Introduction
Venezuela is an oil-rich country that has been severely devastated by decades of misgovernment, corruption, and populism. It has more than 300 billion barrels of proven crude oil reserves, which represents approximately 24% of the world’s oil reserves, and it is one of the largest countries in South America, occupying an ‘area that is larger than the combined areas of France and Germany’.
In the first half of the 20th century, Venezuela became the ‘world’s largest oil exporter’. In the second half of the 20th century, it was one of the wealthiest economies in Latin America and one of the richest countries in the world. Venezuela’s economic boom did not last long, however. In the late 1980s, Venezuela’s oil prices plummeted to the ground, thereby fuelling inflation.
This blog post looks at how the Venezuelan Supreme Court has been developing judge-made law aimed at tackling the effects of inflation over monetary and non-monetary obligations. It focuses, primarily, on the Supreme Court’s introduction of indexation (indexación) and monetary correction (corrección monetaria) as a means of maintaining a constant purchasing power of litigants in periods of inflation.
In doing so, this blog post will examine (a) the link between inflation, purchasing power, and litigation; (b) the Civil Code’s response to the problems caused by inflation; (c) the Supreme Court’s response, which probably constitutes one of the best examples of judicial creativity in Venezuelan statutory interpretation; (d) the meaning of the terms indexation and monetary correction; and (d) some of the leading cases.
The Link Between Inflation, Purchasing Power, and Litigation
Inflation may be defined as ‘a general and broad-based increase in the price of goods and services over [a certain period of time]’. Purchasing power ‘is a measure of how many goods or services you can buy with a unit of currency’. Whilst the effects of inflation on an individual’s purchasing power are manifold, it is safe to say that the higher the rate of inflation, the lower the purchasing power.
This is particularly problematic in creditor-debtor litigation, especially, protracted litigation, mainly because if the rate of inflation increases considerably whilst litigation proceedings are on foot, the purchasing power of the sums received by the relevant creditors (if successful) at the conclusion of those proceedings is likely to be much lower than the sums claimed by such creditors at the initiation of court proceedings.
Between 1990 and 1999, for instance, Venezuela had an average inflation rate of 47.4% (Marta Kulesza, ‘Inflation and hyperinflation in Venezuela (1970s-2016): a post-Keynesian interpretation’ Working Paper No. 93/2017, Berlin School of Economics and Law). The impact of inflation over the purchasing power of a claimant who made a court claim for 100 units of currency in 1990 and received a favourable judgment in 1999 would have been catastrophic, mainly because, by 1999, that claimant would have needed approximately 6096 units of currency to maintain its purchasing power (*).
The Civil Code’s Response
That type of claimant would have found little or no comfort in the Venezuelan Civil Code 1942 (as amended in 1982), not least because Venezuela adopted the ‘nominalistic principle’ (or principle of nominalism), according to which ‘a particular unit of currency is always equivalent to that unit of currency in the eyes of the law regardless of any changes which may have occurred in the internal or external purchasing power of the money’ (Eliyahu Hirschberg, ‘Monetary law and the challenge of inflation’ (1978) 26(7) Chitty’s Law Journal 217).
Article 1737 of the Venezuelan Civil Code provides that the obligation that results from a loan of money is always to repay the amount numerically expressed in the loan agreement and that, in the event of an increase or decrease in the value of the currency before the term of payment has expired, the debtor must repay the nominal amount lent in whatever is legal tender at the time of repayment.
In the 1990s, Professor Dr Enrique Lagrange, a distinguished Venezuelan legal academic educated at the University of Paris in the 1960s, wrote that, although Article 1737 of the Civil Code referred to obligations derived from a loan agreement, there had always been a groundswell of opinion that, as far as Venezuelan law is concerned, the nominalistic principle applied to all monetary obligations. He also argued that, when applying that principle, it was irrelevant whether creditors’ purchasing power had been affected (Enrique Lagrange, ‘Retardo en el cumplimiento de las obligaciones pecuniarias y depreciación de la moneda’ (1994) 49 Revista de la Facultad de Derecho de la Universidad Católica Andrés Bello 242).
Professor James-Otis Rodner, an equally renowned Venezuelan legal academic educated at Harvard University in the 1970s, once commented that Article 1737 of the Venezuelan Civil Code, properly construed, did not allow judges to depart from the strict application of the nominalistic principle. He also explained that, in the absence of the parties’ agreement, it was not possible to protect creditors of a monetary obligation against any future reduction in their purchasing power (James-Otis Rodner, La inflación y el contrato; el uso de cláusulas de valor en el derecho civil venezolano, Editorial Sucre 1979, 67).
