The Complex Commercial Litigation Law Review: Mexico
The Mexican judiciary system is divided into a federal and local jurisdictions, both dealing with commercial disputes across the country. Such commercial matters, though of federal nature, are also heard by local trial courts providing a wider access to justice. However, if challenged, all disputes will be decided by a direct amparo proceeding, the ultimate federal instance.
Commercial transactions and the agreements comprising them are regulated by both commercial and common (civil) law. Commercial obligations, like civil ones, constitute a legal bond between individuals, but the purpose thereof will be an obligation of mercantile nature, derived from a commercial contract. Consequently, the main source of commercial obligations is precisely commercial contracts and the agreements contained therein.
Likewise, disputes arising from commercial contracts will be more quickly resolved according to the rules of commercial procedure, mainly found in the Mexican Commerce Code, rather than those of a civil nature.
Hence the importance of understanding the applicable general principles and common features regarding commercial contract formation and their rules of interpretation, as well as the legal actions, defences and remedies to enforce them.
Mexican Commercial Law does not specifically define the concept of 'commercial contract' or 'commercial obligation', nor elaborates on the requisites for their formation. However, such provisions can be found in the civil law.
Under the Mexican Federal Civil Code (Article 1794), the essential elements for the formation of any contract are the parties' consent and the purpose of the contract. Additionally, when required by law, certain solemn formalities should be followed. If any of these elements is missing, such contract would be deemed inexistent and thus unenforceable.
In addition (Article 1795, Mexican Federal Civil Code), a contract may be invalidated if any of the following is missing:
- capacity of the parties;
- absence of vices of consent;
- a valid subject matter; and
- the contract's form, if required by law.
Likewise, the lack of any of such elements will result in an unenforceable contract.
The first essential element for the existence or modification of a contract is the consent of its parties; in order for consent to be perfected, 'offer and acceptance' must be present. The concept of 'offer' implicates a unilateral proposal from one party, which, if accepted in its terms by its counterparty, will constitute a contract. If such acceptance involves a change of the offer's original terms, then a new offer will be in place that should be accepted in such new terms for the contract to be perfected. There are two ways to accept an offer, which may be either express (by a verbal or written statement) or implied (by its performance); however, the parties may also require express acceptance as a condition for the enforceability of the contract.
In addition, consent must be valid and truly intended, absent of any vices thereto. Following the civil law theory, a contract will be formed only through the valid consent of each of its parties, rendering such consent as ineffective if impaired by any of the legally recognised 'vices of consent', such as error, fraud, duress or unconscionable bargain.
As for the second essential element, the contract's subject matter should always be valid, meaning that the rights and obligations therein, as well as the goods or services subject thereto, must be legal, possible and merchantable.
As for the formalities of the contract itself, as a general rule, as long as there is consent and the contract's subject matter is legal, contracts may be agreed either verbally or in writing. However, certain types of contracts must be in writing. For example, when its value or consideration exceeds a certain amount (i.e., acquisition and transfer of real estate rights, donations or settlements). Other examples include promissory agreements, powers-of-attorney, security agreements (e.g., mortgages, pledges, securities and trust agreements), construction, lease or services agreements, association, partnership or shareholders agreements, or adhesion contracts.
In the same way, certain contracts, because of the amount of their consideration, should be prepared by and executed before a notary public and then formally filed before the applicable public registries. In such cases, the parties themselves, or their attorneys-in-fact with sufficient powers, must appear before the notary public for the process of notarisation of the contract, which is essential for its validity, even among the parties themselves.
As in most Latin American countries, in Mexico the notary public is of significant importance in the country's legal system. They are licensed attorneys and appointed officials who have the authority to officially attest to the truth of facts occurring in their presence, or to certify documents or authenticate signatures therein. Before the notarisation, it is the notary's duty to fully identify the parties and certify their authority and capacity, as well as the legal validity of the act itself. Therefore, there is a legal presumption that a contract executed before a notary public is valid; however, despite the notary's certification, the parties must always comply with the contract's legal requirements for it to be valid.
If the above-mentioned requisites are fulfilled, the parties may agree to almost any obligation they wish, as well as on their assignment or termination.
