The Complex Commercial Litigation Law Review: Mexico
The Mexican judiciary system is divided into federal and local jurisdictions, both dealing with commercial disputes across the country. Commercial matters, although of a federal nature, are also heard by local trial courts, providing a wider access to justice; however, if challenged, all disputes will be decided by direct amparo proceedings, the ultimate federal instance.
Commercial transactions and the agreements comprising them are regulated by both commercial and civil law. Commercial obligations, such as 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 sources of commercial obligations are commercial contracts and the agreements contained therein.
Disputes arising from commercial contracts will be more quickly resolved in accordance with the rules of commercial procedure, which are mainly found in the Commerce Code, rather than those of a civil nature.
It is therefore important to understand 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 does it elaborate on the requisites for their formation; however, such provisions can be found in the civil law.
Under the Federal Civil Code, the essential elements for the formation of any contract are the parties' consent and the purpose of the contract. When required by law, certain solemn formalities should also be followed. If any of those elements is missing, the contract will be deemed non-existent and thus unenforceable.
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.
The first essential element for the existence or modification of a contract is the consent of the parties; for consent to be perfected, 'offer and acceptance' must be present. The concept of offer implies a unilateral proposal from one party, which, if accepted in its terms by the counterparty, will constitute a contract. If the acceptance involves a change of the offer's original terms, a new offer will be in place that should be accepted in respect of those new terms for the contract to be perfected.
There are two ways to accept an offer: express (by a verbal or written statement) or implied (by its performance). The parties may also require express acceptance as a condition for the enforceability of the contract.
Consent must be valid and truly intended, absent of any vices thereto. Following civil law theory, a contract will be formed only through the valid consent of the parties, which means consent will be rendered ineffective if it is 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.
Regarding the formalities of the contract, 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, such as 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, associations, partnership or shareholder agreements, and adhesion contracts.
Certain contracts, because of the amount of their consideration, should be executed before a notary public and then formally filed before the applicable public registries.
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 the 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. Despite the notary's certification being obtained, 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 the condition occurs. The occurrence of subsequent conditions or resolutory conditions will terminate an obligation (or covenant) by returning things to their former condition, as though the contract never existed.
The rules for the interpretation of contracts are contemplated by civil law: the Federal Civil Code. The rules are implicit in all commercial obligations and should be observed when interpreting any contract. They are as follows:
- 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 the wording;
- 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 has several meanings, the provided interpretation must be the most suitable to fulfil 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;
- words that have different meanings will be understood to refer to the 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 (1) the rules above are insufficient to interpret the true meaning of a provision in a contract, (2) it refers to accidental or secondary circumstances of a contract and (3) there is no legal consideration, it shall be interpreted in favour of the lower transmission of rights.
If the contract has consideration, the interpretation should be in favour of the greater reciprocity between the contracting parties.
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.
The rules above 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 to evidence the true intention of the contracting parties.
Notwithstanding the importance of the literal meaning of the wording, when in doubt, a contract should always be interpreted as a whole to identify its true purpose. Based on the above rules of interpretation, if the words of a contract seem contrary to the evident intention of the contracting parties, the latter will prevail over them. Further, 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 is the relevance of the parties' conduct before, during its execution and while performing the obligations therein. With such conduct, the courts can analyse and deduce the parties' true intention. For instance, when the parties execute a series of acts in a regular 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.
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. 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 submit their controversy to arbitration.
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 conventional proceedings.
i Legal proceedings
Applicable law provides various types of proceedings to solve commercial disputes, among which are ordinary, executive and special proceedings. Ordinary commercial proceedings are the most common and, as a rule, are applicable to almost all disputes arising from commercial contracts.
The Commerce Code regulates commercial executive proceedings, where the cause of action must be based on an executory instrument (i.e., 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 These proceedings are characterised by shorter terms than those of ordinary proceedings. Additionally, 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 to be able to initiate a commercial dispute, although the amount of the controversy does determine whether its judgment is subject to appeal and the applicable type of executive proceedings. As of 26 January 2020, all ordinary commercial disputes are processed through commercial oral proceedings, regardless of the amount; therefore, the Mexican legal system has evolved into an oral justice system in ordinary proceedings.
Executive proceedings will generally be processed in a written (traditional) manner, except for claims under the amount of 4 million Mexican pesos, which will be orally processed.
As for ordinary and executive oral proceedings, certain actions must be carried out in writing (i.e., the lawsuit and the statement of defence), whereas 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 of all or certain disputes that may arise between them from a certain legal, contractual or non-contractual relationship. To regulate the arbitration procedure, the Commerce Code establishes certain rules; however, the parties are free to determine the procedure.
Mercantile legislation provides certain judicial proceedings to enforce or support the effectiveness of arbitral awards (i.e., proceedings 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 proceedings described above, the Constitution mandates that legislators should provide alternative dispute resolution mechanisms allowing for mediation as such. In Mexico City, according to the Alternative Justice Law, judges are obliged to inform the parties about the alternative option of mediation, which will only proceed if mutually agreed by the parties. The parties may execute out-of-court settlement agreements resulting from mediation proceedings, which, pursuant to the applicable local alternative justice laws, have the effectiveness of a final and conclusive judgment (res judicata).
The Federal Consumer Protection Law provides legal mechanisms through which the Consumer Protection Agency (PROFECO) can initiate conciliatory proceedings to solve controversies between consumers and suppliers of goods or services, which, if not solved by 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.
