Part 1 of 17

These series of articles aim to give the foreign investor in Spain a general overview of the relevant legal framework. The laws and regulations dealt with here have a national ambit and apply throughout the Spanish territory. Reference is not made to legislation produced by so called autonomous communities which have a limited degree of legislative power. Such legislation has a limited territorial scope but may have a bearing in specific cases.

INTRODUCTION

The Spanish legal system is a typical civil law system in which the main manifestations of the law are codified. Hence, there is a main branch of the law -the civil law- from which the whole private law has derived, in particular the Commercial law. As a result, the Civil Code supplements the Commercial Code in those areas in which the latter provides for no specific regulation. Actions to claim rights are thoroughly regulated in the Ley de Enjuiciamiento Civil (Civil Procedure Act). The procedural system is more adversarial than inquisitive.

Consequently, the courts do not typically take an active role in developing the case or selecting the issues or questions to be proven and testing the evidence brought forward. Generally, the courts will rely on the motion of the parties for these purposes. However, this does not mean that the judge is merely a passive spectator since the law gives him a number of powers to impel the proceedings, e.g., rejecting evidence which is deemed irrelevant or impertinent, ordering new evidence, etc.(1)

As a general rule pre-trial discovery is very limited. Normally evidence is brought forward with the complaint and evidence is tested and/or taken in the discovery period. Lastly, there is a unified court system in Spain, the so called ordinary jurisdiction. The Spanish Civil and Commerce Codes recognise the ability of foreign individuals and companies to trade in Spain subject to their own laws as far as their personal capacity is concerned and to the Spanish laws where the creation of establishments in this country is concerned. Furthermore, aliens legally residing in Spain have the same individual rights as Spaniards except those of a strictly political nature (as a general rule, to vote and be eligible for public office), save the special status for EC citizens in the light of the Treaty of Maastricht.

1. CONTRACT LAW

1.1 Scope of this overview
We refer primarily to mercantile or commercial contracts, notwithstanding those references to the civil law which are necessary to understand the general principles of mercantile contracts, which are fundamentally based on the civil law.

1.2 Separate sets of rules
The Spanish law provides for two separate sets of rules for commercial and civil contracts, however, they often overlap. The civil rules are supplementary to commercial rules. An essential process is to characterise the contract, i.e., define whether the contract possesses a commercial or civil nature, and to know which rules are applicable to the contract in question, particularly which rules of construction should be used, although it is also true that such distinction is being gradually blurred. Generally, however, a business would be signing commercial contracts (with suppliers, other businesses, etc.) and civil contracts (with customers). Contracts with customers would also be affected by consumers regulations.

1.3 Freedom to contract
The basic principle of Spanish contract law, is that the parties are free to establish covenants, clauses and conditions as they may deem convenient, provided these do not infringe upon the laws, public morals and public policies.(2) Pursuant to the foregoing principles of contractual freedom, as a general rule, the parties are not subject to any specific formalities (they can even use a foreign language) and are free to agree as they wish, even to choose a particular type of contract which is regulated in the Code and form it differently. Consumers contracts are subject though to certain restrictions.

1.4 When does a contract exist under Spanish law?
According to the general civil rules, which apply to mercantile contracts pursuant to Article 50 of the Commerce Code, a contract exists from the moment one or several persons undertakes to give something or provide some service to another or others.(3) Contracts are formed merely by consent and consent is expressed by the convergence between the offer and the acceptance of the thing and the cause (consideration) that will constitute the contract.(4)

1.5 Contracts by telephone, fax
Generally referred to contracts between distant persons. With certain qualifications contracts entered by telephone, fax, etc., are valid and binding.

1.6 Breach of contract
The injured party may choose between the enforcement or the repudiation of the obligation with damages and payment of interest in both cases. He shall also be able to claim repudiation even after choosing enforcement whenever this would be impossible.

1.7 Enforcement
There is a vast panoply of measures to enforce contracts (including interlocutory injunctions). However, the drawback is the painful slowness of the courts which in many instances renders your claim useless. Arbitration does not necessarily solve this problem given that the award may be challenged in court on a given number of grounds which are often misused by the losing party. Another disadvantage is that the award may not be enforced provisionally as judgements can; the winning party can only apply for provisional measures. Generally speaking, nevertheless, arbitration is faster.

Accordingly, it would be advisable to get, where feasible, bank guarantees on first demand, performance bonds and related security.

2. COMPANY LAW. GENERAL ASPECTS.

Spanish business law envisages different types of companies: companies limited by shares (sociedades anonimas), limited liability companies (sociedades de responsabilidad limitada), limited partnerships (sociedades en comandita por acciones) and general partnerships (sociedades colectivas). The so called labour companies limited by shares (sociedades anonimas laborales) later joined this panoply of corporate vehicles (5). These are companies that may qualify for a number of benefits and in which the permanent employees of the company must own at least 51% of the share capital. Co-operative Associations have had a limited success (mainly in the farming industry) but are far from being popular as a business vehicle. In fact they are quite unknown.

So far, the company limited by shares (sociedad anonima) has been the most popular business vehicle due to the advantages it offered: no minimum capital requirement, limited liability, very liberal accounting and disclosure requirements and similar to those imposed on other business organisations, greater flexibility (e.g. for the transfer of the shares).

Following Spain's accession to the European Communities in 1986 Spanish business law was amended in depth by Law 19/1989 of 25 July in order to adapt it to EC company law. The Law covered various forms of business organisations, namely companies limited by shares and limited liability companies. The Law came into force on 1st January 1990 though certain provisions came into force on the date of publication (27 July 1989).

Pursuant to its First Final Provision, the Limited by Shares Companies Act was fully restated by the Royal Legislative Decree 1564/1989, of 22 December, published on 27 December (the Restated Text) to include and tidy up the amendments introduced by the Law. The Limited Liability Companies Act of 17 July 1953 shall be in force up to 31 May 1995 only pursuant to Law 2/1995, published on 24 March 1995, which has provided a new legal framework for these companies.

As a result of the amendments introduced by the Law, other types of corporate vehicles are gaining in popularity. The main features of Companies Limited by Shares and Limited Liability Companies, being the more representative types of Spanish companies, will be explained here. A brief reference to the limited partnership will also be made. The aim is to provide a general overview and accordingly there will be exceptions to the general principles set forth.

(1) Articles 340 and 566 of the Civil Procedure Act.
(2) Article 1255, Civil Code; Preamble of the Code of Commerce, Article 53, Commerce Code.
(3) Article 1254, Civil Code.
(4) Articles 1258 and 1262, Civil Code.
(5) Law 15/1986, of April 25, published on April 30, 1986.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstance.
For further information contact Mr. Jorge Angell, L. C. Rodrigo Abogados, Madrid (Spain) Fax:010 341 576 6716.