Earlier this year, the Mexican Congress approved aggressive reforms to completely overhaul the Mexican energy sector to enable foreign investment. Among many expected reforms are:
- Profit and production-sharing agreements will now be permitted
- Licensing contracts will now be permitted, allowing private companies to obtain complete operational control and transference of title to hydrocarbons at the wellhead
- Private companies for the first time will be able to book reserves based upon Mexican hydrocarbons residing in situ.
The injection of foreign investment and technical expertise unquestionably will result in a much needed increase in oil and gas activity in Mexico. Domestic companies with a presence in Mexico will be situated to reap the rewards of the reform. They also face risks that are very different from those encountered north of the border. For the uninitiated, below are five examples of “traps for the unwary” that I have experienced in my practice:
- Corporate authority. The process of contracting by a Mexican corporation is much more formal in Mexico than in the U.S. In more instances than under U.S. law, signatures are required for agreements to be enforceable. Those signatures, in turn, need to be obtained from someone authorized to contract under a valid power of attorney. Relying upon a person’s title or a verbal representation of authority as proof of authority usually is insufficient. With a few exceptions, only Mexican citizens may hold powers of attorney for Mexican companies.
- Unfamiliar and complicated employment and labor laws. To those used to “at will” employment concepts, Mexican labor laws can come as quite a shock. Firing a Mexican employee without cause usually subjects the employer to mandatory severance payments, plus various payments dependent upon length of service. In some instances, the terminated employee may even be able to force his reinstatement. Another fundamental difference is shown by the fact that Mexican companies generally are obligated to share 10% of yearly profits with its employees. A permanent employment relationship exists by default under Mexican law unless otherwise expressed in a written employment agreement.
- Less favorable customary contractual risk allocations. Contracts between U.S.-based energy companies typically contain even-handed indemnities and liability limitations that help define the parties’ respective risk. Such risk-shifting provisions are not the norm in Mexican contracts. Those who have been involved in negotiations with PEMEX frequently complain that they are required to accept exposure that is not commensurate with the potential gain. Many companies have declined to do business in Mexico as a result. While the Mexican government indicates that it hopes that the reform will cause those involved to contract in line with international industry standards, this obviously will not be an overnight process.
- Dispute resolution. Despite the cooperation set forth in NAFTA, the U.S. and Mexico have no treaty or other agreement providing for reciprocal recognition and enforcement of judgments. As such, unless your adversary in litigation has assets upon which to pay a judgment on your side of the border, a win at the U.S. courthouse is an exercise in futility. As with most international transactions, arbitration clauses are better options for resolving disputes between Mexican and U.S. companies, since both countries provide for reciprocal enforcement of arbitration awards.
- Corruption. Overt demands for improper payments from governmental officials and internal corporate misdeeds are commonplace. Any company deciding to do business in Mexico should understand the necessity of a robust compliance program, including FCPA education programs and audits.