Regarding the obligations or covenants agreed in contracts, Mexican law allows the contracting parties to condition their enforcement or termination. Contracts may include conditions precedent or suspensive conditions, in the sense that an agreed obligation (or covenant) will only rise when and whether such condition occurs. Likewise, the occurrence of subsequent conditions or resolutory conditions will terminate an obligation (or covenant) by returning things to their former condition, as though it never existed.
Similar to contract formation, the rules for the interpretation of contracts are contemplated by the civil law: the Federal Civil Code. The rules are as follows, are implicit in all commercial obligations and should be observed when interpreting any contract:
- if the terms of a contract are clear and leave no doubt about the intention of the contracting parties, the literal meaning will prevail;
- if the words appear contrary to the evident intention of the parties, the latter shall prevail over them;
- notwithstanding the generality of the terms of a contract, it is not to be comprehended therein different things or cases from those on which the parties intended to contract;
- if a clause admits several meanings, an interpretation must be provided that is most suitable in order to give the contract's purpose;
- the contract's clauses must be interpreted as a whole in connection with the other clauses therein, giving an overall meaning to the group of clauses, some of which may be unclear;
- it should be understood that words that may have different meanings refer to the one meaning that is most in accordance with the contract's nature and purpose; and
- customs and usage can be considered to interpret the ambiguities therein.
When the rules above are insufficient to interpret the true meaning of a provision in a contract, if it refers to accidental or secondary circumstances of a contract, and when there is no legal consideration, it shall be interpreted in favour of the lower transmission of rights. If the contract does have consideration, the interpretation should be in favour of the greater reciprocity between the contracting parties.
Finally, if the main purpose of the contract is unclear, so that the intention of the contracting parties cannot be known, the contract will be null and void.
These rules should be interpreted hermeneutically and can be summarised into three main categories: the literality of the clauses; the intention of the contracting parties; and the effects that the contract may produce.
Based on the above, it can be concluded that, under Mexican law, contract interpretation is more literal than in common (case) law. Therefore, attention must be devoted primarily to the language contained in the agreements in order to evidence the true intention of the contracting parties. In such sense, the parties' intention, however relevant when interpreting a contract, is a secondary source of interpretation, because if the language contained therein is sufficiently clear and it leaves no doubt about the intention of the parties, there should be no other interpretation.
Notwithstanding the importance of the literal meaning of words, when in doubt, a contract should always be interpreted as a whole in order to be able to identify its true purpose. Based on the rules of interpretation set forth above, if the words of a contract seem contrary to the evident intention of the contracting parties, the latter will prevail over them. In addition, the nature of a contract will always depend not on the title or name given to the agreement, which may be inaccurate or mistaken, but on the facts and acts consented by the parties therein.
Another example of the importance of the 'intentional element' when interpreting contracts is the relevance of the parties' conduct, before, during its execution and while performing the obligations therein. With such conduct, courts can analyse and deduce their true intention. For instance, when the parties execute a series of acts in a regular or ordinary way, or when executed by a single party, there is an express or tacit acceptance by the other. Such behaviour indicates the true intention of the parties regarding the scope they wanted to give to the agreement. Likewise, it could be understood that a contract has been automatically renewed if both parties continue executing actions in connection with such contract.
Mexican commercial law has a complex system for the resolution of disputes regarding disagreements that derive from acts of commerce and responsibilities derived from commercial contracts. And so, the Commerce Code allows commercial disputes to be filed before Mexican courts – in both the federal or local courts – or to be decided through arbitration proceedings, to the extent the relevant parties agree to submit their controversy to arbitration.
It is important to point out that the Commerce Code establishes the general rules that regulate commercial proceedings. However, the involved parties may agree on the procedure to be followed for the resolution of a controversy, since they can agree on a conventional proceeding.
i Legal proceedings
Applicable law provides various types of proceedings to solve commercial disputes, among which are ordinary, executive and special. The 'ordinary commercial proceeding' is the most common one and, as a general rule, would be the one applicable to all disputes arising from commercial contracts.
