Canada: Argentinian Congress Passes New Supply Law That Could Affect Rights Of Canadian Companies Doing Business In Argentina

On September 18, 2014, the House of Deputies, the lower house of the Argentinian Congress, approved a controversial "supply" bill by a vote of 130 to 105. The bill, known as Law N˚ 26.991 or New Regulation of Production and Consumption Relations, had already been approved by the Senate on September 4, 2014 and will become law when signed by President Christina Kirchner. When enacted, the new law could significantly expand the Argentinian government's role in regulating Latin America's third largest economy.

For Canadian companies doing business in Argentina, the new law could have serious consequences since it allows the government to, among other things, impose large fines, control price levels and profit margins, close businesses and confiscate goods in case of violation. If this is the case, Canadian companies may seek compensation for such losses through arbitration under the Canada-Argentina Foreign Investment Protection Agreement (FIPA).

New Law Gives Argentinian Government Sweeping Powers

The bill comes on the heels of Argentina's second debt obligation default in 13 years, and amid rising inflation estimated at around 40% in the last 12 months. Against this backdrop, the executive branch sponsored the bill, which seeks to protect consumers from monopolies, stem job losses, and ensure a steady supply of goods to Argentina's 41 million people. To achieve these stated purposes, the law gives the government wide discretionary powers to interfere in the marketplace and internal business decisions of large companies (under the law, "micro, small, and medium" sized businesses would be exempted).

The Argentinian government argues that this new law actually amends and replaces a pre-existing "supply law" (Law N˚ 20.680) that has been in place since 1974, and is more moderate than its predecessor in some areas. For example, jail time is no longer a potential penalty for violation, and the government cannot take over operation of a business, or intervene in the import and export markets.

Critics of the bill say it will produce the exact opposite of what is desired: increased scarcity, accelerating inflation, continued devaluation of the peso, and reduction in foreign investment.

What Powers And Sanctions Does the New Law Prescribe?

Under the new law, the government would have powers to:

  • set profit margins;
  • set maximum and minimum price levels;
  • establish production quotas;
  • confiscate goods;
  • force companies to continue production if "economically viable";
  • establish business licensing regimes; and
  • examine and detain business documents.

Large companies—both domestic and foreign—in virtually all industries could become subject to the government's powers above if they:

  • "artificially raise" or charge "unreasonable" prices;
  • make "abusive profits";
  • reassess inventory's value without the government's prior approval;
  • hoard raw materials or products;
  • destroy goods or property to create scarcity; or
  • unjustifiably restrict the sale of goods or the provision of services.

Companies found to be in violation of the new law could face the penalties listed below:

  • a fine of up to 10 million pesos (around $1.3 million CDN) increasable up to three times the amount of profit resulting from a breach;
  • closure of business facilities for up to 90 days;
  • confiscation of the goods subject to the infraction;
  • disqualification for up to 2 years to get or renew bank loans;
  • revocation of business licences for up to 5 years; and
  • loss of any concession, privilege or other special treatment previously granted.

The amount and duration of the maximum penalties can be doubled for a second offence. In addition, directors and other management personnel may also be personally liable to pay fines, at a reduced rate of 25 percent, if acting with intention or in gross negligence.

Is the New Supply Law Legal Under Argentinian Law?

The previous law was used sparingly, and typically only in situations of a genuine supply emergency. Former President Raúl Alfonsín invoked it to impose fines on companies in the 1980s. Former President Carlos Menem issued a decree suspending its application in 1991 but reinstated it to end a truck drivers' strike in 1999. In 2006, a court did find it valid when Shell was forced to sell diesel fuel during a shortage and fined hundreds of thousands of dollars during Nestor Kirchner's government. Current President Christina Kirchner invoked its powers in 2008 to intervene in the beef industry, and in 2012 when her government forced wheat farmers to sell their stocks after a rise in the price of flour and wheat.

The Argentinian government relies on Article 42 of the Constitution to argue that the new supply law only specifies the mechanisms for the government's pre-existing authority to protect consumers. Article 42 of the Constitution provides that "consumers and users of goods and services have the right to the protection of their health, safety and economic interests, to adequate and truthful information, to freedom of choice and equitable and reliable treatment." If the law is passed by the President, private sector leaders promised to challenge the new law on the grounds that it violates private property and trade rights.

Does The New Law Contravene Canada-Argentina FIPA?

The Canada-Argentina FIPA stipulates that each party shall encourage the creation of favourable conditions for investors of the other state to invest in its territory, including granting full protection and security to their investments and returns. Measures such as forcing companies to produce goods when it might not make business sense, seizing private property, and shutting businesses out of their facilities could be seen as violations of the treaty. Further, the FIPA prohibits expropriation of investments or returns, unless for public purpose, under due process of law, and for adequate compensation. Seizure of private property and control of prices levels and profit margins could be interpreted as expropriation under the FIPA. A Canadian company sanctioned under the new law could bring a legal dispute challenging the penalties before the Argentinian competent tribunal and/or an international arbitration tribunal.

Conclusion

Although the new Argentinian supply law is more moderate than its predecessor in some areas, it has also increased maximum fines and clarified enforcement practices. In addition, the very fact that it is on the legislative agenda might signal that the Argentinian government is preparing to apply it more often. Representatives from the Argentinian private sector plan to challenge the law before local courts because it violates private property and trade rights. Canadian investors in Argentina might also challenge the application of the law before local tribunals or international arbitration tribunals based on violation of the Canada - Argentina FIPA.

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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