Unsuccessful constitutional complaint lodged by the Republic of Argentina on the grounds that German courts had refrained from a referral to the Federal Constitutional Court in proceedings concerning the Argentine Debt Crisis

Press Release No. 46/2019 of 18 July 2019

Order of 3 July 2019
2 BvR 824/15, 2 BvR 825/15

In an order published today, the Third Chamber of the Second Senate of the Federal Constitutional Court did not admit for decision two constitutional complaints lodged by the Republic of Argentina. The complainant asserted that the Federal Court of Justice (Bundesgerichtshof) had failed to comply with its duty to make a referral to the Federal Constitutional Court pursuant to Art. 100(2) of the Basic Law (Grundgesetz – GG). The proceedings concerned the question whether a general rule of international law confers upon states the right to refuse debt service on bonds held by private creditors who – in contrast to the vast majority of creditors – had not accepted a conversion offer (debt swap) made by the issuing state in the context of a national debt crisis, seeking full payment of the debt instead. The constitutional complaints were lodged after German courts had found against Argentina, ordering the complainant to service bearer bonds it had issued.

As regards the reasons for not admitting the constitutional complaints for decision, the competent Chamber of the Court found that in refraining from making a referral to the Federal Constitutional Court pursuant to Art. 100(2) GG, the Federal Court of Justice did not violate the right to one’s lawful judge; the Federal Court of Justice did not err in finding that the purported general rule of international law invoked by the complainant does not exist.

Facts of the case:

In the 1990s, the Republic of Argentina had emitted bearer bonds with interest coupons in a variety of denominations. Under the terms of the issue, the complainant owed bondholders annual interest and repayment of the principal amount of the bonds on a specified maturity date. In response to economic difficulties experienced since 1999, the Argentine Senate and the Chamber of Deputies declared, by Act of 6 January 2002, a “state of emergency in social, economic, administrative, financial, and monetary policy matters” and delegated to the Government the powers necessary for the restructuring of the Republic’s sovereign debt. Based on the Emergency Act, a decree was issued to the effect that the complainant inter alia suspended debt service vis-à-vis private creditors, seeking to negotiate a debt restructuring. In 2005 and again in 2010, the complainant made conversion offers to the bondholders. A little over 92% of the original bondholders accepted the offers, participating in a debt-to-debt swap where they received bonds with new terms, resulting in a significant value cut, in exchange for their old bonds. More than 7% of creditors, including the two plaintiffs in the initial proceedings before the regular courts, did not participate in the debt swap and ultimately brought an action seeking full payment. In 2013, the Frankfurt am Main Local Court (Amtsgericht) found the complainant liable vis-à-vis the respective private creditor plaintiffs to pay the interest and damages claimed (2 BvR 824/15), respectively to pay the nominal amount together with interest (2 BvR 825/15), on the bearer bonds it had issued. In both proceedings before the Local Court, the total amounts claimed were slightly above EUR 3,000. The appeal on points of fact and law (Berufung) to the competent Regional Court (Landgericht) and the appeal on points of law (Revision) to the Federal Court of Justice against these judgments were unsuccessful, as was the subsequent complaint seeking remedy for a violation of the right to be heard (Anhörungsrüge) lodged by the complainant. With its constitutional complaints, the complainant asserted, in particular, a violation of the right to its lawful judge under Art. 101(1) second sentence GG, a right equivalent to fundamental rights, on the grounds that the Federal Court of Justice had refrained from a referral to the Federal Constitutional Court pursuant to Art. 100(2) GG.

Key considerations of the Chamber

There has been no violation of the complainant’s right to its lawful judge (Art. 101(1) second sentence GG), which is a right equivalent to fundamental rights.

1. A violation of the right to one’s lawful judge may arise in certain cases where a regular court refrains from making a referral to the Federal Constitutional Court pursuant to Art. 100(2) GG. According to established case-law of the Federal Constitutional Court, a referral pursuant to Art. 100(2) GG is already required where, in proceedings before the competent regular court, objective and serious doubts arise as to whether and to what extent a purported general rule of international law exists – regardless of whether these doubts are actually shared by the deciding court – and the unresolved question of international law is material to the court’s decision. Moreover, it must be ascertainable that refraining from making a referral affected the outcome of the challenged decision.

