Nowadays, it is very common to find on any contracts (leasing, loans, credit, insurance, purchase, among others) a clause stating that any of the contractors will incur in a breach a contract for the only reason of requesting the designation of a conciliator, the appointment of a receiver or a trustee, or even to file for bankruptcy seeking the reorganization or restructuring of the debts of one of the parties.
Under Mexican and contractual law it is the general rule that everybody has full and complete freedom to include in their agreements any term or condition they deem it necessary or appropriate for their personal interest. However, there is a limitation of that freedom when a third party’s right is affected or when the will of the contractors is against public policy.
- Freedom to contract vs public interest
Article 1839 of the Federal Civil Code (the “Civil Code”), allow to the contractors to include any term or condition in their agreements they deem appropriate to their individual interest.
Article 1839.-The contractors can include any term or condition they deem appropriate; but those that refer to essential requirements of the contract, or are a consequence of their ordinary nature, will be considered even if they are not expressed, unless the second are waived in the cases and terms allowed by the law.
Nevertheless, this contractual freedom finds its own limits in articles 6th, 1830 and 1831 of the Civil Code:
Article 6th. - The will of individuals can not exempt the observance of the law or modify it. Only private rights that do not directly affect public interest can be waived, when the waiver does not harm third party rights.
Article 1830.- Is illegal the conduct that it is contrary to the laws of public interest or good manners.
Article 1831.- The purpose or apparent reason of the will of contracting parties, must not be contrary to the laws of public interest or good manners.
In this direction, article 1 of the Bankruptcy Law (Ley de Concursos Mercantiles) foreseen the following:
Article 1.- The present Law is of public interest and its purpose is to regulate bankruptcy.
It is in the public interest to conserve the companies and to avoid that the generalized breach of the payment obligations jeopardizes their viability and of the others with which they maintain a business relationship (…)
In other words, when it comes to access to bankruptcy, the Bankruptcy Law on its first article states that it is in the public interest to conserve the companies and to avoid that the generalized breach of obligations jeopardizes their viability.
From this premise it is noted that the well-being of the companies concern to public interest, thus prevails over the individuals rights.
The Supreme Court of Justice of the Nation (Suprema Corte de Justicia de la Nación) has ruled that the public interest are all the rules on which the common welfare rests, and before which the rights of the individuals give way, because the interest of a society prevails over the interest of a secluded and particular citizen, so the public interest works as a limit of the will. In other words, public interest exists when the interests in question are so important that, despite the no harm and even the consent of the interested party, the prohibited act may cause harm to the community.
Therefore, the role of the Judge is to analyze in a particular case the existence of this public interest bearing in mind the essential conditions for the harmonious development of a community.
In the commercial acts, these limitations emerge, fundamentally, when it comes to acts or activities of national interest, public services or acts that affect or may affect certain sectors of the population such as consumers or workers, as well as the national economy.
In Mexico, it has become a common practice to include in contracts clauses that stablishes that any of the parties will breach a contract for the only reason of filing for bankruptcy, therefore the natural consequences may be penalties and the early termination of the contract, harming even more the economic situation of a party that is under a complicated economic situation.
In order to avoid the violation of the public interest, article 87 of the Bankruptcy Law foreseen that any contractual stipulation that agrees modifications that aggravate the terms of the contracts for the company will be considered as not expressed.
Said all the above, the clause that stablishes that any of the parties will breach a contract for the only reason of requesting the designation of a conciliator, or the appointment of a receiver, trustee, or because they file for bankruptcy seeking the reorganization or restructuring of the debts of the party passing through an economic or financial crisis, is illegal and it must be considered as not expressed because the breach of contract always leads to trigger other clauses to the detriment of the company, such as a conventional penalty or a higher interest rate.
Although the contract that contains this kind of clauses is submitted to a foreign jurisdiction, Mexican Judge is empowered to hear the case and to issue a final judgment, since the conservation of Mexican companies is in the public interest (Article 1st of the Bankruptcy Law) and as such it must prevail over the interests of individuals.