Stabilization clauses: important ruling from the Supreme Court

On April 20, 2010, the Argentine Supreme Court of Justice (with the affirmative votes of Elena I. Highton de Nolasco, Enrique Santiago Petracch , Juan Carlos Maqueda and E. Raúl Zaffaroni), in the case “Massolo, Alberto José vs. Transporte del Tejar S.A”, revoked the ruling of the Civil Court of Appeals. This Court of Appeals held that section of the Law of Economic Emergency (which modified the Law of Convertibility) that bans the use of monetary actualization clauses, whether the debtor was in default or not, was unconstitutional.

The conflict between the parties arose from a payment agreement executed on October 6, 2001, in which it was provided that a debt set in Argentine pesos due to a judicial decision would be paid to the creditor in fifteen equal and consecutive instalments. The agreement set forth that “in the event the Law of Convertibility were annulled, and the parity between the peso and the dollar should cease to exist, the parties agreed that each of the instalments would be paid in Argentine pesos, in the amount necessary to acquire the amount equivalent to each of the instalments, to be calculated according to the value of the dollar established by the Banco Nación at the closing of the day in which the immediately prior instalment was due”. After several of the instalments were paid, in March 2002, plaintiff requested that the payment be calculated according to the adjustment clause, and argued that the law that forbade the application of indexing clauses was unconstitutional.

After having confirmed the validity and application of the prohibition of indexing clauses in the case, the Supreme Court decided that the mechanism of adjustment agreed among the parties had the unmistakable intention of indexing the obligations that were still pending payment, as it interpreted that its purpose was to stabilize the value of the obligations linking it with the value of a foreign currency.

While analysing if the prohibition of indexing clauses was constitutional, the Court held that any advantage, disadvantage or error in the prohibition of indexing clauses went beyond the scope of constitutional control, given that the appropriateness of the judgment chosen by the Congress is not subject to judicial revision, since deciding the value that the currency will have is one of the powers granted to the Congress by the Constitution. The Court also said that the value of the currency legally enforceable throughout the territory is grounded on the authority of the State that created it, and, therefore, the durability of that value, as long as it is not altered by the State itself, cannot be subject to private agreements between the parties. The Court also held that the validity and application of stabilisation clauses would have the effect of disregarding the anti-inflationary purpose set by federal laws which aim to prevent the rising of prices related to each sector of the economy, as it immediately reflects on the general index used as a reference to readjust the prices and salaries of each sector contributes to accelerate the generalized rises in prices and gives rise to a lack of confidence in the national currency.

In previous rulings, the Court had upheld that the prohibition of indexing clauses set forth by the Law of Convertibility was constitutional, while the parity between the Argentine peso and the dollar existed. The innovation on this ruling is that it confirms that the prohibition set forth by the Law of Economic Emergency is constitutional in respect to all debts to be paid in a scenario where exchange parity does not exist.