It is unclear whether Professors Lagrange and Rodner’s observations as to the rigidity of the nominalistic principle were somewhat influenced by foreign writers. The Venezuelan Civil Code (in general) was inspired by the Franco-Italian Draft Code of Obligations (1927). Yet Article 1737 of the Venezuelan Civil Code (in particular) is almost a mirror image of Article 1895 of the French Civil Code (1804), which gave statutory basis to such a principle in French law.
It was Carolus Molinaeus, a French jurist, who popularised the notion of nominalism (Eliyahu Hirschberg, ‘The legal aspects of devaluation of currency in modern times’ (1982) 87(4) Commercial Law Journal 184). However, the rule favouring the nominalistic principle was originally ‘laid down in England … as early as 1603 in the Case of Mixt Monies in Ireland’ (Artur Nussbaum, ‘Debts under inflation’ (1938) 86(6) University of Pennsylvania Law Review and American Law Register 573).
The Supreme Court’s Response
In Inversiones Franklin y Paul S.R.L(SCC, 30 September 1992), the Venezuelan Supreme Court was asked to consider whether the effects of inflation over creditors’ purchasing power could be taken into account when assessing the quantum of their claims. The Court held that once a debtor has failed to pay the sums due within the relevant period, the courts were entitled to order indexation of the sums claimed.
The main basis of the Court’s reasoning was that the principle of nominalism was not intended to apply to cases involving the late payment of debts. The Court concluded that the language of Article 1737 of the Civil Code — and that the use of the expression ‘before the term of payment has expired’ — indicated that the said principle did not apply ‘after the term of payment has expired’.
The Supreme Court’s interpretation of Article 1737 of the Civil Code may be described as a judicial reaction to the injustices created by the nominalistic principle. Professor Keith Rosenn, an American scholar who has written extensively on comparative and Latin American law, once noted that the said principle places the burden of the reduction of the value of money upon the claimant, which in turn ‘gives the defendant an enormous economic incentive to delay the proceedings as much as possible’ (Keith S. Rosenn, ‘The effects of inflation on the law of obligations in Argentina, Brazil, Chile and Uruguay’ (1979) 2(2) Boston College International and Comparative Law Journal 291).
That case was a turning point in the Venezuelan law of obligations. It empowered the national courts to order indexation (initially at the request of one of the parties to the proceedings) so as to adjust the value of monetary claims on the basis of the Consumer Price Index (CPI) of the Metropolitan Area of Caracas. From thereon, the CPI became the courts’ tool for measuring not only inflation, but also litigants’ purchasing power.
Darren Rippy, an American economist in the Office of Prices and Living Conditions of the United States’ Bureau of Labor Statistics, once expounded that the idea of using the CPI with a view to measuring inflation probably originated after WWII, particularly, in the United States, where the CPI became the primary, ‘if not [the] only, tool to use in arguing for increasing wages to maintain purchasing power with wartime inflation’, especially in arbitral proceedings ‘between unions and vital industrial sectors’ (Darren Rippy, ‘The first hundred years of the Consumer Price Index: a methodological and political history’ (2014) Monthly Labor Review).
The Supreme Court did not explain why it had decided to use the CPI as a benchmark for measuring variations in the purchasing power of litigants. It is a matter for conjecture whether the Court’s idea was imported from the United States, mainly because that decision was made when Dr Miguel Rodríguez — a Venezuelan economist educated at Yale University — was holding the presidency of the Venezuelan Central Bank, which had been publishing the CPI uninterruptedly since 1950.
The Supreme Court’s decision to use the CPI as a basis for indexation paved the way for the adoption of Dr Eliyahu Hirschberg’s valoristic approach, which ‘holds that money is a means of commanding goods and services and should be considered as generalized purchasing power’ (Eliyahu Hirschberg, ‘Monetary law and the challenge of inflation’ (1978) 26(7) Chitty’s Law Journal 219).
Dr Hirschberg was one of the leading proponents of the principle of valorism. He was of the opinion that, in periods of inflation, the ‘valoristic approach [which is] based on the purchasing power of units of currency … is sounder than the nominalistic approach’ (Eliyahu Hirschberg, ‘Contemporary monetary problems and their legal effects’ (1978) Acta Juridica 97).
Indexation and Monetary Correction: A Novel Idea?
