, as a legal stability premium, plus interest thereon, under the fifth article of Law 963 of 2005, at the equivalent of zero point five percent (0.5%) of the value invested through the first half of 2009, i.e., the sum of THREE HUNDRED EIGHTY FOUR MILLION FOUR HUNDRED AND TWENTY FIVE THOUSAND PESOS (COP 384,425,000 M/Cte), and the equivalent of one percent (1%) of the value invested in 2017, i.e., the sum of TWO HUNDRED AND THIRTY FOUR MILLION SEVEN HUNDRED AND SIXTY FOUR THOUSAND PESOS (COP 234,764,000 M/Cte), for a total of SIX HUNDRED NINETEEN MILLION ONE HUNDRED AND EIGHTY NINE THOUSAND PESOS (COP 619,189,000 M/CTE). This amount is owed from the date this Contract takes effect.

NINTH CLAUSE:     Manner of Payment of the Premium. The INVESTOR shall pay the premium in a single installment within thirty (30) days after this Contract takes effect.

TENTH CLAUSE:     Confidentiality of Information. Confidential or privileged information that has been provided by the INVESTOR to the NATION shall be protected under applicable law.

ELEVENTH CLAUSE:     Term of Duration. Subject to the provisions of the Sixteenth Clause, this Contract shall remain in effect through a term of fifteen (15) years from the signing by the parties to the contract, after complying with the requirements of execution contained in the Nineteenth Clause.

TWELFTH CLAUSE:     Assignment or Subrogation. In case of assignment or subrogation, full or partial ownership of the investment under the contract, the new owner must obtain prior approval of the Committee for Legal Stability provided in Article 41 of Law 963 of 2005, to maintain its obligations and rights under this contract.

THIRTEENTH CLAUSE:     Oversight. The Director of Productivity and Competitiveness, Ministry of Commerce, Industry and Tourism, will verify full compliance with the obligations of the INVESTOR set forth herein, in accordance with Ministry Resolution No. 2286 of September 27, 2007

Oversight reports must be submitted every six (6) months to the Committee of Legal Stability.

FOURTEENTH CLAUSE:     Auditor and Reports. The INVESTOR will hire at its own expense an independent auditor to review and certify compliance with the commitments made in this Contract. The audit may be conducted by the INVESTOR’s public auditor or by a different party.  Not later than March 31 of each year, the auditor must supply to the Department of Planning and the Committee on Legal Stability a detailed report on the satisfaction of the obligations achieved during the year or fraction thereof.

FIFTEENTH CLAUSE:     Applicable Regulations. The present contract is subject to Act 963 of 2005, Decree 2950 of 2005 and 1474, 2008, and such other Colombian rules as may replace, amend, or repeal the foregoing. For all legal purposes this Contract shall have as its legal domicile the city of Bogotá DC.

SIXTEENTH CLAUSE:     Termination Clause of the Contract. The present Contract shall terminate for any of the following reasons:

1.         Upon the expiration of the [contractual] term or duration.

2.         By mutual agreement between the parties.

3.         Upon the termination of all of the duties under the contract due to a declaration as null and void of all of the standards referred to in the Fourth Clause. In the event such judicial declaration as null and void does not include all obligations hereunder, the agreement shall continue in force for the remaining provisions.

4.         Anticipatorily, by the NATION, unilaterally and by administrative act, in any case where:

a.         The INVESTOR fails timely to perform, or withdraws all or part of, the investment described in the Second and Third Clauses;

b.         The INVESTOR fails timely to pay all or any part of the premium for the legal stability in the manner required in the Eighth and Ninth Clauses of this Contract;

c.         The INVESTOR incurs the incapacity contemplated in Article 90 of Act 963 of 2005;

d.         The INVESTOR fails without justification to satisfy its obligations under the present Contract.

5.         For any other reason contemplated by the law.
            SEVENTEENTH CLAUSE:     Arbitration Clause. All disputes arising under this Contract, not settled by the parties directly, shall be submitted to an arbitration tribunal, which will consist of three (3) arbitrators, one of which shall be appointed by each party and the third by mutual agreement between the two sides. Any award that is issued shall be legally binding.           

EIGHTEENTH CLAUSE:     Stamp Tax. This Contract requires a national stamp tax due by the INVESTOR which shall be based upon the value of the legal stability premium, and shall be paid as required by Article 532 of the Tax Statute.

NINETEENTH CLAUSE:     Approval and Execution. To become effective, this Contract must be executed by the contracting parties. To be executed the following provisions are mandatory:

a.         Payment of any stamp tax which may apply;

b.         Fulfillment of the publication requirements in Official Journal of Public Contracting;

c.         Registering the Contract by the INVESTOR at the National Planning Department in accordance with Article 100 of Act 963 of 2005.

TWENTIETH CLAUSE:     Contract Documents.  Each of the following documents shall be an integral part of this Contract:

a.         Act No. 7 of the Committee on Legal Stability from its August 23, 2008 session;

b.         To the extent not inconsistent with the text of this Contract, the application presented by the INVESTOR to the Ministry of Trade, Industry and Tourism on March 12, 2008, as well as supplements or additions thereto furnished by the investor.  In the event of any inconsistency between those documents and this Contract, this Contract shall prevail.

The record is signed in Bogota, DC.

By the NATION:         Ministry of Trade, Industry and Tourism

                                                            Luis Guillermo Plata Paez


                                                            Lazaro Felipe Montes Trujillo

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