Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Dispute Resolution volume discussing topics including Brexit’s impact on choice of law and jurisdiction, market competition and the popularity of ADR within key jurisdictions worldwide.
1 What are the most popular dispute resolution methods for clients in your jurisdiction? Is there a clear preference for a particular method in commercial disputes? What is the balance between litigation and arbitration? What are the advantages and disadvantages of the most popular dispute resolution methods?
In numbers, litigation is the most common dispute resolution method in Mexico. This includes commercial disputes. We believe this to be natural, considering arbitration is a method with which both clients and practitioners nationwide are less familiar. In other words, it is not that litigation is preferred over arbitration, but simply arbitration is not yet known, understood and embraced by all, although the country is heading that way.
The other reason for this is that many disputes do not warrant arbitration, either because of claim amount, the nature of the dispute, arbitrability issues, among others. For example, in Mexico, lawsuits in which the claim is based on judgments or arbitration awards, notary public documents, judicial confessions, negotiable instruments and other documents that ‘entail enforcement’, enjoy being more expeditious than other types of lawsuits, because the law grants a certain preferential protection to those who have a right by such circumstances. In these types of cases, arbitration is often unnecessary. However, this is only an example. There are many other scenarios in which arbitration may well be worth it. In general, the challenge in our jurisdiction is for people to regard cases that do not warrant arbitration as reasoned exceptions, rather than to regard cases that do warrant arbitration as rare exceptions to litigation.
Some of the disadvantages of litigation became more visible in this past year. The covid-19 pandemic exposed an obvious reality: litigation does not adapt to change as easily as arbitration. Resolving conflicts through litigation in Mexico became much slower in the wake of the pandemic, while arbitration continued to be the expeditious and flexible procedure for which we all know it. The lack of regulation regarding virtual hearings is an example of something that litigation suffered. And while some things have been corrected, in general terms, to date the resolution of conflicts through litigation has not yet fully recovered the rhythm it had before the pandemic.
Litigation aside, arbitration is Mexico’s preferred method of dispute resolution. Although it has not yet become a natural means of resolving disputes in the country, there is an increasing tendency to include it as an alternative when negotiating contracts and not only at an international level but also domestically. It continues to grow apace. The latest International Chamber of Commerce (ICC) statistics show promising results for Mexico. It is fourteenth in the global list of most frequent nationalities among parties and second only to Brazil among the Latin American and Caribbean countries. It is also twelfth in the global list of most frequent nationalities of arbitrators and it is tied with India as the eleventh most selected country as place of arbitration. All of this, concerns, of course, ICC cases. These statistics are no surprise, though, since Mexico has a respectable number of recognised experts, law firms, institutions, university programmes and moot competitions focused on international arbitration.
Mediation is now settled as a common alternative, especially in fields such as family law, non-sensitive criminal issues and, in general, civil matters. But there also seems to be a tendency to extend the use of mediation in commercial relationships. This is particularly true in Mexico City, where more experts are becoming certified mediators and are seeking to develop the mediation market in every field of law, including commercial law. Monterrey and Guadalajara are also cities where mediation has found positive development.
Dispute boards have sparked some conversation lately. Their popularity has increased, particularly in the construction and infrastructure sectors. The existing dispute board mechanisms provided by ICC and the Construction Arbitration Centre also favour this purpose. Users in the industry have been progressively getting more familiar with the pros and cons of this form of ADR. Dispute boards have also gained legal recognition, as they have been added in recent law reforms that are particularly applicable in the energy sector. For instance, the Petróleos Mexicanos (Pemex) law provides for the formation of dispute boards consisting of two engineers and one lawyer, and these have to be formed at the beginning of the construction process and must last until the end of it. Notwithstanding the above, it is important to mention that, although it is true that there is a trend of increasing interest on dispute boards, in general there is still reluctance to use them in our jurisdiction.
Regarding expertise, ICC Rules for Expertise are, of course, an example of a useful tool for this type of method, although it must be said that there is still considerable generalised ignorance surrounding this alternative, as, among other things, it is not expressly regulated under Mexican law. Like dispute boards, expertise is also used in the construction and infrastructure sectors, as most issues are technical (or factual) rather than legal.
In addition, with the ratification of the United States–Mexico–Canada Agreement (USMCA), the new treaty that replaced the North American Free Trade Agreement (NAFTA), important changes were introduced to the dispute resolution mechanisms, particularly regarding conflicts between Mexico and the United States. The system of investment protection was also eliminated with regard to Canada. Among the more relevant changes for the US–Mexico system that were included are a narrower scope of the concept of fair and equitable treatment, notably in excluding the notion of legitimate expectations on the part of the investor. Also, while the Salini test is somewhat incorporated to determine when an investment is considered to be present, there is a more restricted notion given to expropriation, which may reduce the scope of coverage in the new treaty. The practical consequences of the treaty, however, are still on early stages.
