Two Federal Supreme Court decisions on the Statute of Limitations for royalties claims and easement indemnifications

1.    Statute of Limitations for the collection of oil royalties: five years (Section 4027, paragraph 3 of the Civil Code)

On December 11, 2007 the Federal Supreme Court, having original jurisdiction, dismissed a claim filed by the Province of Neuquén (“the Province”) against an oil and gas company that carried out activities in the territory of the Province (“the company” or “the defendant”) as it considered that the term to bring an action for the collection of oil royalties allegedly owed by the company had lapsed before the claim was filed.

Such was the decision of the Federal Supreme Court - in a split decision – issued in the case styled “Province of Neuquén against Capex S.A. on collection of royalties” (Nr-392/2002). In this case the Province claimed the payment of the difference between what the defendant had paid as concessionaire for hydrocarbon exploration and exploitation in the Agua del Cajón area and what it should, in the Province’s opinion, have been paid from January 1993 to August 1994.

The differences arose by calculating and paying the oil royalties pursuant to Resolution No 5/1990 issued by the Federal Undersecretary for Energy on the basis of 8% of the computable production, instead of 12% of such production as required under Section 59 of Law No 17,319.

The majority decision of the court was that the limitation period for such claims is set by Section 4027 of the Civil Code at five years and the court dismissed the claim without considering the arguments of the plaintiff.

Legal costs were ordered to be borne equally by the parties in the light of the absence of jurisprudence and the complexity of the matter.

A majority of the judges rejected the argument that the royalties were in the nature of tax payments on the following grounds:

(i)           Sections 57, 59 and 62 of Law No 17,319 distinguish royalties from strictly tax payments;

(ii)           Section 12 of Law No 17,319 refers to royalties as a “share” in the production, and such reference is not found in tax law;

(iii)          Section 59 of Law No 17,319 authorizes the Federal Executive Branch to reduce the percentage of royalties, taking into account productivity, conditions and well location and such criteria are foreign to tax law in the strict sense;

(iv)         failure to pay royalties during a period of three months constitutes grounds for the lapsing of permissions or concessions; and

(v)          Section 3 of Decree No 1671/1989 authorizes the concessionaire to request a reduction in royalties if the production is not economically viable, and such reduction cannot be contemplated in tax matters.

The Court held that the above-mentioned provisions show the clear intention of the legislator to grant to royalties “characteristics close to those of a contractual nature”, and doubtlessly different from any those in the nature of taxation in the strict sense.

The above arguments having been raised and the interpretation of royalties as being in the nature of a tax having been rejected, the majority of the Justices decided that the applicable term was the five-year term provided in the Argentine Civil Code 4027 (3), on the following grounds:

(i)            the royalties were paid monthly,

(ii)           they are “periodic payments” during the period of time in which profits result from the exploitation and

(iii)          the five year term is the most appropriate in order to avoid a “possible huge amount of debt and the resulting difficulties for its collection and payment…”.

Justices Lorenzetti, Petracchi and Argibay issued dissenting decisions and considered that the legislator had attributed to the royalties a “clear tax nature, under Law No 17,319 and under decree 1671/89 regulating Sections 59 and 62 of the Law”.

On that basis they considered it reasonable to apply to the situation, by analogy, the ten-year term provided in Law No 11,585. Moreover, they added that pursuant to prior decisions (“Fallos” 307:412) the ten-year term is the term that should be applied for those taxes not subject to a special regime and emphasized the importance of a restrictive interpretation of statute of limitations terms.

2.    Statute of limitations for awards related to mining rights under Section 100 of Law No 17,319: two years (Section 4037 of the Civil Code)

In a divided decision toward the end of 2007, the Federal Supreme Court decided on another issue not resolved under Law No 17,319: the statute of limitations applicable to a concessionaire’s obligation to compensate landowners for their activities in accordance with Section 100 of the Law (indemnification for easements).

In the case styled “Lagos, Alexander and others against YPF State Owned Corporation and another on Expropriation and Administrative Servitude”, the Federal Supreme Court admitted the ordinary appeal filed by YPF S.A. against the judgment entered by the Division V of the Federal Court of Appeals in Administrative Matters which had substantially affirmed the first instance Court’s judgment and the plaintiff’s rights to collect mining easements.

The plaintiffs – landowners of real state located in the Province of Mendoza - filed a complaint against YPF S.A. and YPF State in June 1995 claiming the payment of sums of money allegedly owed as compensation for oil and gas activities during the period commencing in June 1982 and ending in May 1991.

Among other defenses, YPF S.A. claimed the two-year term prescription period set forth in the Argentine Civil Code 4037 and, subsidiarily, the four-year term prescription period set forth in the Argentine Commercial Code 847(2).

The defendants replied to the prescription defense alleging that the applicable term was the ten-year term set forth in the Argentine Civil Code 4023 and added that, even if the term was the two-year term, the action was not prescribed due to the suspension of the term caused by the administrative steps taken before the filing of the action.

Both the sentence passed by the judge of the first instance Court and the judgment entered by Division V of the Federal Court of Appeals in Administrative Matters found for the plaintiffs, but failed to refer to the statute of limitations relevant to this type of claim.

The Federal Supreme Court revoked such decision and rejected the claim due to the application of the statute of limitations.

The Federal Supreme Court decided that the applicable statute of limitations term was the two-year term set forth in the Argentine Civil Code 4037 based on the following grounds:

(i)            the claim was based on an objective tort pursuant Section 100 of Law 17319;

(ii)           no compensation for contractual damages was requested by the plaintiff and

(iii)          the damage claimed was based on tortious liability because the compensation obligation was established exclusively in the law.

As far as the calculation of the term, it was held that:

(i)           it ran from the moment the damage occurred, that is, since the facilities were installed in the land and damage became clear and not from the moment landowners “found out” the damage existed

(ii)           even if the steps taken before the filing of the complaint were considered “administrative” proceedings, the effect in relation to the term could only be related to those set forth in Section 3986 of the Civil Code.

Due to the above-mentioned reasons and the fact that the complaint had been filed after the expiration of the two-year term set forth in the Argentine Civil Code 4037, the Federal Court decided to revoke the appealed decision and dismissed the complaint. As regards the expenses incurred during the different stages of the legal proceedings, each party had to pay for its own expenses and common expenses were divided because of the complexity and nature of the issue.

Justices Fayt, Petracchi and Argibay dissented in relation to the applicable prescription term for this type of claim since they considered that the term that should be applied, by analogy, was the five year term set forth in Section 56 of the National Law of Expropriations No 21,499 (pursuant to precedents “Fallos” 305:2098 and 319:1801).

On the other questions regarding the calculation of the term (dies a quo and suspension by effect of the administrative proceedings), they agreed with the majority vote.

Although both cases were decided on the basis of divided opinions, the Federal Supreme Court of Justice was able to rule on recurrent questions for the oil industry and to thoroughly debate issues which called out for clear precedents.