The number of commercial and investment arbitration cases in Mexico has steadily increased in recent years, largely due to the attractiveness of investing in Mexico, and to the fact that arbitration is gradually becoming the go-to dispute resolution method in complex and sophisticated transactions and projects, whether between private parties or state entities. As the Mexican political and economic landscapes are still in the process of being defined by the new administration, opting for arbitrating disputes constitutes an additional layer of protection for investments. This chapter provides an overview of Mexico's arbitration environment.
i Mexican legislation
The constitutional right to resort to alternative dispute resolution mechanisms such as arbitration was added to Article 17 of the Mexican Constitution in 2008. As described in the amendment's explanatory memorandum,2 the legislators' main intention with such inclusion was, among other things, to promote the healthy resolution of conflicts, ease the national courts' burden and enhance their performance, and reduce the costs of the justice system and for the parties involved.
Arbitral procedures carried out with Mexico as the seat – whether national or international, and regardless of what rules a Mexican federal state may have that they are carried out in – are governed by the Mexican Commercial Code. Its provisions are chiefly based on the 1985 United Nations Commission on International Trade Law (UNCITRAL) Model Law and were included in the Commercial Code in 1993. The Commercial Code was subsequently modified in 2011 to include the amendments of the 2006 UNCITRAL Model Law.
The Mexican Foreign Investment Law and its Regulations are the applicable legal framework for national and international investment. While the Foreign Investment Law and its Regulations lay out the general requirements for any prospective investment in Mexico, they do not provide any specific investment protection provisions. Such provisions are included in the bilateral investment treaties (BITs) and investment chapters of free trade agreements to which Mexico is a party, as further described below. Generally speaking, such agreements contain, among other things, the following protections for investors:
- a minimum standard of treatment, including fair and equitable treatment and full protection and security;
- a prohibition on expropriation without compensation;
- national treatment;
- most-favoured nation treatment;
- freedom of transfer of funds relating to a covered investment; and
ii Judicial intervention in arbitral proceedings
Unlike other countries, Mexico has no specialised national tribunals whose function is to intervene in arbitral proceedings. Under the Commercial Code, when judicial intervention is required during an arbitral proceeding, the federal judge of first instance or the local judge where an arbitration is taking place shall be the competent judge regarding any action relating to the arbitration.
Mexico's judicial precedents generally make the country an arbitration-friendly jurisdiction, especially since the national courts have largely ruled in favour of the enforcement of national and international arbitral awards, with few exceptions.
National courts can only reject the recognition and enforcement of an arbitral award for the limited reasons established under Article 1462 of the Commercial Code, which echo the grounds found in Article V of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and Article 36 of the UNCITRAL Model Law.
Such limited reasons do not allow an award to be rejected on grounds relating to the merits of an award, as has been reinforced in judicial criteria issued by Mexican tribunals on various occasions.3 In other words, Mexican national courts are expressly barred from denying the recognition and enforcement of an arbitral award by alleging that they do not agree with the legal reasoning used by arbitrators.
iii Commonly used arbitration institutions in Mexico
Arbitration agreements that contemplate Mexico as the seat of an arbitration with an international component often include a clause referring to the International Chamber of Commerce (ICC), the International Centre for Dispute Resolution (ICDR) or the London Court of International Arbitration (LCIA). Notably, as per the recent reforms in the Mexican energy sector (2013), the exploration and production agreements entered into by Petróleos Mexicanos (PEMEX) have included arbitration clauses referring to UNCITRAL. Moreover, the Valle Ruiz and others v. Spain case initiated in 2018 was the first time Mexican investors have gone before the Permanent Court of Arbitration. Thus, there is a great variety of arbitration institutions available for Mexican nationals and foreigners when initiating an international arbitration.
Domestic disputes, on the other hand, are commonly brought before one of Mexico's two national arbitration institutions, namely the National Chamber of Commerce of Mexico City (CANACO) or the Mexican Arbitration Centre (CAM), both of which receive approximately 11 or 12 new cases each year.