Additionally, the Commerce Code regulates the 'commercial executive proceeding', which implies that the cause of action must be based on an 'executory instrument', which is a legal document that underlines an immediate enforcement action, which translates into the possibility that the judge, at the time of admitting the claim, can issue an 'exequendo order' allowing the seizure or attachment of property at the commencement of the procedure to guarantee the payment of the amounts claimed in the lawsuit.2 This type of proceeding is characterised by shorter terms than those of the ordinary one. In addition, the defendant's defences and exceptions are limited to the ones specified by law.3
ii Written and oral commercial proceedings
Commercial legislation in Mexico does not provide for a minimum amount in order to be able to initiate a commercial dispute, although the amount of the controversy does determine the type of proceeding to pursue and whether its judgment is subject to appeal or not. As a general rule, as from 26 January 2020, all ordinary commercial disputes will be processed through the commercial oral proceeding, regardless of the amount; that the Mexican legal system has significantly evolved into an oral justice system in this type of proceedings.
However, executive proceedings will generally be processed in a written (traditional) manner, except for claims not exceeding the amount of 4 million Mexican pesos, as of 26 January 2020, which will be orally processed.
As for the ordinary and executive oral proceedings, certain actions must be carried out in written form (i.e., the lawsuit and the statement of defence), though others must be carried out orally (i.e., the offering of evidence and the formulation of pleadings), their main characteristic being speed and efficiency.
iii Arbitral proceedings
Mexican commercial law provides that parties may enter into arbitration agreements under which they will submit to arbitration all or certain disputes that may arise between them from a certain legal, contractual or non-contractual relationship. In order to regulate the arbitration procedure, the Commerce Code establishes certain rules; however, the parties are free to determine said procedure.
Mercantile legislation provides certain judicial proceedings in order to enforce or support the effectiveness of arbitral awards (i.e., proceeding for the recognition and enforcement of arbitral awards), as well as the possibility for Mexican courts to declare the nullity of arbitration awards under certain specific assumptions.
iv Alternative dispute resolution proceedings
In addition to the arbitral and conventional proceedings described above, the Mexican Federal Constitution mandates that legislators should provide alternative dispute resolution mechanisms in order to allow 'mediation' as such. In Mexico City, according to the Alternative Justice Law, judges are obliged to inform the parties about the mediation alternative, which will only proceed if mutually agreed by them.
In addition, the Federal Consumer Protection Law provides legal mechanisms through which the Consumer Protection Agency (PROFECO) can initiate a conciliatory proceeding to solve controversies that arise between consumers and suppliers of goods or services, which, if not solved with an agreement between the parties, culminates with the issuance of an 'opinion' that constitutes an 'executory instrument' in favour of the consumer. When designated by the parties, PROFECO may act as an arbitrator and solve controversies of this nature. Also, the Federal Consumer Protection Law grants similar prerogatives to the National Protection and Defence for Users of Financial Services Commission, so it can initiate conciliatory or arbitration proceedings to solve disputes between financial institutions and their users.
v Extension of jurisdiction
In case of any controversy or need for interpretation, parties may waive the jurisdiction that the law grants them, having the right to submit themselves to any other jurisdiction of their choice, provided that the proper legal requirements4 are met. This means that the parties appoint as competent courts those of the domicile of any of the parties, the place of performance of the obligations or the location of the goods subject to the dispute.
Breach of contract claims
Federal civil law regulates the fulfilment of contractual obligations, as there is no special commercial regulation on this matter. Therefore, the breach of contractual obligations must be analysed pursuant to the Federal Civil Code.
i Breach of contractual obligations
Federal courts have established that contracts are governed by the 'pacta sunt servanda' principle, according to which the contracts legally celebrated must be faithfully fulfilled.5 The breach of contractual obligations creates civil liability, which consists of the obligation of the non-performing party to compensate its counterparty for the damage and lost profits caused by having breached the contractual obligation.6 Additionally, civil legislation establishes specific rules for cases in which contractual obligations are breached, based on the distinction between those obligations to 'do', 'not to do' or 'give' something.
In the case of obligations 'to do' something, civil law establishes that if the person responsible to perform fails to do so, his or her counterparty has the right to request the specific performance of the obligation, having the possibility of requesting that, at the expense of the non-performing party, another person executes such obligation when such substitution is possible. In addition, if such obligation is not performed in the agreed terms, the performing party can request the party at breach to 'undo' it. Finally, such obligations are enforceable at the expiration of the agreed term. In the absence of an specific term, performance must be made when required by the performing party.
Regarding obligations 'not to do' something, applicable legislation establishes that, if the person obliged to abstain from carrying out certain conduct fails to comply with such obligation, that mere contravention generates an obligation to compensate the damage and lost profits caused to its counterparty.