Whilst it is true that the Supreme Court’s approach was a novel way of addressing the problems caused by inflation over creditors’ purchasing power during the 1990s (and beyond), it is also true that the notion of indexation was far from novel. Countries such as ‘Argentina, Brazil, Chile, and Uruguay [had already] resorted to indexation, or monetary correction as it [was] frequently [and indistinguishably] called, to readjust a great variety of legal transactions’ (Keith S. Rosenn, ‘The effects of inflation on the law of obligations in Argentina, Brazil, Chile and Uruguay’ (1979) 2(2) Boston College International and Comparative Law Journal 275).
There are no universally accepted definitions of the terms ‘indexation’ or ‘monetary correction’. Both terms appear to have gained a foothold in American scholarly writings in the first half of the 1970s. In a collection of essays entitled Essays on Inflation and Indexation (American Enterprise Institute for Public Policy Research 1974), for example, Milton Friedman, a Nobel prize winner and one of the most influential economists of the 20th century, uses both terms interchangeably.
When examining the notion of ‘indexation’, for instance, Professor André Roncaglia De Carvalho, a Brazilian economist, comments that ‘There is a long history of the perception of indexation as a mechanism to cope with fluctuation in prices and the uncertainty associated with ideas going back to the early eighteenth century’ (André Roncaglia De Carvalho, ‘The development of the Sawtooth Wages Model of inflation’ (2024) 46(2) Journal of the History of Economic Thought 263).
As for the notion of ‘monetary correction’, Professor Rosenn once explained that, in Brazil, for example, the purpose of monetary correction was to adjust ‘for declines in the purchasing power of the currency by multiplying original values by coefficients derived from price indices’ (Keith S. Rosenn, ‘Expropriation, inflation, and development’ (1972) 3 Wisconsin Law Review 866).
A closer examination of the works published from the 1970s onwards shows no discernible differences between the terms indexation and monetary correction. There is no doubt that the aim of such mechanisms has always been to maintain the value of money over time, but it can be said that, to date, no attempt has been made so as to fully and systematically differentiate indexation from monetary correction, especially within the confines of court-connected claims.
The Leading Cases
Initially, the Venezuelan Supreme Court used the terms indexation and monetary correction synonymously. But in Teodoro de Jesús Colasante Segovia (SC, 20 March 2006) the Supreme Court took a different view. The Court expressly said that indexation and monetary correction were different. The Court did not provide any detailed guidance as to the differences between the two terms. However, it shed some light on the approach to be taken by the lower courts.
The Court relied on the classical distinction between ‘monetary obligations’ and ‘non-monetary (or value-based) obligations’. The former assumes that the object of the obligation is the payment of a sum of money, whereas the latter assumes that the object of the obligation is the transfer of a given value. The Court made clear that indexation does not apply to non-monetary obligations.
The Court went on to say that a creditor of a non-monetary obligation is entitled to obtain a sum of money equivalent to the reference value of the thing which constituted the subject matter of the defaulting debtor’s obligation. The Court also held that judges must determine the sum to be paid by the debtor of a non-monetary obligation (the equivalent value) as at the date of their decision.
A little over two years later, i.e., in Domingo Antonio Solarte et al (SC, 5 November 2008), the Supreme Court relied on its previous decision in Teodoro de Jesús Colasante Segovia (SC, 20 March 2006) so as to set aside a lower court’s indexation order on the footing that the parties’ dispute concerned a non-monetary obligation, as a result of which the lower court was expected to make a monetary correction order instead.
In Giancarlo Virtoli Billi (SC, 28 April 2009), the Supreme Court was asked to consider whether creditors would be entitled to claim interest together with indexation. The Court held that interest and indexation were founded on totally different principles and, therefore, that they were perfectly compatible. Unlike indexation, the payment of interest has a statutory basis. The general rule is that statutory interest can be claimed regardless of inflation levels.
The Court referred to Article 1277 of the Venezuelan Civil Code and noted that statutory interest on the late payment of debts is only intended to compensate creditors for the costs associated with the debtors’ delay in payment. Interest, said the Court, is not intended to adjust the purchasing power of creditors. It only seeks to provide a percentage uplift on the amount that creditors were entitled to receive at an earlier date.
In Junta Liquidadora del Instituto Nacional de Hipódromos(SC, 26 March 2013) the Supreme Court decided that, in the fight against inflation, the judicial branch of the state could use several methods. Although the Court did not fully elaborate on which methods it was referring to, it seemed to have concluded that monetary correction is the genus, whereas indexation is just a species of monetary correction.