In an effort to promote domestic and international use of arbitration, the CAM has recently entered into a cooperation agreement with the Ibero-American Arbitration Centre (CIAR), wherein they agree to facilitate the holding of CIAR hearings at CAM's facilities when Mexico City is chosen as the seat of arbitration.
Additionally, considering that the subject has taken on greater importance since its inclusion in the UNCITRAL Working Group II's agenda during its 51st session (June to July 2018),4 and that the discussions thereof remain ongoing,5 it is worth mentioning that the CANACO was one of the first institutions to provide parties to arbitration with a set of rules for fast-track arbitration.
iv Arbitration trends and statistics
According to the 2018 ICC dispute resolution statistics, Mexico hosted 18 ICC arbitrations during that year, meaning it occupies second place in terms of Latin American countries that use arbitration as an alternative dispute resolution method, and it is ranked in the top ten of arbitration seats. In particular, Mexico City is among the top 10 most frequently selected cities as the seat of arbitration, and Mexico ranked sixth (tying with Spain) with a total of 32 cases in which the laws of Mexico were chosen as the applicable law.6
In 2018, there were also 54 cases before the ICDR that had a Mexican participant, which is three more than in 2016, making Mexico the third top non-US state with cases before the ICDR during that year.7
Additionally, LCIA casework data showed a 3 per cent rise in the number of parties from Mexico in arbitration proceedings, a 2 per cent rise in the number of disputes governed by Mexican law and a 2 per cent rise in the number of disputes seated in Mexico in 2018.8
Moreover, Mexico is treaty-bound by a large number of bilateral and multilateral investment agreements. It is currently party to 31 BITs (two of which are not yet in force), and 17 treaties with investment provisions (two of which are not in force). The vast majority of these treaties were entered into by Mexico during the past two decades.
II THE YEAR IN REVIEW
i Commercial arbitration developments in local courts
Recent judicial criteria regarding commercial arbitration
In the past year, the Mexican collegiate circuit tribunals issued nine non-binding judicial criteria regarding arbitration in Mexico, of which the following are the most relevant developments.
In November 2019, a collegiate circuit tribunal issued a different interpretation regarding the nature of arbitral tribunals' activities that, according to such collegiate circuit tribunal's ruling, do not constitute a formal jurisdictional activity. According to such interpretation, an arbitral tribunal derives its powers from the parties' agreement, and not from a specific statute that would constitute the arbitral tribunal as a formal authority when issuing an award. In such regard, the collegiate circuit tribunal determined that an arbitral award is not subject to a specific constitutional review process through which parties may directly challenge such award by means of a constitutional claim (amparo) against an arbitral award.9
Another collegiate circuit tribunal limited, to some extent, the scope of an arbitration agreement in connection with non-signatory parties. Specifically, the collegiate circuit tribunal ruled that an arbitration procedure derives from the parties' consent to enter into arbitration and, consequently, such consent limits the scope of an arbitration to the parties that agreed to the arbitration. In such regard, parties that did not consent to the arbitration cannot be involved in the arbitration even if there are other agreements related to the agreement that has an arbitration clause.10
Regardless of the value of the foregoing criteria, they are not final under Mexican law and may be subject to change. For such criteria to become binding (jurisprudence), one of two events must take place: a total of five consecutive judgments must be issued by collegiate circuit tribunals or the Mexican Supreme Court of Justice upholding the same point of law; or, in the event of contradictory criteria, the Supreme Court has the power to issue a binding criterion to suppress the contradiction.
ii Developments affecting international arbitration
Treaties with investment provisions
Recently, the suitability of certain multilateral trade agreements has been the subject of much talk in the political arena. This has led to the renegotiation of important trade treaties, which has affected the trade and economies of the parties involved, for better or worse. Below is a brief explanation of the most relevant developments regarding the relevant treaties to which Mexico is a party that have recently undergone a renegotiation process.
Comprehensive and Progressive Agreement for the Trans-Pacific Partnership
As a result of the United States' decision to withdraw its signature to the Trans-Pacific Partnership (TPP) agreement in January 2017, thus rendering the threshold for enactment (12 ratifications) unobtainable, the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP) was drafted by the remaining 11 parties (Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, New Zealand, Peru, Singapore and Vietnam) with terms similar to those of the TPP.