2 Are there any recent trends in the formulation of applicable law clauses and dispute resolution clauses in your jurisdiction? What is contributing to those trends? How is the legal profession in your jurisdiction keeping up with these trends and clients’ preferences? What effect has Brexit had on choice of law and jurisdiction clauses?
The covid-19 pandemic has brought new ways of doing things, including the way disputes are resolved and negotiations are held. Mexico is not the exception. Technology has inevitably gained a lot of ground, mainly due to the confinement that has become necessary at different times during this pandemic, but also due to the need to save costs (eg, travel costs).
In addition, perhaps as a natural consequence of the gains that mediation has had as an alternative, step-clauses including mediation and then arbitration are becoming increasingly used. As is commonly known, mediation is less expensive and complex than arbitration and, therefore, users have started to evaluate how to accommodate this two-step process. While there are professionals who deal with both mediation and arbitration, it is more common to find experts only in one of these two fields Mexico. This suggests a need to collaborate more with colleagues.
It is doubtful that Brexit has had an effect on choice of law and jurisdiction clauses. Indeed, English law will remain just as good a choice of governing law post-Brexit as it is now and the United Kingdom will keep applying the Rome I and Rome II Regulations (which deal, respectively, with the law applicable to contractual and non-contractual obligations) as these will be incorporated into domestic law. The regulations do not require reciprocity and Rome I only requires its member states to give effect to the governing law chosen by the contracting parties (irrespective of whether the parties are from outside the European Union).
As for jurisdiction, the Hague Convention on Choice of Court Agreements is of relevance, which operates to give effect to exclusive jurisdiction clauses and the enforcement of any resulting judgment. Following the United Kingdom–European Union transition period, the United Kingdom submitted an instrument of accession on 28 September 2020, thus confirming itself a party to the convention. The convention, which came into force on 1 October 2015, includes as parties (ratification and accession) the European Union, Denmark, Mexico, Singapore, Montenegro and the United Kingdom. Parties that signed but have not ratified include China, Israel, North Macedonia, Ukraine and the United States.
3 How competitive is the legal market in commercial contentious matters in your jurisdiction? Have there been recent changes affecting disputes lawyers in your jurisdiction? How is the trend towards ‘niche’ or specialist litigation firms reflected in your jurisdiction?
It is quite competitive in commercial contentious matters as there are a great number of expert firms and solo practitioners. However, the number of experts in ADR and, more specifically, in international arbitration, remains relatively small, as in many countries. Notwithstanding this, we believe covid-19 has had an impact on the number of dispute lawyers that have decided to place their sights on arbitration, given its advantages.
Also, as already mentioned, there is a tendency to develop mediation as a prior step to litigation or arbitration. This has become a source of concern for some litigators who do not sympathise with ADR measures, as they see these alternatives as a threat to their practice. Pitifully, a considerable number of practitioners do not support ADR.
As to niche or specialist litigation firms, they have always existed in our jurisdiction, but we do believe that more have emerged as of lately. For example, recent government issues surrounding the energy sector have meant more practitioners focusing on that field and, given that it is a key sector in arbitration, many of these practitioners have also sought to specialise in arbitration.
4 What have been the most significant recent court cases and litigation topics in your jurisdiction?
There is a topic that has sparked a lot of controversy lately. In April 2021, a decree was published in our Federal Official Gazette, through which the National Register of Mobile Telephone Users was created. The register was created to obligate citizens to deliver their biometric data in order to gain access to mobile communications. More precisely, in order to have access to a mobile phone line, Mexicans will have to hand over almost all of their personal data to the government and phone companies. In addition to a copy of their ID, they will now have to register their fingerprints, face photographs and other detailed data. The decree will supposedly come into effect in 2022 and will not only apply to new mobile lines, but also to existing ones.
It should be noted that this measure is similar to those that exist in countries such as China, Saudi Arabia, the United Arab Emirates and Venezuela. Many individuals have already started amparo proceedings, alleging several human rights violations. While it is too soon to predict an outcome, many hope that the high number of amparo proceedings will force the Mexican Supreme Court to resolve the constitutional issue. If this happens, its decision would be binding throughout the jurisdiction. The right to communication, the right to privacy and the presumption of innocence are some of the rights at issue that are being argued. The latter because the decree was allegedly created and published as a way to prevent and prosecute mobile communication-related crimes.