In the case of obligations 'to give' something, applicable legislation provides that, if the person who is obliged to 'give' or 'deliver' certain goods breaches such obligation, its counterparty has the right to claim the return of such goods or its value, in addition to the compensation for the caused damage and lost profits. These obligations are enforceable once the agreed term is met. If a deadline is not agreed, the performing party may only file a claim after a 30-day period from a payment request (either judicially or extrajudicially, through a notary public or before two witnesses).
Although Mexican legislation does not establish specific means of evidence to demonstrate compliance or breach of an obligation, judicial precedents from federal courts have established that the affected party must only demonstrate the existence of a valid contract, meaning that said contract complies with all the applicable legal requirements. However, the party at breach must prove compliance with his or her obligation, or the existence of a justified cause for his or her non-compliance, exempting him or her from liability.7
ii Damages and lost profits
As explained above, the breach of contract generates the obligation of the breaching party to pay its counterparty the damages and lost profits actually caused in connection thereto.
Civil legislation defines 'damage' as the loss or impairment suffered in one's patrimony because of the obligation's lack of fulfilment and 'lost profits' as the deprivation of any legal future earnings that would have been obtained if the obligation was fulfilled.
iii Constitutive elements of contractual liability
Mexican doctrine considers that, in order to demonstrate the constitutive elements of contractual responsibility, it is necessary to prove the following:
- the existence of a contractual obligation;
- the breach of such obligation; and
- that the caused damage is the direct and immediate consequence of such breach.8
These elements may be proved through any of the evidence means provided by law – private or public documents, confessions, testimonies, expert evidence, legal presumptions or presumptions of fact, etc.
Also, Mexican law grants the affected party the possibility to claim damages and lost profits, either in a 'determined' way – specifying the claimed amount as compensation, since filing the claim – or in an 'indeterminate' way – meaning that the compensation quantification will be subject to a special ancillary proceeding during the enforcement of judgment stage.
iv Exemptions for contractual breach
Civil legislation establishes certain rules according to which a party may be released from its contractual obligations without generating contractual responsibility. Such is the case of 'acts of God' ('fortuitous case' or force majeure).
Defences to enforcement
One of the most recurrent methods to avoid enforcement of contractual obligations is through defences related to missing essential or validity elements of a contract. For instance, the purpose of a contract cannot violate the law or public policy; otherwise, such contract would be unenforceable because of its illegal object. Additionally, contracts signed under duress would be unenforceable as well, as duress is considered a vice of consent.
It is possible to avoid enforcement of a contractual obligation under the 'frustration of purpose' theory. Mexican law defines the purpose of a contract as the main reason a party enters into it. As such, frustration of purpose occurs when an unforeseen event prevents said purpose from being achieved. Nonetheless, Mexican courts often require the parties' main purpose for entering a contract to be declared on the contract itself or for the party seeking this defence to provide irrefutable evidence of said purpose, which may be difficult to prove.
It is important to consider that although common law countries have adopted the Doctrine of Impracticability, Mexico has not yet fully adopted it. Historically, Mexican courts have determined that the country's Federal Civil Code only adopts the pacta sunt servanda principle, which, as courts have interpreted, means that contracts must be sustained, even when there is an occurrence that makes the performance of such contract extremely difficult or burdensome for one of the parties.9
As a result of the 2011 amendment to Article 1 of the Federal Constitution, a new legal interpretation model was introduced into Mexico's legal system. It has changed from a strictly formal and rigorist legal system to a deontological one, in which the most important goal is the effective protection of human rights and individuals.10 With this change, human rights have become the centrepiece of the Mexican legal system. Historically speaking, Mexican courts have conceived human rights as a limitation of public power and thus concluded that they were only enforceable in subordinated relationships between individuals and public authorities.11 Under this assumption, human rights were restricted to public law and almost completely excluded from commercial law and contracts. Nonetheless, since 2009, federal civil courts began to adopt the German Drittwirkung theory. Broadly, this theory states that human rights have a horizontal aspect to them, meaning that they are not only applicable and enforceable in relationships between individuals and public authorities, but also in relationships between private individuals.12 The Mexican Supreme Court of Justice has also recognised this horizontal aspect in different judicial precedents.13
The recognition by Mexican courts of the Drittwirkung theory added a completely new set of defences against the enforcement of contractual obligations. For example, the Supreme Court of Justice has interpreted that the interest rate established by the parties in a credit agreement is limited by Article 21.3 of the American Convention on Human Rights that prohibits usury.14 Based on these precedents, human rights violations defences are becoming more common in Mexico in respect of civil and commercial contractual controversies.