Mexico ratified the CPTPP on 28 June 2018, and the agreement entered into force on 30 December 2018 once a total of six state parties – Australia, Canada, Japan, Mexico, New Zealand and Singapore – had ratified it.
The CPTPP's chapter on investment provides investment protections for investors of state parties (e.g., no expropriation, no discrimination, minimum standard of treatment, national treatment, most-favoured nation treatment) with certain limitations, including the following:
- the most-favoured nation treatment protection does not include dispute resolution procedures or mechanisms;
- regarding the minimum standard of treatment, the CPTPP provides that fair and equitable treatment, or full protection and security, do not involve treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights;
- host states' actions or omissions that may be inconsistent with investors' expectations do not constitute a breach of the minimum standard of treatment; and
- under certain circumstances, a host state's refusal to issue, maintain, grant, reduce or modify a subsidy will not constitute an expropriation or a breach of the minimum standard of treatment.
The CPTPP provides that host states have the powers to adopt, maintain or enforce measures that they consider appropriate to ensure that investment activity in their territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives. Moreover, the CPTPP also provides that a host state may encourage enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate into their internal policies those internationally recognised standards, guidelines and principles of corporate social responsibility that have been endorsed or are supported by that state.
Regarding the settlement of investor–state disputes, the CPTPP contemplates that claimants and respondents should initially seek to resolve a dispute through consultation and negotiation procedures, which may include the use of non-binding, third-party procedures such as good offices requests, conciliation or mediation, and provides that, under certain circumstances, a counterclaim may be submitted by a host country.
Regarding the procedural features of investment arbitration provided under the CPTPP, the treaty:
- advocates the full transparency of arbitration proceedings;
- allows the presentation of oral and written submissions regarding the interpretation of the CPTPP by non-disputing parties thereof;
- allows the submission of amicus curiae by a decision of a tribunal;
- provides that tribunals shall consider whether a claim was frivolous when allocating reasonable costs and attorneys' fees;
- ensures the possibility to issue interim awards regarding jurisdictional issues;
- provides the possibility that, at the request of any of the parties to the arbitration, the tribunal may inform the parties of its proposed decision before issuing such decision or award, and grants a 60-day period in which the parties may submit further written comments;
- contemplates the application of the Code of Conduct for Dispute Settlement Proceedings under Chapter 28 (dispute settlement) to any arbitrator that is appointed to an investment tribunal; and
- provides that no claim shall be submitted to arbitration if more than three years and six months have elapsed from the date on which the claimant first acquired, or should have first acquired, knowledge of the breach to be alleged.
Notwithstanding the possibility of initiating investment arbitration under the CPTPP, in Annex 9-L, Mexico expressly limits its consent to submit a dispute to investment arbitration when the submission to arbitration of that claim would be inconsistent with the following Mexican laws with respect to the relevant acts of authority:
- Articles 20 and 21 of the Hydrocarbons Law, which refer to the administrative termination of exploration and extraction contracts and the early recovery of exploration and extraction areas;
- Article 98, Paragraph 2, of the Law on Public Works and Related Services, which regulates the administrative termination of public contracts;
- Article 139, Paragraph 3, of the Public Private Partnerships Law, which refers to the revocation of concession titles and authorisations, as well as any administrative act carried out thereunder;
- Article 80 of the Law on Roads, Bridges and Federal Motor Carriers, which refers to the administrative resolutions issued based on such Law and its regulations;
- Article 3, Paragraph 2, of the Ports Law, which refers to the exclusive jurisdiction of federal courts regarding disputes arising out of the application of such Law and the management and operation of ports;
- Article 3, Paragraph 2, of the Airports Law, which refers to the exclusive jurisdiction of federal courts regarding disputes arising out of the application thereof;
- Article 4, Paragraph 2, of the Law Regulating Railway Services, which refers to the exclusive jurisdiction of federal courts regarding disputes arising out of the application thereof;
- Article 264, Paragraph 2, of the Commercial and Navigation Maritimes Law, which refers to the exclusive jurisdiction of federal courts and the maritime authorities regarding disputes arising out of the application thereof;
- Article 3, Paragraph 2 of the Civil Aviation Law, which provides that federal courts have exclusive jurisdiction over disputes arising out of the application thereof; and
- Article 28, Paragraph 20, Subparagraph VII of the Mexican Constitution and Article 312 of the Federal Telecommunications and Broadcasting Law, which refer to the exclusive jurisdiction of federal courts regarding acts and decisions issued by the Federal Economic Competition Commission and the Federal Institute of Telecommunications.