In Gino Jesús Morelli de Grazia (SCC, 3 July 2017) the Supreme Court held that the courts, when exercising their decision-making powers, cannot ignore the political, social, economic, and historical factors that justify a given course of action. The Court also added that, in order to resolve the problems caused by inflation over those seeking justice, judges may order indexation or monetary correction (sua sponte).
Editorial constraints do not permit a more detailed account of the Supreme Court’s case law on indexation and monetary correction. However, an examination of the cases decided since Inversiones Franklin y Paul S.R.L(SCC, 30 September 1992)would seem to suggest that indexation is invariably associated with the use of an index (such as the CPI), whereas monetary correction is not constrained by indices.
The distinction is important because ‘the CPI is not a reliable measure of inflation over long time periods’ (Charles Steindel, ‘Are there good alternatives to the CPI?’ (1997) 3(6) Current Issues in Economics and Finance 3). Thus, in cases of protracted litigation, the CPI may not be the most accurate way of calculating the sum that would place creditors in the same position as they would have been in if the payment had been made within the relevant period, i.e., the point at which the payment ought to have been made.
Nor is the CPI capable of measuring an individual’s ‘personal inflation rate’, but just the ‘national inflation rate’. Over the last sixteen years, Venezuela has experienced 3 currency redenominations: (1) from Bolívar to Bolívar Fuerte (2008), (2) from Bolívar Fuerte to Bolívar Soberano (2018), and (3) from Bolívar Soberano to Bolívar Digital (2021). Legal tender lost a total of fourteen zeros as a result of such redenominations.
The consequences of those currency redenominations over a creditor’s purchasing power can be easily illustrated as follows. For a creditor who made a Bs. 50.000.000 damages claim before 2008, and whose case is yet to be decided by the courts, the nominal amount of the claim (as per the new legal tender) would have been transformed into Bs.D 0,0000005, which, from any point of view, is plainly ludicrous.
It would appear that the question of whether that creditor could apply for indexation or monetary correction will depend on the nature of the obligation. In other words, the remedies available must reflect the nature of the obligation which has been infringed, with the consequence that indexation would be reserved for cases involving the breach of monetary obligations, whereas monetary correction would be reserved for cases concerning the breach of non-monetary obligations.
Conclusions
The Supreme Court’s interpretation of Article 1737 of the Civil Code represented one of the most important jurisprudential steps towards the resolution of one of the gravest problems caused by inflation in Venezuela. In the absence of indexation and monetary correction, most creditors would have been left with nothing more than an unjust decision and, above all, with the false impression that justice had been done.
The Court’s analysis of the nominalistic principle is a good example of judicial creativity in response to the problems caused by inflation over monetary and non-monetary obligations. Faced with the challenge of protecting creditors’ purchasing power in times of inflation, the Court boldly introduced the use of indexation and monetary correction adapting such a principle to contemporary economic conditions.
But neither inflation nor monetary correction will be able to address one of the underlying problems. A few months ago, the Supreme Court ‘upheld the re-election of Nicolás Maduro as president following accusations of widespread voter fraud in July’s poll’. This is bad news for commercial parties, not least because ‘Venezuela’s economic decline under Maduro is one of the worst in the past 35 years’.
The ‘Venezuelan bolivar has become near-worthless’. Inflation has reduced Venezuelans’ purchasing power at an exponential level and the most recent economic forecasts are far from promising. But the good news is that, in spite of the economic crisis, the Venezuelan Supreme Court continues to be committed to protecting creditors’ interests by way of indexation and monetary correction.
(*) Future Value = Initial Value × (1 + Inflation Rate)n
Posted by Dr Julio César Betancourt, BPP University’s Law School
This piece belongs to BACL’s “Judicial Creativity” series which shines a light on the role of judicial creativity in recent reforms of the laws of obligations around the world. The series is edited by Dr Radosveta Vassileva (Middlesex University), Dr Sirko Harder (University of Sussex), and Prof Yseult Marique (University of Essex). To access the other pieces from this series, either select the “Judicial Creativity and the Law of Obligations” category or click on the #Judicial Creativity&Obligations tag on the BACL Blog.
Suggested citation: Julio César Betancourt, ‘Indexation and Monetary Correction: Tackling Venezuela’s Inflation by Means of Judicial Interpretation’, BACL Blog 13 December 2024 available at https://british-association-comparative-law.org/2024/12/13/indexation-and-monetary-correction-tackling-venezuelas-inflation-by-means-of-judicial-interpretation-by-julio-cesar-betancourt/.
Picture credits: Image created by Julio-Cesar Betancourt using Microsoft Copilot
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