October 30 2008
The Supreme Court of the Province of Buenos Aires is yet to decide on appeals filed against the decision of the La Plata Court of Appeals in re Milantic Trans SA v Ministry of Production - Shipyard Río Santiago.(1)
The award was rendered in London on November 15 2004. It was the result of arbitration proceedings initiated in January 1999 for breach of a vessel construction contract entered into by Milantic Trans SA and Shipyard Río Santiago (owned by the province of Buenos Aires) in October 1996.(2)
The defendants' behaviour (which hindered the enforcement of the award) and the extraordinary grounds put forward by the appeal court (which brought the case before the provincial Supreme Court) did not seem to recognize that an arbitration agreement is first and foremost a gentleman’s agreement. The complete and efficient development of arbitration proceedings inevitably relies on parties being respectful of private agreements and international treaties.
The final, binding and unchallenged award was not performed in a timely manner by Shipyard Río Santiago, so Milantic sought to enforce the award in Argentina.(3)
The province of Buenos Aires put forward a defence of lack of legal standing, alleging that it was not a party to the contract, even though Shipyard Río Santiago, which was located on its property, had been one of the parties to the arbitral proceedings. The defendants’ arguments were as follows:
In November 2006 the Second Administrative Court of First Instance of La Plata rejected the unsubstantial defences put forward by the defendants and recognized the award, declaring it enforceable. In the ruling the judge stated that: (i) the contract was approved by the provincial law that authorized the shipyard to obtain the necessary guaranty contract from the provincial bank; and (ii) regulations relating to the enforcement of foreign judgments and the New York Convention were applicable because the contract was a commercial one.(5) Moreover, the judge pointed out that the award was not contrary to public order, since Section 623 of the Civil Code authorizes compounding interest.(6)
The defendants challenged the judgment on grounds of costs and the La Plata Court of Appeals - based on an unwise interpretation of the regrettable decision of the Argentine Supreme Court in re Cartellone (7) - reversed the decision rendered on August 30 2007 by the court of first instance. The appeal court decided the case extra petita, ruling on the merits of the prior first instance decision.
In so doing, the La Plata Court of Appeals stated that: (i) the jurisdictional clause in favour of an arbitral tribunal was decided without legal and expressed authorization; and (ii) the New York Convention was not applicable in the province of Buenos Aires. The court therefore disregarded the fact that Argentina’s ratification of the New York Convention implied its incorporation into national law and the automatic application of its regulations in both national and local jurisdictions.
In its decision the appeal court attempted to find an alternative solution to prevent the province of Buenos Aires from having to face up to assumed contractual and arbitral commitments. However, its decision may have damaged confidence in finding arbitral solutions to international contractual disputes that have a public legal entity as a party. This may have undesirable consequences for future contracts, as the implicit risk may increase guarantee and financing costs.
The Supreme Court of the Province of Buenos Aires now has the opportunity to reaffirm the correct path marked by the first judicial decision and restore the principle of legal rights. At the same time, it can reject any arguments that objectively undermine confidence in the Argentine judicial system.
For further information on this topic please contact Alberto DQ Molinario or María Laura Velazco at Marval O'Farrell & Mairal by telephone (+54 11 4310 0100) or by fax (+54 11 4310 0200) or by email (firstname.lastname@example.org or email@example.com). The Marval O'Farrell & Mairal website can be accessed at www.marval.com.ar.
(1) Milantic Trans SA v Ministry of Production - Shipyard Río Santiago and Province of Buenos Aires s recognition and enforcement of arbitral award. The appellant filed an extraordinary appeal based on procedural violations of the lower court trial, requesting the reversal of the decision, which allegedly contradicted doctrine established by one of the divisions of the same appellate court over the last 10 years.
(2) An additional award, related to costs, was rendered on July 1 2005.
(3) In these proceedings judges should reach a finding related only to the authenticity and legality of the arbitral proceedings and international public order.
(4) Argentina reserved application of the New York Convention to differences arising exclusively from commercial relationships.
(5) New York Convention, Rule 23.619 and National Constitution, Sections 31 and 75(22).
(6) A legal regulation forbidding compounding interest would be a mandatory local law, but not international public order. On November 18 2004 in re Thàles v Euromissile the Court of Appeals of Paris stated that a violation of international public order must be “flagrant, effective and specific”, “the unlawful matter must burn judges’ eyes”. In Revue de l´Arbitrage, Comité Français de l`Arbitrage, Litec editions, 3, 2005, pp 529.
(7) José Cartellone Construcciones Civiles SA v Hidroeléctrica Norpatagónica SA o Hidronor, CSJN, 327(2) Fallos 1880 (2004).
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Alberto DQ Molinario
María Laura Velazco