Hacienda Virtual Realty Argentina - HVRA
Basic Argentine Business Law
The Argentine Constitution dates back
to 1853, and was recently amended in August 1994. It prescribes the type of
government and individual rights and guarantees for all residents of the country.
Its approach is remarkably broad and generous, as it grants foreigners the same
rights to work, do business, buy, own and sell property, etc. as it does to
Argentine Nationals, stating property is inviolable and no resident of the nation
may be deprived of it except by means of a firm judicial decision.
Foreign and domestic private entities therefore have full rights to establish
and own business enterprises and engage in all forms of remunerative activity.
Private parties freely establish, acquire and dispose of interests in business
enterprises.
State Reform, Deregulation
and Stability in three Acts
In 1989, the Argentine Congress passed two of the three laws that today
make up the backbone of a comprehensive state and market reform plan. The STATE
REFORM ACT in August of 1989 prescribed a far-reaching, ambitious plan that
three years later showed 176 privatizations completed, including gas and electric
utilities and distribution companies, telecom companies, railways companies,
airline companies and YPF, formerly the state oil corporation now trading over
the counter in New York.
The ECONOMIC EMERGENCY ACT in September of 1989 initiated a massive deregulation
program covering foreign investment, capital markets, domestic markets for goods
and services, and state regulatory agencies. Interest rate, currency exchange,
price and salary controls were eliminated along with an often unwieldy array
of local content requirements, subsidies and preferential tax treatments that
crooked market performance.
The CONVERTIBILITY ACT, passed by Congress on April of 1991, completes
the triad of laws fundamental to the profound structural reforms undertaken
by Argentina providing a strict mechanism that has proven conducive to low inflation
and stability. Pursuant to this Act, the Argentine peso must be fully backed
by reserves made up of foreign currency and gold, at a set exchange rate of
one peso per US dollar.
Indexation of any kind was banned, and the public was allowed to freely enter
contracts based on foreign currency, with the assurance that their performance
is fully enforceable before Argentine courts. There are no foreign exchange
controls of any kind, and as a consequence a single foreign exchange market
is in operation. Individuals and corporations may freely hold, conduct business,
collect revenues and maintain bank accounts in foreign currency.
The combined effect of the three Acts on state reform, deregulation and convertibility
has allowed for a dramatic fall in inflation rates, more efficient markets,
vigorous growth and a newfound sense of the merits of budget discipline.
The Rule of Law and Structural Reform in Argentina
It has recently emerged as an important topic the issue of legal integrity in
regard to the ongoing privatization and State reform processes. These concerns
are the result of a variety of factors, mostly the sheer speed of change Argentina
has undergone in recent years. In its rush to break down all the controls and
barriers which had been erected over the years, the government unwillingly compromised
predictability in judicial decisions, a result of the courts' slowness to digest
brand new legislation.
This is why even when it may be of interest only to the legal counsels of interested
foreign investors, it is worthwhile to describe the legal foundations of structural
reform in more detail. The rule of law concept refers to a form of foreseeability
involving the result of judicial processes and the knowledge of legal rules
in effect.
A given observer will tend to find a higher degree of legal integrity inasmuch
as the probable outcome of a judicial decision can be accurately assessed prior
to its rendition and, of course, to have an operative understanding of the scope
and extent of the rules applicable to the matter at hand.
Foreseeability depends on the legal system's overall stability and the consistency
of judicial decisions based therein. Legal foreseeability then, on the one hand
stems from the system's stability -that is the relative absence of change within
the body of laws in effect and their intrinsic logical coherence- and on the
other it arises from the consistency of judicial decisions settling a conflict
or dispute brought upon for resolution.
The body of law's intrinsic logical coherence contributes to the perceived degree
of legal integrity: new rules and regulations can be foreseen inasmuch as they
keep a harmonious accord with the main thrust and principles guiding the system,
for only then can their content be logically derived from the higher rules.
Jurisprudential consistency in turn deals with the concrete application and
adjustment of the general rule to the case to be settled; in this regard there
would be no predictability if, despite a total clarity in the rules in effect,
their application by the judges were capricious or random.
If legal integrity deals with the body of law's overall stability, foreseeability
of the content of new rules, and consistent and coherent jurisprudence, it follows
that the most direct way to diminish it is by means of a change in applicable
laws, especially one of great magnitude. A change of such characteristics is
precisely the one taking place in Argentina today.
