New Argentine Supreme Court decision concerning judicial review of arbitration awards: a preliminary

On June 1, 2004, the Argentine Supreme Court issued a decision that allows Argentine courts to review, on the merits, local arbitral awards even when the right to appeal has been waived by the parties. It has been claimed that this decision can affect the international arbitrations to which Argentina is currently a party to.

The case[1] concerned a public works contract between plaintiff (one of the leading Argentine construction companies) and a State owned company. The contract had included an arbitration clause which provided that the award would not be subject to appeal. The arbitration panel, by a divided vote (the third arbitrator having agreed on most issues with the arbitrator designated by the private party), found in favour of the plaintiff.

The Court declared the award void because, in setting the date as from when the price readjustment should be calculated, it had gone beyond the relevant terms of reference. However, the Court also revoked the award in respect of the interest rate applied to defendant’s debt, on the grounds that such rate produced an unreasonable result, almost four times higher than the amount yielded by applying to the inflation-adjusted principal a 5% annual interest rate as contractually agreed.

In order to consider the interest issue, the Court stated that the waiver of the right to appeal an arbitral award cannot be construed to extend to cases in which the terms of the award violate public policy (“orden público”) as it is not logical to foresee, when agreeing to this waiver, that the arbitrators will adopt a decision that incurs in such a defect. The Court went on to say that:

“It should be remembered that the evaluation of the facts and the regular application of the law are the arbitrators’ roles and that, therefore, the award rendered under such conditions shall not be subject to appeal, but, instead, their decision may be judicially challenged when it is unconstitutional, illegal or unreasonable”.

The Court cited a 1975 precedent[2] wherein it had set aside an award rendered in an arbitration provided by a collective labor agreement, using similar words to those transcribed above in italics. However, in that case the relevant rules reserved the right of the parties “to appeal to the State organs”.

2. Preliminary analysis

The Federal Code of Civil and Commercial Procedure (“the Code”) allows the waiver of appeals against an arbitration award, but this waiver does not exclude the challenge of voidness of the award based on (i) an essential defect of the procedure, (ii) the award having been rendered outside the agreed term, (iii) the award extending to issues not included in the arbitration, or (iv) the award containing decisions that are incompatible with each other (Code, secs. 760, 761). The refusal to enforce a foreign award on grounds that it violates Argentine public policy is also provided by the Code [sec. 517 (4)][3].

A long line of Supreme Court precedents has denied extraordinary appeals[4] of awards rendered in a voluntary arbitration (i.e. one chosen by the parties and not imposed by law)[5]. However, extraordinary appeals have been admitted against court decisions that had rejected the challenge of voidness of the award when, in the opinion of the Supreme Court, the limited grounds for allowing such challenge existed[6].

The Cartellone decision expands judicial review of awards beyond the limits allowed by the Code. Without discussing enforcement, the Supreme Court in Cartellone states that the award may be judicially reviewed on grounds of public policy and also when it is “unconstitutional, illegal or unreasonable”.

Cartellone concurs with certain dissenting opinions[7] and, more significantly, with a recent law review article written by Dr. Horacio Rosatti, the current Attorney General (“Procurador del Tesoro”) in which he argues that international arbitration awards should be subject to review by Argentine courts to determine their compatibility with the Constitution[8]. It is not surprising, therefore, to read in the general press that Dr. Rosatti has hailed the Cartellone decision as “recovering national jurisdiction and insuring the effectiveness of the Constitution”[9].

However, both Cartellone as well as the 1975 precedent it cites, involved a local arbitration based on contract, and not international arbitration based on a treaty such as those commenced by foreign investors against the Republic of Argentina under the different Bilateral Investment Protection Treaties to which it is a party. The difference is important because, pursuant to the Constitution, a treaty ranks higher than a law[10] and the 1975 precedent had cited, but did not discuss, the relevant sections of the Code on grounds for review of awards that have been explained above[11].

The ICSID Convention[12], ratified by Argentina, provides the framework under which many of these arbitrations are being pursued. Sections 53 (1) and 54 (1) of the ICSID Convention stipulate the finality of the awards rendered in such arbitrations in the following words:

“The award shall be binding on the parties and not be subject to any appeal or to any other remedy except those provided in this Convention” [sec. 53(1)];

“Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State” [sec. 54(1)].

It is interesting to note that the word “final” used by the ICSID Convention has been translated in its Spanish version as “firme” (firm, i.e. not subject to appeal because the term allowed for the appeal has expired) and not as “definitiva” (definitive, i.e. one which puts an end to a suit or action, as distinguished from an interlocutory decision). The Argentine rules on recurso extraordinario allow this extraordinary remedy to be filed against “definitive” judgements but not against “firm” judgements.

However, following the Attorney General’s reasoning to its logical conclusion, Argentina might argue that an award rendered against it in an ICSID arbitration may be challenged before the Argentine courts on constitutional grounds since the ICSID Convention rules on finality of awards should not be considered valid under the Constitution in respect of such challenges.

This argument would run contrary to the doctrine that considers that awards rendered in ICSID arbitrations have res iudicata effects in all States parties to the ICSID Convention.