Under Mexican commercial regulations, parties can establish the terms and conditions under which they intend to be bound to one another – including applicable interest. This contractual freedom has traditionally been limited by the restrictions expressly foreseen in the applicable law.
Usury is regionally considered as a "form of exploitation of man by man" – as set out in Article 21(3) of the American Convention on Human Rights. Thus, the Mexican courts have issued several precedents to eradicate the existence of usury on interest bearing, allowing judges to discretionally reduce interest rates agreed by the parties.
All of these precedents suggest that ordinary interest is subject to usury prohibitions. Nevertheless, some of these precedents contradict each other as to whether the usury prohibition applies to default interest.
A First Chamber of the Supreme Court decision was published in the Mexican Judiciary Newspaper to clarify all of the inconsistences which have arisen from the conflicting judicial precedents.
The first of these conflicting precedents was delivered by the Third Collegiate Court of Civil Matters for the Sixteenth Circuit. This precedent cited the distinction between ordinary and default interest as the main argument to sustain that default interest is not subject to usury prohibitions. It established that ordinary interest is derived from the loan's natural course, while default interest is contingent – since its application is always predicated on a borrower's breach of its obligations – and will serve as liquidated damages to the lender. Thus it does not constitute the exploitation of man. In light of this, the court considered that default interest cannot be examined or reduced by a judge.
The second conflicting precedent was delivered by the Ninth Collegiate Court of Civil Matters for the First Circuit. This precedent considered that default interest rates can be abusive and, thus, the usury prohibitions apply thereto. Further, it established that, regardless of the uncertainty of default interest, the agreed rate could be considered abusive and disproportionate and allow the lender to obtain an excessive profit to the detriment of the borrowers' property. Thus, it constitutes an exploitation of man by another man. Based on the foregoing reasons, this court considered that default interest should also be subject to the usury prohibitions.
To resolve the above conflict, the First Chamber protected borrowers' human rights against any form of exploitation by stating that:
- although parties are free to establish the terms and conditions under which they intend to be bound to one another, this freedom is restricted;
- excessive interest profits obtained by a lender to the detriment of the borrower are a form of usury exploitation and should thus be forbidden;
- although default interest is contingent, its rate could be abusive. Thus, it is subject to the usury prohibitions;
- judges have an ex officio obligation to examine both ordinary and default interest rates; and
- judges are entitled to discretionally reduce usury interest rates in the affected party's favour.
The Supreme Court's precedent is a good example of how Mexico is advancing the protection of human rights in financial matters. The precedent is binding on all Mexican courts (except the Supreme Court).
Although this precedent will likely reduce abusive conduct, there is an inherent risk that it will damage financial contractual freedom by giving judges the authority to discretionally reduce interest.
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