5 What are clients’ attitudes towards litigation in your national courts? How do clients perceive the cost, duration and the certainty of the legal process? How does this compare with attitudes to arbitral proceedings in your jurisdiction?
Clients are aware that both litigation and arbitral procedures may involve time and money. The difference in many cases lies on the circumstances of each case. Changing the paradigm to incorporate arbitration as the natural and more appropriate means for dispute resolution continues to be a challenge in Mexico. Cost seems to be one of the factors that has hindered both the growth and general acceptance of arbitration, especially in complex cases that require sophisticated counsel and expertise.
Arbitration has had a double effect in the midst of the pandemic. On the one hand, agreeing to arbitration has been a true difficulty for those most affected economically but, on the other, it has roused the general interest of the country due to its unique characteristics of expeditiousness, flexibility and openness to the use of new technologies, especially in comparison with litigation.
As has always been acknowledged, litigation does not represent a cost associated with courts, as opposed to arbitration, where the parties must absorb the fees and costs of the institution (where applicable) and the arbitrators. However, the downside of litigation is that, apart from certain types of conflicts, such as those already mentioned where the claim is based on a document that ‘entails enforcement’, procedures usually take longer, given that a considerable number of appeals and other remedies may be filed during the course of litigation before obtaining a final judgment with res judicata effects. This includes, for example, the well-known Mexican constitutional remedy known as the amparo proceedings. The time that must elapse before obtaining a final judgment has also only worsened because of the pandemic. In arbitration, remedies in general are limited to stages where the judiciary intervenes.
These factors influence clients. They cause them to seriously consider arbitration, especially when the case is complex. A cost–benefit analysis is crucial, especially considering long-term costs, in addition to other circumstances that are unique to each case.
6 Discuss any notable recent or upcoming reforms or initiatives affecting court proceedings in your jurisdiction.
In March 2021, a significant reform was published in our Federal Official Gazette, commonly referred to as the ‘judicial reform’. One of the main changes that came with the reform is the creation of a new system of ‘case law by precedents’, similar to those from other jurisdictions. Put simply, through this system, judgments of the Plenary of the Mexican Supreme Court with a majority of eight votes in favour, as well as judgments of any of the two Chambers of the Supreme Court with a majority of four votes in favour, will be directly binding for the rest of the judiciary (federal and local). In other words, with such judgments becoming binding case law, they may now be created directly without the need for reiteration of criteria (without the need for five consecutive judgments ruling the same thing over the same constitutional law issue). For this to be possible, a series of constitutional provisions were reformed, as well as the organic law of the judiciary. This will strengthen the role of the Mexican Supreme Court, as it will give our highest court the power to create binding case law in a simpler and more flexible way than before.
7 What have been the most significant recent trends in arbitral proceedings in your jurisdiction?
Mexico’s long-awaited ratification of the ICSID Convention in 2018 had an immediate impact. Last year, we informed about two claims having been initiated against Mexico under the ICSID Convention’s Arbitration Rules: the Legacy Vulcan and Highlands cases. To date, both are ongoing.
Since last year’s edition, four more cases have emerged under the ICSID Convention’s Arbitration Rules – two in 2020 and two in 2021. The first was started on 11 May 2020 by Espiritu Santo Holdings, LP, a Canadian enterprise. The second was initiated on 14 July 2020 by the Dutch company Coöperatieve Rabobank UA. The third was commenced on 31 March 2021 by yet another Canadian corporation, First Majestic Silver Corp. And the fourth case was brought on 12 May 2021 by three US companies: Finley Resources Inc, MWS Management Inc and Prize Permanent Holdings, LLC. The four cases are currently in their early stages.
In the Espiritu Santo Holdings case, the Canadian enterprise invoked the NAFTA. The economic sector of the dispute is information and communication, with the specific subject being a telecommunications concession. The dispute is related to claims regarding the company’s investments in a mobility concession for the taxi sector (taximeters) and a mobile application in Mexico City. The latest development of the case is the issuance of Procedural Order No. 1, concerning procedural matters, on 29 March 2021.
The Coöperatieve Rabobank case had as the invoked treaty the Mexico–Netherlands bilateral investment treaty (1998). The dispute relates to maritime transport services, with the claim arising as a response to the Mexican government’s seizure of Oceanografía, SA de CV, a maritime shipping enterprise, as well as other measures, which allegedly resulted in the company’s bankruptcy and thus, the loss of the claimant’s investment in Oceanografía, an investment consisting of loans that the company gave to Oceanografía to finance the purchase of maritime transport services vessels. The latest development in the case has been Alexis Mourre’s, the well-known outgoing president of the ICC Court of International Arbitration, acceptance of his appointment as arbitrator on 16 October 2020.
