Argentina: Things Go Better With Coke

This article reports on two significant recent developments. The lead story centers on a national appellate court decision holding (we think unfairly) a regional Coca Cola bottler jointly liable for labor claims made against a distributor. Our second story, Shocked Back to Life?, offers some encouraging news to bondholders pursuing claims in bankruptcy.

In a decision that has left the mouths of attorneys agape, the National Labor Appeals Court has held a Coca Cola bottler jointly liable for labor claims brought by an employee of one of the bottler’s distributors. In Andrada v. O’Mari S.A.,1 the appellate court determined that Coca Cola Femsa de Buenos Aires S.A. ("Femsa"), a Coca Cola bottler serving the Buenos Aires metropolitan region, was jointly liable for work-related injuries suffered by the plaintiff. The court based its ruling on Section 30 of the Employment Agreement Act.2

Section 30 is a statutory basis for respondeat superior or vicarious liability. It holds a person jointly liable, in certain instances, for employment withholding taxes, social security contributions and other labor obligations payable by subcontractors to their employees. Section 30 liability attaches when the subcontractor’s work or services involve the "ordinary and specific activity" (actividad normal y específica) of the principal. Thus, the statute nullifies corporate chicanery to subcontract workers who are, in effect, employees as a means to avoid the Employment Agreement Act.

Whether a subcontracted activity meets the definition of "ordinary and specific" has been scrutinized by judges and scholars alike. A clear majority holds that joint liability follows only when the subcontracted services form part of the principal’s "chain of productive activity." Thus, Section 30 liability would apply to employees of a subcontractor manufacturing cookies for a food products company. That same food products company would not, however, be liable for the obligations of outsourced security, cafeteria or cleaning service providers.

A minority of commentators takes a radically different approach to consider a business as a "global organization" that includes all subcontracted activity contributing toward a final profit motive. Under this theory, the litmus test for liability would be far more lax. A company would almost always be jointly liable for labor claims of its subcontractors’ employees.

In 1993, a landmark Supreme Court decision, Rodríguez v. Compañía Embotelladora Argentina appeared to settle the debate.3 In Rodríguez, the high court looked at the relationship between another bottler (this time from the Pepsi Cola group) and its distributor to evaluate the bottler’s joint liability. The court determined that a "collaborative relationship" (e.g., parties to a concession, franchise or distribution agreement) does not alone confer joint liability under Section 30. In articulating what is essentially the "chain of productive activity" argument, the Supreme Court held that Section 30 liability can only be sustained by a finding that the contracted services were supplementary or necessary to the contractor’s "principal activity."

Andrada v. O’Mari turns back the clock to pre-Rodríguez by embracing the "global organization" view. Thus, the appellate court emphasized Femsa’s corporate charter, which was not limited to manufacture, bottling and supply but also, at least nominally, extended to "the marketing, sale, export and import" of Coca Cola products. This fact led the court to conclude that the transport and distribution of soft drinks by O’Mari is not beyond Femsa’s stated activity and Section 30 liability would apply.

The appellate court was not troubled by the conspicuous absence of "distribution" from the text of the Femsa charter. It maneuvered around this inconvenience by equating "marketing" with "distribution."

Not many courts dare to depart so brashly from Supreme Court precedent.4 While it is technically correct that the Argentine legal system does not confer on the high court the power of stare decisis, it is no less true that its interpretative decisions are traditionally respected and followed by the lower courts. Should the case augur other appellate decisions choosing to ignore the Rodríguez doctrine, Andrada v. O’Mari represents a serious blow to current business practices and assumptions favoring the subcontracting of services, not to mention Argentine judicial credibility. In the wake of Andrada, it just became harder for a company to have a Coke and smile.

Shocked Back to Life?

Past articles have reported on several Argentine legal developments affecting, mostly negatively, holders of defaulted corporate bonds.5 One recent ruling arising out of an involuntary bankruptcy petition filed against Transener 6 offers at least a glimmer of hope that all is not lost.

Transener is Argentina’s largest transporter of electricity. It is also one of the most enduring and complicated Argentine reorganizations undertaken in recent years. Of its US$459million in financial debt, approximately US$364 million is owed to bondholders.

Despite their relative size as a class, substantive and procedural aspects of Argentine law conspired to hinder the bondholders’ ability to enforce their claims in Transener and in other Argentine reorganizations. One major problem centered on proving title to the bonds. Argentine courts frequently refused to accept customary certificates of ownership furnished by the clearing systems (i.e. DTC, Clearstream, Euroclear), insisting that the creditor produce an instrument signed by the debtor, which, of course, had little or no interest in helping the creditor with its claim.

Decree 611/2001, released during the time of former Minister of the Economy, Domingo Cavallo, helped bondholders by expressly validating certificates issued by the clearing systems to prove ownership in a legal proceeding. Nonetheless, this decree has been routinely challenged by debtors arguing that the matter required legislative enactment and not a mere diktat from the executive branch.

Transener has quieted this dispute by declaring Decree 611/2001 a valid codification of the Negotiable Obligations Law. The decision emphasizes international customs and practices in the trading of bonds and the need to accept clearing certificates—even if not contemplated by the Negotiable Obligations Law—to affirm the bondholders’ right to collect on a claim.

The Transener decision also dismisses another argument tendered by most Argentine debtors—that of "pesofication" of the debt. Transener alleged that, despite the choice of New York law stated in the notes, the Negotiable Obligations Law governed the form and issuance of the bonds to qualify them as "negotiable obligations." As a result, the debtor argued that Argentine law applied and, consistent with prevailing domestic law, required conversion of the notes to pesos.

The Transener court made short shrift of the argument, noting that while Argentine law governs formal aspects of bond issues, foreign law may be chosen by contract to govern all other respects, including currency. As a result, the court determined that the bonds were exempt from "pesofication."

At last, chalk one up for the bondholders.

1 Andrada Roberto Hugo c/O’Mari S.A. y otro s/accidente ley 9688, CNTrab., Sala VI (March 4, 2004). Expte. 7069/98S

2 Law No. 20,744. -1-

3 Rodríguez, Juan Ramón c/Compañía Embotelladora Argentina S.A. y otro, Supreme Court (April 15, 1993).

4 In terms incredulous to a common-law practitioner, the appeals court noted that the Supreme Court in Rodríguez was not a "Court of Cassation" (i.e., with the power to bind lower courts) and, as a result, the doctrine adopted in Rodríguez should be reviewed on a case-by-case basis.

5 Further Amendments to the Argentine Bankruptcy Code: Bondholders of Argentine Securities Given a Voice—Sort of (June 7, 2002); Of Corporate Bondage: How Bondholders May Be Adversely Affected by the Bankruptcy Code (August 29, 2003).

6In re Sonzini y otro s/pedido de quiebra promov. en Transener S.A., Commercial Court N° 23 (March 17, 2004).

This article is provided as a service to clients and friends of Negri, Teijeiro & Incera.

It is not intended to impart legal advice on any matter.

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