A. State Reform Acts and the Rule of Law
As discussed above, the transformation process in the Argentine economy
recognizes two basic pillars, Laws 23.696 and 23.697, known respectively as
Administrative and Economic Emergency Acts. In view of the importance of these
two Acts for a study of legal integrity in Argentina, it is necessary to analyze
their legitimacy because any legal defect or vice would jeopardize the validity
of the entire system built upon them.
1. Legitimacy of the Administrative and Economic Emergency Acts
The first and element to point out is that, as to the formal validity of the
aforementioned instruments, both are irreproachable insofar as they are laws,
approved by Congress following constitutional rules and procedures. This fundamental
fact explains the total absence of criticisms and objections to the formal validity
of these Acts.
2. Insertion of the Acts within the legal system
Here the validity of the Acts is analyzed not in their form but in the adequacy
of their contents to the principles guiding the overall legal system. These
overarching principles are to be found in the Argentine Constitution, whose
content supersedes all other rules of inferior hierarchy which must meet the
constitutional terms or risk being declared unconstitutional.
The Acts under scrutiny, far from contradicting Constitutional spirit, are harbingers
of a rather spectacular return to constitutional principles of respect for individual
rights, free association and trade which had been strongly limited or suppressed
during the last 50 years by countless rules and procedures that placed the State
as the main player in the economy.
The Argentine Constitution strongly supports the protection of economic freedom
and gives particular emphasis to the individual rights of free trade and industry.
In short, it is not possible to object to the legislative spirit of the Acts
as they represent a renewed commitment to the liberal principles expressed in
the Constitution.
Concluding this analysis of the validity of the basic State reform laws, it
is necessary to mention an issue that has led astray some observers, regarding
the special circumstances surrounding approval of the Acts.
The state of "emergency" that both Acts declare cannot be assimilated to a requirement
for them to be in effect.
The limited application period established by the Administrative Emergency Act
applies only to certain subjects identified by the Act, such as contract renegotiation
by the State or legal suits against it, but in no way restricts the enforcement
of the Act as a whole. That certain rules within an Act have an application
limited in time is a classic legal technique that cannot be misinterpreted,
and in this situation the "emergency" simply points to the facts and general
circumstances motivating the enactment of the law.
The Administrative and Economic Emergency Acts are in full force, and they constitute
the basis of a body of law that tends to reestablish the free enterprise principles
of the Constitution, and in support of that goal they foster a sharp contraction
in the State's involvement in the economy by diverse techniques such as privatization,
demonopolization and deregulation.
In "Lopez c/ Explotaci—n Pesquera de la Patagonia S.A.", the Argentine Supreme
Court asserted that the Acts evidence the existence of a Governmental program
approved by Congress, "a process of stabilization of the economy ... being implemented
by the Government through a body of new rules affecting all areas of national
life".
3. Executive Decrees and Legal Integrity
The usual legal procedure is for the laws to establish the more general guidelines,
leaving their finer application to Executive regulation, as prescribed by article
28 of the Constitution. Given the magnitude of the reforms prescribed by the
aforementioned Acts, it can be expected that accompanying rules and procedures
be equally voluminous, and that has been the case.
In regard to Executive decrees, it is extremely important to comment article
10 of the Administrative Emergency Act, authorizing the Executive Power
to exclude privileges, monopolies and discriminatory practices, even when these
derive from laws, when they hamper the processes that lead to the reform of
the State.
The cited article has operated as a legislative delegation granting the Executive
Power faculties sufficient to implement the State withdrawal from commercial
and industrial activities.
Exercising this legislative delegation, the Executive has issued an important
number of decrees, among which decree 2.284 stands out in terms of its scope
and widespread effects. This decree has been the target of numerous criticisms
alleging its unconstitutional character, presumably because the decree's scope
would go beyond the faculties granted in the legislative delegation commented.
This position however, has not been accepted by the courts and is now relegated
to minority position within the legal doctrine, due to the following three reasons:
a) Art. 61 of the Administrative Emergency Act expressly authorizes the Executive
to liquidate governmental entities whose task is to enforce special laws, therefore
implying the faculty to suppress the underlying legal regimes.
b) A long standing doctrine supports the validity of decrees issued by reason
of "urgent necessity", and stated briefly, grants the Executive a temporary
authorization to dictate rules in areas normally reserved to Congress if two
requirements are met:
1. the existence of a state of public necessity, and the sending of the decree
by the Executive for congressional consideration. Regarding the first requirement,
the debate over the existence of the state of public necessity is unavoidable
given the absence of an objective gauge, and it naturally provides minority
doctrine with their best argument against the validity of the decree.
