Argentine Necessity Case

The following is the text of the judgment of the Federal Constitutional Court:

The proceedings are combined for a joint ruling.

No general rule of international law is ascertainable which entitles a State temporarily to refuse to meet private-law payment claims due towards private individuals by invoking State necessity declared because of inability to pay.

A.

I.

The Republic of Argentina has been confronted since 1999 with considerable economic problems, which at least temporarily expanded to become a State financial crisis. In connection with the financial crisis, Argentina made considerable use of the tool of government bonds abroad in order to cover the need for currency and for capital. Such bonds were also issued on the German capital market and subscribed to by German creditors.

In 2000, the Republic of Argentina received a loan of US $39.7 billion from the International Monetary Fund (IMF). In order to comply with the conditions attached to disbursement, the Republic of Argentina initiated drastic budgetary cuts, which in turn led to a grave loss of confidence in the Argentinian currency. The consequence was that Argentina had to pay higher interest on the capital markets, which, against the background of the existing economic problems, ultimately led to the declaration, by Act no 25,561 on Public Emergency and the Reform of the Exchange Rate System of 6 January 2002, of the public emergency in social, economic, administrative, financial and monetary policy. On the basis of Decree no 256/2002 of 6 February 2002 on the Restructuring of Obligations and Debt Payment of the Argentinian Government issued thereupon, foreign debt service was suspended by the Argentinian Government in order to restructure the foreign debt service. The Act on Public Emergency has been extended annually, most recently until 31 December 2007.

After a decision to this effect pronounced on 15 December 2005, the Republic of Argentina has now repaid, ahead of schedule, its complete obligations to the IMF amounting to US $9.6 billion.

II.

1. Several actions entered by German investors are pending against the Republic of Argentina before the Frankfurt civil courts. By orders of 10 March 2003 and 21 March 2003, the Local Court initially submitted the question as to whether rules of international law stand in the way of convicting the defendant.

2. By orders of 2 July 2003, 3 July 2003, 4 July 2003, 24 November 2003 and 9 December 2003, the Local Court reformulated the submission orders, and now submitted the question whether the State necessity declared by the defendant with respect to the inability to pay entitles the defendant by force of a rule of international law temporarily to refuse to meet due payment claims, and, if appropriate, whether this is a general rule of international law which, pursuant to Article 25 of the Basic Law, is an element of federal law which directly gives rise to rights and obligations for the individual, in this instance the parties.

The Local Court specifically explained that the submitted question was material to the ruling for the respective proceedings because the actions were admissible and well founded as to the main claims, and the claims could only be dismissed based on the application of the principle of international law proposed by the defendant which purportedly justifies the defendant's refusal to pay due to State necessity. The court handing down the judgment presumed the existence of State necessity, and was of the view that it was unable to judge on the factual circumstances of such State necessity itself. Serious doubts as to the existence of a general rule of international law on the use of State necessity as a plea were said to emerge from the fact that there was a principle of State necessity under international law, which in principle could also justify the non-fulfilment of an international obligation, but that there were no unambiguous rulings by international courts on the legal consequences of the inability to pay, in particular in the case of due claims by private third parties.

3. By orders of 16 May 2006 and 19 May 2006, the Local Court submitted two more sets of proceedings relating to the same question.

III.

1. The German Bundestag, the Bundesrat and the Federal Government were afforded the opportunity to make a statement pursuant to 83.2 of the Federal Constitutional Court Act (BundesverfassungsgerichtsgesetzBVerfGG).

The Federal Ministry of Justice made a statement for the Federal Government by letter of 30 December 2003 on the impact of State necessity under international law. In its statement, the Ministry of Justice asserted that regulations on the lack of actionability of claims pursuant to Article VIII section 2(b) of the Articles of Agreement of the International Monetary Fund in its version of 30 April 1976 (Bundesgesetzblatt (Federal Law GazetteBGBl) 1978 II pp. 13 et seq.) did not contradict the materiality of the submitted question to the ruling. In the view of the Federal Government, there was no general rule of international law within the meaning of Article 25 of the Basic Law permitting a State to suspend payment obligations under private-law contracts unilaterally by invoking State necessity. There were said to be sufficient indications that State necessity had gained a foothold in customary international law. This, however, was said to apply only in the context of the strict preconditions of Article 25 of the Articles on State Responsibility of the United Nations International Law Commission, in other words only for the justification of the violation of international obligations. Additionally, the State may not have caused the occurrence of the peril itself.

There were, however, said to be considerable doubts when it came to transferring these principles to a case in which a State does not meet its payment obligations because of overindebtedness...