In the First Majestic Silver case, the Canadian corporation invoked both the NAFTA and the USMCA. The Mexican government is said to be seeking more than US$500 million due to allegedly owed taxes. Despite the efforts of the company, the Mexican government has allegedly refused to negotiate. The proceedings of the mining-related dispute are in their very early stages, the latest development being the appointment of Stanimir A Alexandrov as arbitrator on 8 April 2021.
Lastly, in the Finley Resources, MWS Management and Prize Permanent Holdings case, the companies are claiming breaches to a contract entered into with Petróleos Mexicanos (Pemex), a contract that arose from a tender about a decade ago, related to a project in Veracruz, Mexico. Such companies are said to be seeking around US$150 million, alleging violations to investment provisions of both the NAFTA and UMSCA. Prior to this arbitration, the conflict had gone through local courts without success. The only procedural development of the case so far has been the registration by the secretary-general of the request for arbitration on 12 May 2021.
Even though the latter dispute is not directly related to the recent approval of reforms to the Hydrocarbons Law on 4 May 2021, such reforms could ignite more arbitration proceedings, as they put at risk the legal certainty of foreign investments in the sector. Fortunately, two federal judges recently indefinitely suspended the application of various of the key reforms. One of the reasons for the suspension was that the reforms were considered to favour Pemex and made a monopoly possible. The indefinite suspension that was granted has general effects and provisionally protects all companies in the sector.
Similarly, on 19 March 2021, a federal judge indefinitely suspended the effects of several recent reforms to the Electricity Industry Law, reforms that, just like those of the Hydrocarbons Law, were promoted by the Mexican government of Andrés Manuel López Obrador. The reforms to the Electricity Industry Law favour the other state-related company, the Federal Electricity Commission (CFE).
The indefinite suspension of both series of reforms was based on the intention to protect the rights of free market competition. Both have sparked a lot of controversy, especially among investors in the sector, and could trigger multiple investment arbitrations if they ultimately withstand. Without a doubt, these issues are worth keeping a close eye on.
In sum, a total of 31 investment arbitration cases have been brought against Mexico. However, only the six aforementioned cases have been initiated under the ICSID Convention’s Arbitration Rules. Mexico’s ratification of said rules on 2018 adds to the dozens of bilateral investment treaties and treaties with investment provisions, including the USMCA and Comprehensive and Progressive Agreement for Trans-Pacific Partnership, that Mexico has in place. Considering all of this, more arbitration proceedings against Mexico under the ICSID Convention’s Arbitration Rules may be expected, especially considering the unsettling attitudes towards foreign investment that the current federal government has been showing as of lately, such as the already mentioned recent reforms and measures affecting the energy sector, which jeopardise foreign investment provisions related to non-discriminatory treatment, minimum standard of treatment and illegal indirect expropriations.
Lastly, in mid-May 2021, news came out revealing that Goldman Sachs initiated an international arbitration against the CFE for US$400 million for a non-payment related to a natural gas contract with CFE International. The alleged breach was triggered during a freeze that hit the state of Texas, the largest energy producer in the United States and one of the largest in the world, in February 2021. The extremely low temperatures severely affected the supply of electricity, affecting millions of people and causing prices to skyrocket. It will be interesting to see the future developments and outcome of this case as well.
8 What are the most significant recent developments in arbitration in your jurisdiction?
The arbitration law has not changed since the 2011 reform of the Code of Commerce, where relevant modifications were introduced, particularly regarding the intervention of the judiciary in the arbitration process. Case law has been limited as well. This may be because of the reduced number of cases that are challenged before courts. However, occasionally, relevant cases that contribute to case law emerge.
For example, in a recent case, a federal court determined that there cannot be an impossibility to enforce an arbitration award if the arbitration is already in process or resolved before a lawsuit is initiated in which the claim is based on the existence of alleged related and interdependent contracts. While it is true that in such cases there may be parties that did not agree to arbitration, the court explained, this cannot deprive the parties’ that did agree to arbitration the right to arbitrate, nor prevent the issuance of an arbitration award, and even less its enforcement, thus affecting the parties that opted for arbitration instead of litigation. Hence, the court ruled, the arbitration award cannot be considered to be of impossible enforcement due to the fact that, in a counterclaim of an ordinary commercial lawsuit, a party has claimed that a master contract, its subcontracts and the corresponding lump sum construction contract, entered into by the parties, are all linked and interdependent.
