Contributed By RIDER Litigation Finance
Litigation funding is generally permissible in Mexico.
Given that credit agreements are classified under Mexican law as either civil or commercial, a Mexican individual or entity may validly choose to opt for foreign law and jurisdiction. The underlying right may be subject to a "debtor-held security" mechanism, whereby, upon any material breach, the substantive rights are automatically transferred to the lead investor who acts on behalf of all of the investors.
If Mexican law is applicable, to avoid being considered usurious, the agreement may also specify that the interest or returns payable to lenders are aligned with industry standards and are proportionate to the risk assumed.
Common structures include:
The validity and enforceability of each litigation funding agreement must be confirmed by the law firm receiving the funds to cover legal costs.
As of today, there are no binding body of rules that must be followed when providing third-party funding in Mexico.
There are no non-legal body of rules (including voluntary codes) that are widely followed by third parties providing funding in Mexico.
Commercial loan regulations are governed by Articles 358, 361 and 362 of the Commercial Code. If a loan is classified as civil in nature (meaning it is not between merchants or for commercial purposes) interest rates may be subject to statutory caps under state law. In these cases, a judge may nullify any interest considered excessive, usurious or exceeding the maximum rate permitted by law (eg, Article 2380, Section IV of the Civil Code of the State of Hidalgo). As a result, it is advisable to submit to foreign laws and to arbitration or foreign courts.
Litigation funding agreements typically prohibit both the waiver of substantive rights and the withdrawal from legal proceedings. While the enforceability of no-withdrawal clauses may depend on the subject matter, withdrawal of proceedings does not equate to the waiver of underlying material rights, which will then transfer to the investors. To protect the underlying right, a debtor-pledged security may be granted in favour of the investors, who are represented by a lead investor.
In these cases, the claim holder also commonly forfeits any right to proceeds, having breached a fundamental obligation and misled funders by committing not to withdraw without the prior consent of all lenders, the law firm and other stakeholders. It may be prudent to ensure that the power of attorney granted to the trial lawyers expressly excludes authority to withdraw. The litigation funding agreement should clearly state that disbursements are conditional on this commitment. Any breach may therefore constitute criminal fraud.
There is no obligation to disclose funding (either automatically or an application by an opponent) in Mexico.
There is no judicial precedent of a third-party funder being held liable to pay adverse costs nor any statutory provision in that regard.
The calculations of costs will vary depending on the subject matter of the dispute. In commercial matters, the litigant fees (licensed attorney) are the basis for calculation.
Adverse costs vary depending on the nature of the litigation. For example, in commercial disputes, Article 1084 of the Commercial Code states that:
“The award of costs shall be ordered when required by law or when, in the judge’s opinion, the party has acted with recklessness or bad faith.
The following shall always be ordered to pay costs:
I. Anyone who fails to present any evidence to support their claim or defense when based on disputed facts;
II. Anyone who submits false documents or instruments, or presents false or bribed witnesses;
III. Anyone who is found liable in a summary proceeding, or who initiates one and fails to obtain a favorable judgment. In this case, costs shall be awarded in the first instance, and in the second, the provisions of the following section shall apply;
IV. Anyone who is convicted by two fully consistent judgments in their operative part, regardless of the ruling on costs. In this case, the award shall include the costs of both instances; and
V. Anyone who brings improper actions or asserts baseless defenses or exceptions, or files frivolous motions or incidents. Such a party shall not only be ordered to pay costs related to those specific actions, defenses, exceptions, or motions, but also for any inoperative procedural exceptions.”
After the event insurance (or a similar product) is not widely used in Mexico to mitigate the risk of adverse costs. A bond is required when precautionary measures are requested that may cause harm or damage.
There are no alternative fee structure restrictions in Mexico.
There are no restrictions on third-party funders (assuming they are not operating as regulated law firms) sharing fees with lawyers.
There are no restrictions on, or additional requirements for, non-lawyer ownership of equity (or equivalent) in law firms.
While a tax is typically charged on services provided in Mexico for the benefit of a Mexican tax resident, no such tax is typically charged for services provided to a foreign client.
Specialist tax advice should be sought to explore the withholding tax implications of third-party funders based in offshore jurisdictions.
Av. Paseo de la Reforma No. 516
Col Lomas de Chapultepec
C.P. 11000
Mexico City
Mexico
+52 55 5540 3961
gpardo@riderlitigation.com www.riderlitigationfinance.com