2. As for the second element, the Executive routinely sends "urgent necessity"
decrees for consideration by Congress, and it connects with c) below.
c) Another doctrine well established in jurisprudence states that if a decree
of the Executive is not vetoed within a reasonable time by Congress, a tacit
approval operates rendering the instrument valid. An example of the operation
of this doctrine is given by the decrees sanctioned by de facto governments,
which are in effect in absence of congressional disapproval within a reasonable
time.
In short, the considerations above show that the legal validity of Executive
decrees deregulating the economy are well grounded in both law and doctrine,
and therefore are not more vulnerable nor more likely to undergo Supreme Court
scrutiny than any other rule, whether it is an Executive decree or a Congressional
law.
B. Legal Integrity and the Judiciary
An analysis of the consistency of judicial decisions is only feasible in regard
to a specific area of law, and those affecting foreign investment make a good
subject given their economic importance and direct impact on the perception
of legal integrity.
1. The Supranationalization of Dispute Settlement
The critical importance of judicial decisions affecting foreign investment,
coupled with the traditional mistrust of foreign investors as to the independence
and consistent enforcement of laws by host country judiciaries, has spurred
a movement towards a supranationalization of disputes regarding foreign investments,
so as to place the procedure beyond the reach of the local judiciaries, therefore
reducing uncertainty over erratic or unduly influenced decisions.
The techniques include agreements over foreign investment disputes in Bilateral
Investment Treaties (BITs), arbitration clauses in individual contracts, international
organizations such as the International Center for the Settlement of Investment
Disputes (ICSID). These techniques are widely employed in Argentine local tribunals,
relieving the burden of settling investment disputes by means of decisions of
potentially far-reaching economic, cross-border consequences.
Recently in this regard, the Argentine Supreme Court established a precedent
of enormous importance, providing full jurisprudential support to supranational
settlement of disputes. In "Fibraca vs. Salto Grande" the Argentine Supreme
Court dismissed the plaintiff's claim and abided by the principle stating that
when parties agree to subject future disputes to international arbitration,
the decisions thereby obtained cannot be brought to an Argentine local court
for revision. The rule further states that, given a valid agreement subjecting
future disputes to international arbitration, controversies fall automatically
within the exclusive reach of applicable international law, and no party can
resort to domestic laws to justify a breach. The "Fibraca" decision marks the
effective abandonment by Argentine tribunals of one of the most conspicuous
features of South American judiciaries, namely subjecting foreign investment
to the laws and jurisdiction of the host country, much to the irritation of
foreign investors concerned with the tribunals' dubious independence and erratic
enforcement of the law.
2. Legal reforms and the Foreign Investor
[NOTE: this following paragraph is also at the top of "FOREIGN INVESTMENT"
Argentina's sweeping move towards full-fledged free enterprise has been
extended to foreign investors.
The Argentine Constitution contains very clear principles in this matter - never
before fully implemented - guaranteeing equal treatment for foreign and local
investors (article 20) and making the "import of foreign capital" a specific
congressional duty.
Law 21.382 regarding foreign investment, as amended in 1993, places foreign
and local investors on an equal footing and expressly states that both capital
and profits can be repatriated at any time without any government approval being
needed.
Equal treatment means foreign investors have the same tax treatment as locals,
are entitled to make full use of local credit lines, and move both capital and
profits freely in and out of the country without any approvals being required.
Capital repatriation waiting periods, and the need to register foreign investment
have both been abolished.
This clear commitment to free enterprise and non discrimination between
foreign and local investors is further strengthened in over 36 bilateral treaties
for the promotion and protection of foreign investment, all of them signed or
negotiated under the Menem administration, including the U.S., Canada, United
Kingdom, Germany, France, Italy, Spain, and Switzerland among many others.
The laws and decrees implementing the program of economic reform do not exhibit
legal technical flaws so as to lend support to foreign investors concern over
the rule of law.
The origin of such concerns then, has to be traced back to the political and
social context, and Argentina's history of institutional instability.
To this respect we expect time will settle the enormous economic changes on
the political and economic fronts and on Argentine society at large.
Only then the international community will be ready to form a conviction as
to the permanent character of the deep reforms carried out by the Menem administration.