Regarding statutes of limitations, the Commerce Law provides for different periods according to the subject matter and type of claim, from one to 10 years. Under Article 1048 of the Commerce Code, when no particular statute of limitations period is established by law, the general period of 10 years will apply. Mercantile law does not include a statute of limitations period for claims related to missing essential or validity elements of a contract or contractual breaches or claims; instead, those statute of limitations periods are established in the Federal Civil Code. For instance, the period for claims regarding a contract entered into under duress is of six months from the date such duress has stopped.
Fraud, misrepresentation and other claims
In addition to the defences and claims mentioned above, there are other claims based on the tortious conduct surrounding commercial relationships before entering into a contract. For instance, pursuant to Article 1815 of the Federal Civil Code, a contract would be deemed invalid and thus unenforceable if one of the parties uses false pretences and deception to induce the other party to enter into a contract.
The fraudulent inducement must be directly related to the affected party's purpose to execute the contract, otherwise it would not result in an invalid contract. Simply put, to establish a claim of fraudulent inducement, the victim must prove that he or she would not have entered into the contract if he or she had known the truth. In addition to fraudulent inducement, the above referred provision also includes 'fraudulent concealment' as a cause to invalidate a contract. Mexican law defines fraudulent concealment as a deliberate hiding of a material fact or circumstance to deceive the other party into entering a contract. It also requires the concealing party to be aware of the other party's lack of belief in or unawareness of the hidden material fact in order for the contract to be invalidated.
In addition to the latter, the implied covenant of good faith and fair dealing is recognised in Article 1796 of the Federal Civil Code, providing that the parties entering into a contract must act in good faith and deal with each other honestly and fairly during its execution. Given the nature of the covenant of good faith and fair dealing, most of the claims that arise from said principle are claims to enforce a contract or to avoid that one of the parties might use a rigorist or technical interpretation thereto in order to refuse to perform his or her obligations. The covenant of good faith and fair dealing is also recognised as an interpretation rule that both parties and courts must take into account when executing or enforcing a contract.
Mexican legislation on contractual matters establishes an extensive regulation to ensure the rights of the parties in such a way that, in the event of a breach, they have at their disposal a series of legal means to ensure the enforcement of the contractual obligation.
In this regard, applicable doctrine and legislation give the parties certain rights and remedies to ensure the fulfilment of a contractual obligation or, at least, to seek compensation. These rights and remedies are regulated through the following legal fundamentals.15
i Pactum commissorium
This principle is implied in all reciprocal obligations, by which the party that fulfilled its obligation is entitled to claim from the other either the specific performance or the termination of the contract, and, in both cases, the payment of caused damage and lost profits.
Federal courts have considered that judicial intervention is necessary to enforce this principle.
ii Exceptio non adimpleti contractus
In the event of breach of contract, the affected party has the right to refuse to comply or perform his or her obligations therein.
Mexican doctrine considers that the exercise of this exception does not attack the validity of contractual obligation, since the only effect it generates is the deferral of its compliance. Once the breaching party has performed his or her obligation, this defence will no longer be valid and, consequently, the former breaching party may demand immediate performance.16
iii Right to retain
Mexican legislation allows the creditor who holds a debtor's asset to refuse its delivery until the debtor complies with his or her obligations relating to the delivery of the property.17
This has similar characteristics to the exceptio non adimpleti contractus, since it tends to protect the fulfilment of contractual obligations, granting the affected party the ability to refuse to comply with the obligations that correspond such party – in this case, the delivery of a good.
iv Theory of risks
It is possible to determine in contracts that establish reciprocal obligations 'to give' something, which of the parties will assume the risk of a loss in the event that one of the parties cannot comply with its obligations, in case of fortuitous event or force majeure.
v Indemnity by dispossession by due process of law
Legislation regulates the right of the acquirer of a property to be compensated in the event that a third party deprives him or her of such property by means of an enforceable judgment, claiming to have a better and prior right.