This is because, considering that it is only a simple claim of one of the parties, there is no pronouncement on the merits of such controversy nor firmness that makes it impossible to enforce the arbitration award, since arbitration agreements and their execution must always be favoured, as it must be recognised that arbitration, as an alternative dispute resolution mechanism, allows individuals or legal entities to freely choose for their disputes to be solved by one or more arbitrators and not the state’s courts. Further, this is a dispute resolution method that offers greater flexibility and less formality. Finally, the federal court explained, considering that arbitration has the same constitutional relevance as judicial litigation, because ultimately, what is intended is a resolution to the conflict with the effects of res judicata, such resolution must be respected, as a general rule, without de facto preventing its enforcement.
Another interesting development in arbitration happened in November 2020. The Ministry of Foreign Affairs of Mexico and the Permanent Court of Arbitration (PCA) formalised a Framework Cooperation Agreement with the aim of promoting the use of ADR in the country, including arbitration, conciliation and mediation. Although we cannot be certain, some say this agreement could open the door for a later agreement that would allow the PCA to open offices in Mexico.
9 How popular is ADR as an alternative to litigation and arbitration in your jurisdiction? What are the current ADR trends? Do particular commercial sectors prefer or avoid ADR? Why?
ADR is growing in popularity at a fast pace. Clear proof of this is the increasing number of programmes involving ADR and, more specifically, arbitration and mediation at law schools, as well as the increasing competition among students throughout the country. It seems that the new generations are pushing hard to normalise the resolution of disputes through arbitration and ADR. While most of the older generations regard litigation as the one and only method, younger practitioners have a mindset in favour of alternatives. The fruits of this paradigm shift have already begun to manifest themselves and will undoubtedly continue to do so in years to come.
The judiciary has also shown positive progress regarding both arbitration and ADR. The more time that passes, the more familiarity and less hostility there is. We have many good judges that are constantly and decidedly learning and understanding these methods, although there is still work to be done to make this more generalised, especially in smaller cities within the country. But it is certainly good to see that it is becoming normal to have judges and judiciary staff virtually attending courses, conferences and seeking to gain knowledge and a deeper understanding of the technicalities involving arbitration and ADR.
In a more international perspective, there is, of course, still work to be done in order for Mexico and its cities to be regarded as great seats for arbitration. But, there has been a lot of positive progress. We are heading in the right direction.
In relation to if certain sectors prefer or avoid ADR in our jurisdiction, it could be said that there are certain types of commercial disputes in which ADR is naturally avoided, such as those that involve credit titles and guarantees. This is expected. For example, let us imagine that a mortgage guarantee is agreed upon in a credit agreement. If the party breaches its obligation to pay the loan, the bank or financial institution will very rarely agree or be open to a negotiation or mediation, it will very likely foreclose.
10 What is the position in relation to litigation funding in your jurisdiction? Is funding available? Have there been any significant developments in this area in your jurisdiction?
Third-party funding in general is not as common in our jurisdiction as it is in others. However, it does not seem to be prohibited either. We do not believe there have been any notable developments in Mexico regarding this area as of late, but we do believe it is an interesting area of opportunity that does deserve more attention.
The Inside Track
What is the most interesting dispute you have worked on recently and why?
We recently participated in a case involving a dispute clause, which combined the language for arbitration and litigation, thus creating confusion as to the proper jurisdiction. Given that the statute of limitations was close to being reached, actions were pursued simultaneously before the two fronts, but ultimately arbitration prevailed. The complications generated by this clause are a reminder that arbitration clauses must be reviewed by experts and that language must be clear.
What do you consider to have been the most significant legal development or change in your jurisdiction of the past 10 years?
There have been several significant legal changes in Mexico over the past 10 years. Some have had a direct impact on arbitration while others have done so only indirectly but are still extremely relevant. Specially, in 2011, a new section was introduced in the Code of Commerce in connection with judicial intervention in arbitration, thus providing important elements in favour of arbitration efficiency. Also, in 2013, a new amparo law was published, which among other changes, introduced the admissibility of this special remedy against acts of private institutions when acting as authorities. Fortunately, the existing judicial precedents have excluded the admissibility against arbitration awards.
What key changes do you foresee in relation to dispute resolution in the near future arising out of technological changes?
Before covid-19, the use of technology for legal purposes in Mexico was very limited, including in litigation. Virtual hearings, for example, came in the wake of the pandemic and only as a temporary solution. Arbitration, on the other hand, has always shown less resistance towards the use of new technologies. What follows for the legal industry in general is a relentless search to find new ways to use technology to add value to clients. We refer to the use of new software and AI, for example. We already use some of these technologies, however, they are only the beginning.