Additionally, Annex 9-L states that the application of the provisions established in the preceding items (a) through (i) will be considered a limitation to investment arbitration, as long as they will not be employed as a 'disguised' means to breach or repudiate an investment agreement. Finally, Annex 9-L also states that Mexico's limitations shall cease to apply in the event that the above-mentioned provisions are amended at any moment after the entry into force of the CPTPP.
The North American Free Trade Agreement and the agreement between the United States, Mexico and Canada
The parties to the North American Free Trade Agreement (NAFTA) have recently endeavoured to update it. After more than a year of negotiations, the agreement between the United States, Mexico and Canada (USMCA) was signed in Buenos Aires, Argentina, on 30 November 2018. Subsequently, after another round of negotiations, the parties signed a revised version of the USMCA on 10 December 2019, putting in place new language strengthening labour, environmental, pharmaceutical and enforcement provisions, mainly pushed by the democrats in the US Congress.
After Canada's ratification of the Agreement on 13 March 2020, the entry into force of the USMCA – and NAFTA's repeal – is currently scheduled to take place on 1 July 2020.
Regarding foreign investment, Chapter 14 of the USMCA partially replicates that provided under Chapter 11 of NAFTA. However, there are certain key differences. In particular, the USMCA provides the same investor protection as NAFTA (e.g., minimum standard of treatment, national treatment, most-favoured nation treatment, and transfers and protections in cases of direct or indirect expropriations), but in a far more limited scope. Such limitations include narrowing the definition of the minimum standard of treatment to entail the customary international law minimum standard of treatment of aliens and clarifying that an action would not be a breach of such standard simply because it was inconsistent with an investor's expectations. Notably, the USMCA now includes a clear definition of what is to be understood as treatment accorded in 'like circumstances' and clarifies that the term treatment under the national treatment and most-favoured nation treatment protections does not include the provisions of third-party treaties and does not create additional substantive rights.
Moreover, such investor protections can only be claimed by US and Mexican companies working in the oil and gas, energy, telecommunications, transportation and infrastructure sectors, known as the covered sectors, provided that they hold a government contract or carry out activities related to one of these sectors. Investors not included in the foregoing scenarios still have access to arbitration, but such access is limited to claims involving national treatment or most-favoured nation treatment, and violations involving a direct expropriation excluding violations to fair and equitable treatment and indirect expropriation. Any other treaty violations must be submitted before national courts. On the other hand, the USMCA provides a specific chapter establishing an investment arbitration mechanism for financial services that is also limited to the foregoing scope of protections.
The USMCA also contains a more stringent local remedies requirement than NAFTA, with investors forced to pursue domestic court proceedings to completion or for at least 30 months before pursuing an arbitral claim under an agreement.
The Mexico–Canada and US–Canada investor–state dispute systems, on the other hand, were completely eliminated from the treaty, meaning that Canadian investors in the United States will have to rely on national courts or state-to-state arbitration, and that Canadian investors in Mexico will have to rely on the protections granted by the CPTPP.
The relevance of these changes in relation to NAFTA must be taken into consideration both by foreign investors in Mexico as well as Mexican investors abroad in light of the impending entry into force of the USMCA, as they shall surely impact their ability to initiate arbitration when not within the covered sectors or when investing in Canada, and drastically change the way NAFTA arbitration proceedings have been carried out until this moment.
All in all, in spite of very strong political questioning of NAFTA during the past few years, the negotiation of the USMCA can be considered as a success. How the political and commercial relationships between the three state parties shall evolve once the new Agreement enters into force remains to be seen.