For compensation to proceed, it must be a transferring domain agreement where the right of the third party arose prior to the acquisition of the property; that the acquirer is totally or partially deprived of such property; and that the reason of the deprivation of the property is based on an 'enforceable judgment'.
vi Indemnity by hidden defects by due process of law
There are certain legal provisions that grant the acquirer of a property the right to claim compensation in the event that such property presents hidden defects of the acquired property.
To enforce these rights and remedies, the parties can initiate a proceeding before Mexican courts, arbitral courts or through any other alternative dispute resolution mechanism.
vii Conventional penalty
Mexican law entitles the parties to agree, in advance, to a 'conventional penalty' or 'penalty clause', which, essentially, is a benefit agreed by the parties that has the nature of a 'penalty' in case of breach of contract. However, if the penalty clause is enforced, the affected party cannot also claim any compensation for damages or lost profits caused by such breach. In addition, a penalty clause cannot exceed the value of the contract's main obligation.
viii Damages and lost profits
As mentioned in Section V, Mexican legislation provides for the possibility of claiming damages and lost profits; however, it does not provide for the concepts of 'direct' or 'indirect' damages, or 'punitive' or 'exemplary' damages.
As with most Latin American countries, the Mexican Federal Civil Code is based on the Napoleonic Civil Code, meaning that Mexico follows the civil law system as opposed to the common (case) law system. Therefore, contract formation and interpretation rules, breach of contract claims, defences to enforcement and remedies are mainly codified, similar to the rest of the civil law countries.
However, in addition, the Mexican legal system also has judicial precedents issued by the Mexican Supreme Court of Justice and Federal Circuit Courts, which, together with the codified laws, provide an updated interpretation thereof, strengthening the legal commercial framework and the applicable procedural rules, providing a greater certainty to investors and commercial transactions.
Nevertheless, regarding commercial litigation, Mexico is adopting a mostly orally driven system that will likely translate into faster and more efficient proceedings. As of 2018, the migration of commercial litigation into such oral system is still a work in progress.
As given throughout this work, Mexico offers a strong legal commercial framework that safeguards the rights of merchants and strengthens commercial relations in the country, making it suitable for both local and foreign investors.
1 Javier Curiel Obscura and Ernesto Palacios Juárez are partners at Martínez, Algaba, De Haro y Curiel, SC. The authors would like to thank Vicente Cuairán Chavarría, Eduardo Vinssac Navarro, Luis Felipe Álvarez Hinojosa, María José Vázquez Coronado and Fernando Jesús Gutiérrez Vázquez for their assistance in preparing this chapter.
2 Castrillón y Luna, Victor, Derecho Procesal Mercantil, Editorial Porrúa, México, 2001, p. 378.
4 Article 1093 of the Commercial Code.
5 Judicial precedent issued by the Eighth Collegiate Civil Court in Mexico City, No. I.8o.C. J/14, digital record number 186972.
6 Rico Álvarez, Fausto (among others), Teoría General de las Obligaciones, Editorial Porrúa, México, 2005, pp. 362–363.
7 Judicial precedent issued by the Fifth Collegiate Civil Court in Mexico City, No. I.5o.C.54 C (10a.), digital record number 2004314.
8 ibid, p. 365.
9 Judicial precedent issued by the Eighth Collegiate Civil Court in Mexico City, No. I.8o.C. J/14, digital record number 186972.
10 Silva Meza Juan N and Silva García Fernando, Derechos Fundamentales, Editorial Porrúa, México, 2009, p. 216.
11 Judicial precedent issued by the First Chamber of the Mexican Supreme Court of Justice, digital record No. 314379.
12 Judicial precedent issued by the Third Collegiate Civil Court in Mexico City, No. I.3o.C.739 C, digital record No. 166676.
13 Judicial precedent issued by the First Chamber of the Mexican Supreme Court of Justice, No. 1a./J. 15/2012 (9a.), digital record No. 159936.
14 Judicial precedent issued by the First Chamber of the Mexican Supreme Court of Justice, No. 1a./J. 132/2012 (10a.), digital record No. 2002817.
15 Rico Álvarez, Fausto (among others), Teoría General de las Obligaciones, Editorial Porrúa, México, 2005, pp. 411–413.
16 ibid, p. 426.
17 ibid, p. 427.