Argentina: ARGENTINA VS. ICSID: Unconstitutionality of the BITs and ICSID Jurisdiction - the Potential New Government Defenses Against the Enforcement of the ICSID Arbitral Award - Issues That May Subject the Award to Revision by the Argentine Judiciary.

Last Updated: 17 May 2005

Article by Carlos E. Alfaro and Pedro Lorenti from Alfaro-Abogados

The International Centre for the Settlement of Investment Disputes (ICSID) will be one of the main topics of political discussions during 2005 in Argentina. The first ICSID award decision on a case involving issues of compensation for devaluation and pesification of tariffs has been rendered against Argentina (CMS case May 2005). Enforcement of these awards may affect what otherwise would apparently be a successful renegotiation of both the bond-holders debt and the debt with the IMF. It would create economic uncertainty and affect the rebound of the economy at a crucial moment. The Government is preparing a strategy that could allow it to subject the review of the ICSID awards to the courts of Argentina.

To structure an adequate defense that may defuse the negative effects of potential adverse awards is vital for the present Government. Analyzing the theories being discussed by Government officials seems therefore to be appropriate. Some of the criteria followed by the Argentine government were already discussed in "ICSID Arbitration and BITs Challenged by the Argentina Government", December 2005; published by Mondaq.com and "ICSID Energy-Related Arbitration Cases Against Argentina Revisited", February 2004 in the Latin America Energy Report (World Trade Executive, Inc.). In this paper we will analyze the challenge to the constitutionality of BITs and ICSID awards which is being formulated in Argentina.

The initial approach.

The position originally adopted –and still held- by the Argentine Attorney General’s Office in charge of the country’s defense at ICSID, rests on a basic principle of Argentine Constitutional law: that international treaties are subordinated to the Argentine Constitution. This rule was in force under our originally enacted Constitution (1853-1860), and has been kept, clarified and somehow expanded the 1994 constitutional reform. In effect Article 27 of the 1853 original text of the Constitution and not amended in 1994- states that "The Federal Government is required to consolidate peace and commercial relations with foreign powers by means of treaties that shall be subject to the public law principles set forth in this Constitution", and Article 75, section 22, 1st paragraph, amended in 1994-, empowers the National Congress to "Approve or reject the treaties executed with other nations and with international organizations and the agreements with the Holy See. The treaties and agreements supersede the laws".

Pursuant to these constitutional clauses, the ICSID agreement is deemed a treaty with an international organization that shall be subject to the public law principles of Argentine Constitutional law. Since the ICSID treaty has already been granted the Congressional’ approval–by means of its enactment by law 24,353 on August, 1994-, Congress could not be blamed should it take on these grounds. However, the requirement to abide with public law constitutional principles applies to the whole system, i.e. to the treaty and to its products, such as the awards issued under the ICSID rules.

The main consequence of this legal construction is to forestall the ICSID’s principle, requiring the direct enforceability of its awards within the territory of the country member’s countries: is the award’s full compliance with domestic public law principles has to be checked first.

The door is open, therefore, for local authorities in Argentina, its Judiciary- to review the ICSID awards- and to decide whether or not they should be enforced. Obviously, "the public law principles set forth in this Constitution", as article 27 states, encompass standards closely linked to concepts like "sovereignty" and "state of emergency". Legal grounds could thus be found to block those ICSID awards that may affect the Government’s decisions adopted within the framework of said concepts.

The latest theory

The most challenging new theory that is being harbored these days establishes that both the treaties that were signed subjecting certain disputes to arbitration and the system of ICSID are unconstitutional because they are violating the process established under the 1994 reform of the National Constitution. The reasoning under this theory goes as follows:

As we mentioned above, although ICSID was created in March 1965, Argentina only adhered to it through Law 24,353 dated July 28, 1994, promulgated on August 22, 1994 and published in the Official Gazette on September 2, 1994. These dates are important, because at the same time, by August 22, 1994 the above- mentioned Constitutional reform was enacted and entered into force on August 24, 1994. Through article 75, section 24, 1st paragraph, the Argentine Constitution empowered the Congress to "approve" treaties delegating powers and jurisdiction to supranational bodies.

In this regard, there is a special procedure for the approval. An absolute majority of the present members of each Congressional Chamber shall state the convenience of entering into the Treaty and, after a 120 day term, it shall be approved again by an absolute majority of the members of each Chamber.

Thus, according to this new theory an unusual legal situation has taken place. Law 24,353 followed the parliamentary procedure set forth in the 1853/1860 Constitution. But since it was published after the 1994 Constitutional amendment entered into force, it is argued that it did not complete its validity requirements under the new system. Therefore, the assignment of sovereignty implied by the ICSID arbitral powers should also have gone through the new process of approval regulated in article 75, section 24 of the 1994 Constitution. As said procedure was never followed, any arbitration carried out by the ICSID against Argentina could be declared null and void by a domestic court.

But this theory makes another turn of the screw: it also ascertains that treaties delegating "competence and jurisdiction" to international bodies –such as the ICSID-, executed before the 1994 Constitutional reform, have became null and void with its enactment. The reason is that the new rules set forth to delegate such powers –i.e. the two congressional approvals, etc.- are mandatory. Since the clauses of an international agreement –of this kind- cannot prevail over an article of the National Constitution, they became extinguished as soon as the constitutional article that contradicts them entered into force.

As a consequence, in none of the current cases is the ICSID empowered to render a valid decision against Argentina. With the special law required by the 1994 Argentine Constitution finally enacted, it would only regulate future cases and not those already filed.

The fact that said nullity has not been claimed so far, does not prevent the Government from invoking it in the future: as a nullity an inherent defect that cannot be cured. The enforceability of an article of the National Constitution does not depend on whether the Government argues about it or not.

Conclusion. Both theories share a common ground: that the direct enforceability of the ICSID awards in Argentina is contrary to its constitution, and that these awards are subject to prior constitutional control by the competent authorities in Argentina and the Judiciary.

The first theory is a development of this principle by means of the legal construction of old constitutional clauses still in force together with some others enacted in 1994. Its aim is mainly procedural: to undoubtedly establish the jurisdiction of local courts for reviewing the ICSID awards. Though the reason for said review is the protection of domestic "public law principles", nothing specific is advanced as to the content of these principles, a matter to be resolved by the courts.

The second theory entails a more "radical" approach. It not only maintains the domestic courts’ jurisdiction –thus answering the procedural question-, but also furnishes them with some legal grounds to declare the ICSID awards’ unconstitutional at the least because the ICSID treaty was not approved pursuant to the 1994 Constitution; and at the most because the 1994 Constitution abrogated all the former treaties awarding jurisdiction to international bodies.

The opportunity to introduce any of these subjects will depend on the strategy to be adopted by the Government. Should it try (i) to get an ICSID award acknowledging any of these doctrines –which is unlikely- or (ii) which is more likely to rely on the domestic courts to nullify the awards’ and to block their enforcement.

It is not a wild guess to assume that the Argentine Judiciary, presided over by a new Supreme Court with the majority of its members appointed by this Government, may rule in favor of these positions, particularly if the Government convinces the people and the Judiciary of the economic hardship for its society resulting from enforcing an award which would force Argentina to compensate the investors.

We will undertake a deeper study of both theories’ legal grounds in future papers. Knowledge of the issues at stake will assist the players involved in ICSID disputes in properly assessing and deciding the issues at stake.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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