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 requirements are met.4 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 principle of pacta sunt servanda, according to which the contracts legally celebrated must be faithfully fulfilled.5 The breach of contractual obligations creates civil liability, which comprises 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 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, having the possibility of requesting that, at the expense of the non-performing party, another person executes the obligation when such substitution is possible. If the obligation is not performed under the agreed terms, the performing party can request the party at breach to 'undo' it. The obligations are enforceable at the expiration of the agreed term. In the absence of a specific term, performance must be made when required by the performing party.
Regarding obligations not to do something, the applicable legislation establishes that if the person obliged to abstain from carrying out certain conduct fails to comply with the obligation, that mere contravention will generate an obligation to compensate the damage and lost profits caused to the 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 the obligation, the counterparty has the right to claim the return of those goods or their value, in addition to the compensation for the damage caused and lost profits. The obligations are enforceable once the agreed term is met. If a deadline is not agreed, the performing party may only file a claim after 30 days of 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 obligations, judicial precedents have established that the affected party must only demonstrate the existence of a valid contract, meaning that the contract complies with all the applicable legal requirements; however, the party at breach must prove compliance with his or her obligations or the existence of a justified cause for his or her non-compliance that exempts him or her from liability.7
ii Damages and lost profits
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 had the obligation been fulfilled.
iii Constitutive elements of contractual liability
Mexican doctrine considers that, to demonstrate the constitutive elements of contractual responsibility, it is necessary to prove:
- the existence of a contractual obligation;
- the breach of the obligation; and
- that the caused damage is the direct and immediate consequence of the breach.8
These elements may be proved through any of the evidential means provided by law – private or public documents, confessions, testimonies, expert evidence, legal presumptions or presumptions of fact, etc.
Mexican law grants the affected party the possibility to claim damages and lost profits either in a determined way (i.e., claiming a specific amount as compensation) or in an indeterminate way (i.e., where the quantum of compensation will be subject to special ancillary proceedings 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 common 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, the contract is unenforceable because of its illegal object.
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; thus, frustration of purpose occurs when an unforeseen event prevents the purpose from being achieved.
Nonetheless, Mexican courts often require the parties' main purpose for entering a contract to be declared in the contract itself or the party seeking this defence to provide irrefutable evidence of the purpose, which may be difficult to prove.
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 the courts have interpreted, means that contracts must be sustained, even when there is an occurrence that makes the performance of the contract extremely difficult or burdensome for one of the parties.9
As a result of the 2011 amendment to Article 1 of the Constitution, a new legal interpretation model was introduced into Mexico's legal system. It 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
Consequently, human rights have become the centrepiece of the Mexican legal system. 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.11 Based on those precedents, defences of human rights violations are becoming more common in Mexico in civil and commercial contractual controversies.
Regarding statutes of limitations, the Commerce Law provides different periods depending on 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 six months from the date the duress 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 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 will not result in an invalid contract. In other words, to establish a claim of fraudulent inducement, the victim must prove that he or she would not have entered into the contract had he or she 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 the 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, which provides 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 this principle are claims to enforce a contract or to prevent one of the parties from using a rigorist or technical interpretation thereto to refuse to perform his or her obligations. The covenant of good faith and fair dealing is also recognised as an interpretative rule that both the parties and the courts must take into account when executing or enforcing a contract.
Mexican legislation on contractual matters establishes extensive regulation to safeguard 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.
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. Those rights and remedies are regulated through the following legal fundamentals.12
i Pactum commissorium
This principle is implied in all reciprocal obligations. It provides that 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 the damage caused and lost profits. The 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.13
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.14
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 to such party – in this case, the delivery of a good.
iv Theory of risks
In contracts that establish reciprocal obligations to give something, it is possible to determine which party will assume the risk of loss if one of them cannot comply with its obligations owing to fortuitous events 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 if a third party deprives him or her of the 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; the acquirer is totally or partially deprived of the property; and 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 if the property has hidden defects. To enforce those rights and remedies, the parties can initiate proceedings 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 a penalty clause, which, essentially, is a benefit agreed by the parties that has the nature of a penalty in case of breach of contract. If the penalty clause is enforced, the affected party cannot also claim any compensation for damage or lost profits caused by the breach. Additionally, 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, 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 other civil law countries.
However, the Mexican legal system also includes judicial precedents by the Supreme Court of Justice, regional plenaries (plenos regionales) 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 and providing a greater certainty to investors and commercial transactions.
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, Fernando Jesús Gutiérrez Vázquez and Luis Miguel Garza Cámara for their assistance in preparing and updating this chapter.
2 Victor Castrillón y Luna, Derecho Procesal Mercantil, Mexico, Editorial Porrúa, 2001, p. 378.
4 Article 1093 of the Commercial Code.
5 Judicial precedent by the Eighth Collegiate Civil Court in Mexico City, No. I.8o.C. J/14, digital record No. 186972.
6 Fausto Rico Álvarez (among others), Teoría General de las Obligaciones, Mexico, Editorial Porrúa, 2005, pp. 362–363.
7 Judicial precedent 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 by the Eighth Collegiate Civil Court in Mexico City, No. I.8o.C. J/14, digital record No. 186972.
10 Juan N Silva Meza and Fernando Silva García, Derechos Fundamentales, Mexico, Editorial Porrúa, 2009, p. 216.
11 Judicial precedent by the First Chamber of the Supreme Court of Justice, No. 1a./J. 132/2012 (10a.), digital record No. 2002817.
12 Fausto Rico Álvarez (among others), Teoría General de las Obligaciones, pp. 411–413.
13 ibid, p. 426.
14 ibid, p. 427.