2. These conditions are not met in the present case.

a) The general rules of international law encompass universally applicable customary international law, together with the general principles of law rooted in the domestic legal orders. The existence of customary international law or of general principles must be determined in accordance with international law. Given that the general rules of international law are binding upon all states, this determination is subject to stringent requirements. A general rule of customary international law within the meaning of Art. 38(1)(b) of the Statute of the International Court of Justice (hereinafter: ICJ Statute) is a rule reflected in the consistent practice of numerous, albeit not necessarily all, states that is accepted as binding international law. General principles of law within the meaning Art. 38(1)(c) ICJ Statute are principles rooted in the domestic legal orders that lend themselves to analogous application at the level of international law. This refers to general principles that are recognised as fundamental precepts within the major legal families. Recourse to the general principles primarily serves to fill legal gaps, supplementing international treaty and customary law.

b) Based on these standards, the Federal Court of Justice was correct in finding that the purported general rule of international law invoked by the complainant does not exist. The Federal Court of Justice’s conclusion that – since the 2007 Senate decision by the Federal Constitutional Court – there have been no new developments in international law that could cast doubt on this finding is not objectionable under constitutional law.

aa) Based on the Order of the Second Senate of 8 May 2007 (Decisions of the Federal Constitutional Court, Entscheidungen des Bundesverfassungsgerichts – BVerfGE 118, 124 et seq.), the Federal Court of Justice did not err in finding that there are no serious doubts that the purported general rule of international law did not in fact exist at the time the decision was rendered.

The Federal Court of Justice correctly observed that, in the cited decision, the review undertaken by the Federal Constitutional Court as to whether the general rules on the state of necessity were also applicable to an economic crisis, and whether and under what conditions a state could invoke the necessity objection in the event of insolvency, also dealt with the question whether international law provides for a comprehensive set of rules governing state bankruptcy. In the 2007 decision, the Federal Constitutional Court had reached the conclusion that at the level of international law there are neither uniform nor codified rules on the bankruptcy of states. It held that, at best, rudimentary rules could be discerned from international law standards, which could not be qualified as customary international law nor as general principles given that a general and consistent state practice had yet to evolve.

The purported general principle invoked by the complainant, however, presupposes the existence of a framework on state bankruptcy at the level of international law. Specifically, the complainant invokes the principle of good faith in the context of (imminent) state insolvency. Even supposing that the specific requirements derived by the complainant from the principle of good faith – namely the equal treatment of creditors (par conditio creditorum) and the integrity of formal insolvency proceedings – amounted to a general principle, and even if it was true that these specific manifestations were recognised within the major legal families, the complainant’s position does not hold. For it would still be necessary to show that international law actually provided for a framework on state bankruptcy in the first place; in the absence of such a framework, the aforementioned requirements could in any case not be applied accordingly at the level of international law. Yet in its 2007 decision, the Second Senate of the Federal Constitutional Court specifically rejected the existence of an international law regime governing state bankruptcy. The specific requirements that, according to the complainant, derive from the principle of good faith with regard to insolvency law could only be applied accordingly at the level of international law if there was also an independent regulatory or supervisory authority competent to monitor compliance with these rules and capable of ensuring an equitable balancing of the interests of all affected parties.

The principles of insolvency law asserted by the complainant are rooted in domestic insolvency laws and as such are embedded in the respective domestic regime, which subjects insolvencies to detailed rules of procedure, including safeguards protecting minority creditors, and provides for oversight by a neutral authority. The existence of a procedural framework in line with the rule of law, which ensures that decisions adversely affecting a minority of creditors are subject to review, is an essential prerequisite for an application of the asserted good faith requirements at the level of international law. It follows that it is not possible to invoke, in isolation, principles derived from insolvency law as general principles in accordance with Art. 38(1)(c) ICJ Statute. In the challenged appellate decision on points of law, the Federal Court of Justice correctly stated that the complainant’s submission hinges on the assertion that a set of international rules on state insolvency is recognised by the community of states, even though such a framework undoubtedly does not exist at the level of international law.

bb) Moreover, the Federal Court of Justice held that following the Order of the Second Senate of 8 May 2007, it is not sufficiently ascertainable that there have been new developments in international law that would seriously call into question the aforementioned finding. This conclusion is not objectionable. The Federal Court of Justice was therefore not required to make a referral to the Federal Constitutional Court pursuant to Art. 100(2) GG