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Breach of contract37

Federal civil law regulates the fulfilment of contractual obligations, as there is no special commercial regulation on this matter. Therefore, the breach of contractual obligations must be analysed pursuant to the Federal Civil Code.

i Breach of contractual obligations

Federal courts have established that contracts are governed by the 'pacta sunt servanda' principle, according to which the contracts legally celebrated must be faithfully fulfilled. The breach of contractual obligations creates civil liability, which consists of the obligation of the non-performing party to compensate its counterparty for the damage and lost profits caused by having breached the contractual obligation. Additionally, civil legislation establishes specific rules for cases in which contractual obligations are breached, based on the distinction between those obligations to 'do', 'not to do' or 'give' something.

In the case of obligations 'to do' something, civil law establishes that if the person responsible to perform fails to do so, his or her counterparty has the right to request the specific performance of the obligation, having the possibility of requesting that, at the expense of the non-performing party, another person executes such obligation when such substitution is possible. In addition, if such obligation is not performed in the agreed terms, the performing party can request the party at breach to 'undo' it. Finally, such obligations are enforceable at the expiration of the agreed term. In the absence of an specific term, performance must be made when required by the performing party.

Regarding obligations 'not to do' something, applicable legislation establishes that, if the person obliged to abstain from carrying out certain conduct fails to comply with such obligation, that mere contravention generates an obligation to compensate the damage and lost profits caused to its counterparty.

In the case of obligations 'to give' something, applicable legislation provides that, if the person who is obliged to 'give' or 'deliver' certain goods breaches such obligation, its counterparty has the right to claim the return of such goods or its value, in addition to the compensation for the caused damage and lost profits. These obligations are enforceable once the agreed term is met. If a deadline is not agreed, the performing party may only file a claim after a 30-day period from a payment request (either judicially or extrajudicially, through a notary public or before two witnesses).

Although Mexican legislation does not establish specific means of evidence to demonstrate compliance or breach of an obligation, judicial precedents from federal courts have established that the affected party must only demonstrate the existence of a valid contract, meaning that said contract complies with all the applicable legal requirements. However, the party at breach must prove compliance with his or her obligation, or the existence of a justified cause for his or her non-compliance, exempting him or her from liability.

ii Damages and lost profits

As explained above, the breach of contract generates the obligation of the breaching party to pay its counterparty the damages and lost profits actually caused in connection thereto.

Civil legislation defines 'damage' as the loss or impairment suffered in one's patrimony because of the obligation's lack of fulfilment and 'lost profits' as the deprivation of any legal future earnings that would have been obtained if the obligation was fulfilled.

iii Constitutive elements of contractual liability

Mexican doctrine considers that, in order to demonstrate the constitutive elements of contractual responsibility, it is necessary to prove the following:

  1. the existence of a contractual obligation;
  2. the breach of such obligation; and
  3. that the caused damage is the direct and immediate consequence of such breach.

These elements may be proved through any of the evidence means provided by law – private or public documents, confessions, testimonies, expert evidence, legal presumptions or presumptions of fact, etc.

Also, Mexican law grants the affected party the possibility to claim damages and lost profits, either in a 'determined' way – specifying the claimed amount as compensation, since filing the claim – or in an 'indeterminate' way – meaning that the compensation quantification will be subject to a special ancillary proceeding during the enforcement of judgment stage.

iv Exemptions for contractual breach

Civil legislation establishes certain rules according to which a party may be released from its contractual obligations without generating contractual responsibility. Such is the case of 'acts of God' ('fortuitous case' or force majeure).

Defences to enforcement

One of the most recurrent methods to avoid enforcement of contractual obligations is through defences related to missing essential or validity elements of a contract. For instance, the purpose of a contract cannot violate the law or public policy; otherwise, such contract would be unenforceable because of its illegal object. Additionally, contracts signed under duress would be unenforceable as well, as duress is considered a vice of consent.

It is possible to avoid enforcement of a contractual obligation under the 'frustration of purpose' theory. Mexican law defines the purpose of a contract as the main reason a party enters into it. As such, frustration of purpose occurs when an unforeseen event prevents said purpose from being achieved. Nonetheless, Mexican courts often require the parties' main purpose for entering a contract to be declared on the contract itself or for the party seeking this defence to provide irrefutable evidence of said purpose, which may be difficult to prove.

It is important to consider that although common law countries have adopted the Doctrine of Impracticability, Mexico has not yet fully adopted it. Historically, Mexican courts have determined that the country's Federal Civil Code only adopts the pacta sunt servanda principle, which, as courts have interpreted, means that contracts must be sustained, even when there is an occurrence that makes the performance of such contract extremely difficult or burdensome for one of the parties.

As a result of the 2011 amendment to Article 1 of the Federal Constitution, a new legal interpretation model was introduced into Mexico's legal system. It has changed from a strictly formal and rigorist legal system to a deontological one, in which the most important goal is the effective protection of human rights and individuals. With this change, human rights have become the centrepiece of the Mexican legal system. Historically speaking, Mexican courts have conceived human rights as a limitation of public power and thus concluded that they were only enforceable in subordinated relationships between individuals and public authorities. Under this assumption, human rights were restricted to public law and almost completely excluded from commercial law and contracts. Nonetheless, since 2009, federal civil courts began to adopt the German Drittwirkung theory. Broadly, this theory states that human rights have a horizontal aspect to them, meaning that they are not only applicable and enforceable in relationships between individuals and public authorities, but also in relationships between private individuals. The Mexican Supreme Court of Justice has also recognised this horizontal aspect in different judicial precedents.

The recognition by Mexican courts of the Drittwirkung theory added a completely new set of defences against the enforcement of contractual obligations. For example, the Supreme Court of Justice has interpreted that the interest rate established by the parties in a credit agreement is limited by Article 21.3 of the American Convention on Human Rights that prohibits usury. Based on these precedents, human rights violations defences are becoming more common in Mexico in respect of civil and commercial contractual controversies.

Regarding statutes of limitations, the Commerce Law provides for different periods according to the subject matter and type of claim, from one to 10 years. Under Article 1048 of the Commerce Code, when no particular statute of limitations period is established by law, the general period of 10 years will apply. Mercantile law does not include a statute of limitations period for claims related to missing essential or validity elements of a contract or contractual breaches or claims; instead, those statute of limitations periods are established in the Federal Civil Code. For instance, the period for claims regarding a contract entered into under duress is of six months from the date such duress has stopped.