Update of the economic partnership, political coordination and cooperation agreement between Mexico and the European Union
As part of the global renegotiation of trade agreements recently undertaken by the European Union with various countries, in 2016 Mexico and the EU started the negotiation process for the drafting of a modernised edition of the current economic partnership, political coordination and cooperation agreement (EU–Mexico Global Agreement). An agreement in principle on the main trade provisions was reached on 21 April 2018, which has not yet been subject to the parties' signatures or ratification due to the fact that some of the chapters are still subject to negotiation.
Pursuant to Article 22 of the investment chapter of the EU–Mexico Global Agreement, on the date of its entry into force, the bilateral investment agreements between certain Member States of the EU with Mexico, including the rights and obligations derived therefrom, shall cease to have effect and shall be replaced and superseded by the new EU–Mexico Global Agreement. This provision is a turning point as Mexico has signed many BITs with EU Member States. While such agreements shall be replaced by the EU–Mexico Global Agreement, claims may be submitted under the replaced agreements if a two-prong test is met: the claim must have occurred from a breach of the replaced agreement on a date prior to the provisional application of the EU–Mexico Global Agreement or the date of its entry into force; and no more than three years must have elapsed from the date of the provisional application of the EU–Mexico Global Agreement or its entry into force until the date of submission of the claim.
Although the available text is subject to modification, as of today, it is foreseen that such agreement shall implement the EU's new approach to investment protection and investment dispute resolution by establishing an international investment court system (ICS) instead of providing for the traditional investor–state dispute settlement mechanism. In sum, under such system, claims regarding the investment protection provisions under the EU–Mexico Agreement shall be submitted to a permanent investment tribunal system made up of members appointed in advance by the parties. Decisions rendered by a tribunal of first instance can be subject to appeal, which shall be submitted to a newly created appeals court.
This provision goes strongly hand in hand with the EU's position regarding the investor–state dispute settlement system as it stands, its disapproval of intra-EU BITs and its non-recognition of awards rendered thereunder – as was reflected in the Court of Justice of the European Union's (CJEU) decision in the Slovak Republic v. Achmea case – as well as its efforts aimed at establishing a multilateral investment court with the purpose of having a multilateral institution to rule on investment disputes covered by all the bilateral agreements in place, instead of having one bilateral investment court per treaty it is a party to. Most recently, on 5 May 2020, 23 EU Member States signed an agreement for the termination of intra-EU BITs.
Notably, on 30 April 2019, at Belgium's request, the CJEU issued a decision stating that the ICS was indeed compatible with EU law.11 However, several arbitral tribunals have rejected requests on behalf of respondent states to revise decisions and awards in light of the Achmea judgment.12 To this date, and in addition to the BIT and ICS with Mexico, the EU has negotiated new BITs, including an ICS with Canada, Singapore and Vietnam.13 However, whether all such agreements shall be approved by the EU Member State parliaments remains to be seen, especially since there has been resistance from certain Member States about the incorporation of this new system (e.g., Austria, France and Germany).14 The matter has also been discussed within the framework of the UNCITRAL's Working Group III, entrusted with a mandate on investor–state dispute settlement reform.
In any event, the decision to include the ICS in the final version of the new EU–Mexico Global Agreement and the replacement of the agreements between certain Member States of the EU with Mexico once the EU–Mexico Global Agreement enters into force must be taken into consideration when planning investment strategies.
iii Investor–state disputes
Resulting from Mexico's ratification of the International Centre for Settlement of Investment Disputes (ICSID) Convention in July 2018, the Convention entered into force for Mexico on 26 August 2018. As a party thereto, Mexico now has access to the ICSID annulment mechanism, the international disputes initiated against it shall be carried out under the Convention and Mexico will now be able to participate in the discussions held at the ICSID as a Member State thereof. Previously, investors had access to the Convention's Additional Facility Rules.
To date, and according to publicly available information, Mexico has been involved in 35 investment disputes, of which nine were decided in favour of the investor and eight in favour of the state, three were discontinued, one was settled and 15 are currently pending.
