MEXICO: An introduction to Dispute Resolution: Arbitration

Towards the end of the current administration, the Mexican government seems to have taken a firm position and a relevant change of policies through its public entities, regarding the defence of their contractual position in strategic contractual relationships with private parties, particularly in the energy industry. As of recently, certain Mexican state-owned companies appear to have taken a more active role in the management of disputes arising from their contractual relationships with private parties.

A shift in approach

Contrary to the prognosis and political critiques surrounding the current administration (which are commonly extended to the new one), regarding nationalisation and an extreme approach to the defence of Mexico’s sovereignty, the latest trends show a generalised mandate to defend Mexico’s contractual position in the commercial arbitration forum. Whereas Mexico’s state entities have concluded arbitration agreements for years, they have typically participated in arbitration proceedings as defendants. However,  Mexico’s recent approach to arbitration has visibly shifted, with an increasing number of arbitration claims filed by certain state-owned entities and a more sophisticated management thereto.

Mexican confidence

This recent shift denotes Mexico’s confidence in commercial arbitration as a safe and solid forum to settle disputes regarding complex strategic issues and enforce the state-owned entities’ rights. Whereas the government’s transition is underway and the new administration’s policies remain to be seen, should this friendly approach to arbitration continue, it could potentially have favourable effects in the finances of any such entities and of the country.

Ideological continuity

Moreover, as a result of Mexico’s election process, the seeming ideological continuity between the current administration and the president elect, as well as the configuration of Congress, an initiative for a series of legal reforms presented by President López Obrador in February 2024 could be enacted during the president elect’s tenure. The so-called “Plan C” entails initiatives to pass 18 constitutional and legal reforms that are currently pending approval from Congress. Due to the relevance of the issues and sectors addressed by the proposed reforms, their prospective approval is likely to impact arbitration in Mexico from several fronts.

Judicial constitutional reform

The judicial constitutional reform is one of the main and most controversial items proposed, since it entails a radical change in the appointment process of judges, going from an institutional selection process (combining the intervention of the executive and legislative branches and certain qualification procedures) to election by popular vote. In this context, the election of judges by popular vote has raised concerns about the legitimacy and quality of the administration of justice, as well as judicial independence. The judiciary has reacted against this potential reform and has threatened with implementing strikes to oppose it. However, the efficacy of such measures may be questionable considering that the judiciary is not perceived positively by most of the population because of the reported rates of impunity for violent crimes in Mexico (estimated in over 90%, with some states reaching levels of 100%), which hinder its legitimacy and serve to propel the reform proposed by the government. Regardless of any political views, if passed by Congress, the reform to the Mexican judiciary could potentially lead to an increase of commercial arbitration cases among private parties at all levels.

An increase in disputes

Consequently, the Mexican arbitration forum should get ready to deal with a potential increase in the number, type and complexity of arbitration disputes, as well as with the inherent challenges regarding prompt and expeditious justice in arbitration.

The plan C initiative

Additionally, as part of the Plan C initiative, a constitutional reform recognizing indigenous and Afro-Mexican communities as sectors subject to public law is envisioned. This includes elevating to constitutional level the right to prior, free, informed, culturally appropriate and good faith consultation in order to protect the rights, assets and values of such communities in any legislative or administrative measures that could have an impact on them. Aside from the obvious social implications, the proposed reform would likely influence the development of infrastructure projects and arbitration proceedings related thereto, not to mention any potential impacts on the interpretation of investment treaties to which Mexico is a party, in consideration of the local communities standing and rights. 

The Federal Electricity Commission (CFE)

In line with President López Obrador’s policies aimed at strengthening Mexico’s Federal Electricity Commission (CFE) as a public entity with a social function, the proposed reforms also contemplate a shift in CFE’s legal nature (from a state-owned electricity utility to a strategic public entity), with dominant participation in the electricity sector over private companies. Whereas the policies aimed at strengthening the CFE’s market position were prioritised by the Mexican government throughout the past six years, this initiative entails further conceptual changes for CFE and the entire industry.

Sector-specific changes

Other relevant items of the pending initiative include prohibiting the planting and human consumption of transgenic corn and the extraction of hydrocarbons through fracking may also impact the agricultural and oil and gas sector giving rise to additional claims from foreign investors.

In addition to these sector-specific changes, the initiative also includes a proposal to expand the scope of train service concessions and recover some of them for the government. Currently, these concessions primarily cover the transportation of goods. However, the reform aims to limit such concessions and allow the government to provide passenger transportation services, which could mark a significant shift in the country’s transportation infrastructure. The entering government has already unveiled an ambitious plan to revitalize and expand train routes, connecting various regions of the country for both freight and passenger services. This initiative reflects a broader strategy to enhance national connectivity and reduce dependency on road and air transport.

Challenges

However, as it is often the case with large-scale infrastructure projects, this expansion of train services will likely face several challenges. Financing will be a key hurdle, requiring substantial investment from both public and private sectors. Additionally, the implementation of these projects will require careful negotiation and consensus-building, particularly in obtaining social licenses from affected communities. These licenses are crucial for ensuring that local populations are supportive of the projects and that their rights and interests are respected. The proposed constitutional reforms are expected to strengthen the requirements for obtaining social licenses, potentially making the process more rigorous and ensuring that community concerns are adequately addressed. This emphasis on social licensing underscores the government’s commitment to sustainable development and the protection of community interests, but it could also lead to delays or increased costs as project developers navigate the enhanced regulatory environment.