Six of the pending cases are being carried out under the UNCITRAL Arbitral Rules and four under the ICSID Convention Additional Facility Rules. Notably, the Legacy Vulcan, LLC v. United Mexican States case15 is the first and only pending case that is currently being carried out against Mexico under the recently ratified ICSID Convention. The dispute was initiated under NAFTA's investment chapter and concerns a series of actions carried out by the government affecting the claimant's operations of limestone mining in Mexico, including, among other things, the unilateral modification of the claimant's port concession, the imposition of discriminatory taxes, an increase in the claimant's concession fees and modification of the land use.
There is no information available regarding the arbitral rules applicable to the remaining four cases.
III OUTLOOK AND CONCLUSIONS
Recent trends show that not only is Mexico increasingly considered as a leading country in the region for arbitration, but that the number of arbitration proceedings in Mexico is most likely to continue its steady growth in the years to come.
With its openness to accommodating counterparts' requests in trade agreement negotiations while advocating for healthy trade and commerce relations, as well as its endorsing of a variety of alternative dispute resolution mechanisms, Mexico has reinforced is position as an arbitration-friendly jurisdiction and as an appealing country for foreign investors.
In the near future, these will be very important traits and advantages considering the atmosphere of uncertainty that has emerged due to the current political atmosphere in Mexico and the relatively adverse effects it has had on Mexico's energy, construction, automotive and production and manufacturing sectors.
1 Bernardo Sepúlveda Amor is of counsel at Creel, García-Cuéllar, Aiza y Enríquez, SC.
2 Explanatory Memorandum of the Constitutional Reform dated 18 June 2018.
3 Non-binding judicial criterion: 'Arbitral Award. Its homologation by ordinary judicial authority and its analysis, in amparo, does not allow the study of its meaning as to its substance', Ninth Period, Collegiate Circuit Tribunal, published in August 2002 in the Weekly Federal Judicial Gazette, Volume XVI, page 1,317; non-binding judicial criterion: 'Arbitral Award. When legally or materially it is not possible to enforce it, the incidental remedy to demand substitute performance proceeds', Ninth Period, Collegiate Circuit Tribunal, published in September 2008 in the Weekly Federal Judicial Gazette, Volume XXVIII, page 1,309; non-binding judicial criterion: 'Arbitral Award. Denial of its execution. analysis of the updating of the hypothesis indicated in paragraph c) of section I of article 1462 of the Commercial Code', Tenth Period, Collegiate Circuit Tribunal, published in December 2012 in the Weekly Federal Judicial Gazette, Book XV, Take 2, page 1,435.
4 Report of the United Nations Commission on International Trade Law 51st session (A/73/17) (25 June–13 July 2018) General Assembly Official Records 73rd Session Supplement No. 17.
5 Report of the United Nations Commission on International Trade Law 51st session (A/74/17) (8–19 July 2019) General Assembly Official Records 74th Session Supplement No. 17.
6 International Chamber of Commerce Dispute Resolution Bulletin, 2019 Issue 1.
7 2018 ICDR Case Data Infographic.
8 London Court of International Arbitration, 2018 Annual Casework Report.
9 Non-binding judicial criterion No. 2020940: 'Responsible Authority for purposes of amparo review. Private arbitrators lack such nature', 10th Period, Collegiate Circuit Tribunal, published on 8 November 2019 in the Weekly Federal Judicial Gazette.
10 Non-binding judicial criterion No. 2021201: 'Arbitration agreement, it only includes the parties that agreed to it', 10th Period, Collegiate Circuit Tribunal, published on 6 December 2019 in the Weekly Federal Judicial Gazette.
11 Opinion 1/17 of the Court of Justice of the European Union, 30 April 2019.
12 e.g., Dan Cake SA v. Hungary, ICSID case No. ARB/12/9; Edenred SA v. Hungary, ICSID case No. ARB/13/21.
13 AG Bot in Opinion 1/2017. 'The autonomy of the EU Legal Order v. the reasons why the CETA ICS might be needed', S Gáspár-Szilágyi.
14 'The European Union in International Investment Governance: a Hybrid Approach to Dispute Settlement', B Pérez de las Heras, Romanian Journal of European Affairs, Volume 18, No. 2, December 2018.
15 ICSID case No. ARB/19/1.