In Mexico, litigation, before the ordinary courts, is still the preferred tool for controversy resolution.
In 1971, Mexico acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (New York) making it easier for the governed to access both national and international arbitration. Since the Commercial Code adopted the UNCITRAL Model Law, Mexico has become an important centre of arbitration in Latin America because of the respect for arbitration agreements and the proper enforcement of arbitral rules.
The issues that currently affect the choice of arbitration as the preferred method for the resolution of disputes are primarily the costs and time of resolution of an arbitral process, which sometimes tend to be dissuasive for the parties in conflict, as well as the fact that enforcement of the arbitral award must necessarily be carried out by the local courts in Mexico.
This is relevant because one of the primary factors in choosing arbitration as a method for resolving disputes is precisely to avoid resorting to the courts of local jurisdiction.
It is probable that in view of the new public policies that Mexico’s Federal Government is implementing, a greater number of international arbitrations against Mexico will take place in the coming months and years.
In addition, it should be noted that Mexico is part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Free Trade Agreement between Mexico and the European Union (FTA EU-MX) and the United States-Mexico-Canada Agreement (pending ratification by the USA and Canada), which encourage the use of arbitration as a method to resolve disputes, including those with foreign investors.
The following industries are experiencing more international arbitration activities: aviation, mining, foreign investment (investor-state arbitration), environmental, energetic, contracting and public works, expropriations, infrastructure and telecommunications.
The following arbitral institutions are mostly used for international arbitration in Mexico: the Arbitration Commission of the CANACO, the Arbitration Commission of the International Chamber of Commerce (ICC), the Arbitration Center in Mexico (CAM), the Construction Industry Arbitration Center (CAIC), the London Court of International Arbitration (LCIA), the International Centre for Dispute Resolution (ICDR) and the Court of Arbitration for Sport and International Centre for Settlement of Investment Disputes (CIADI). This is due to the fact that these institutions have an important presence in this country.
The Mexican arbitration rules, which are included in the Commercial Code, are based on the UNCITRAL Model Law, and do not diverge in any significant way from such law.
There have been no significant changes to the national arbitration law in the past year.
The arbitration agreement must be incorporated in a contract or a separate document. The arbitration clause must be in writing and shall include, at least, the following:
The subject matters that cannot be submitted to arbitration by legal disposition, are the following: those that correspond to land and water located in national territory, the resources of the exclusive maritime economic zone, acts of authority or related to the internal regime of the State and federal or states’ dependencies, the internal regime of Mexican embassies or consulates abroad, the right to receive food, divorces, marriage annulment actions, conflicts concerning the civil status and capacity of persons, successions, tax, customs and administrative disputes, bankruptcy process, company liquidation, labour matters, social security, nuclear damage, non-contractual damages, maritime and air matters, industrial property, telecommunications, government contracts, and corruption.
Only those matters where legislation clearly sets forth that the conflicts must be known and resolved by the Mexican Courts, will not be 'arbitrable'.
In general, Mexican courts can intervene in arbitral proceedings under the following circumstances:
Normally the Mexican Courts are receptive to the enforcement of arbitral awards; the Commercial Code establishes the rules for said enforcement.
The Commercial Code sets forth that the decision of an arbitral tribunal declaring a contract null and void does not imply the annulment or invalidity of the arbitration clause.
Under certain circumstances the 'principle of separability of the arbitration agreement' is applicable, especially when faced with situations that UNCITRAL has already detected. For example, when a transaction is documented and executed in various related contracts which provide arbitration clauses for the resolution of disputes, but one of these agreements is not signed and it is the one that contemplates the obligation whose breach motivates the claim to be submitted to arbitration, then the principle of separability is applicable.
In Mexico, the arbitration procedure is governed primarily by the parties’ autonomy. Therefore, it is the parties themselves who decide how they wish the controversy to be resolved.
In arbitrations conducted before arbitration institutions, usually there are rules that provide the mechanisms by which an arbitrator may be selected – for example, when the parties failed to agree on these terms.
However, in ad hoc arbitrations, in which there are no institutions involved, the arbitrators and the parties themselves are the ones who will have to administer the proceeding, including the manner in which they will resolve failures in the arbitration agreement.
Therefore, the default procedure to appoint an arbitrator, if the method for the arbitrator selection fails, is subject to the following rules:
The Commercial Code provides that, at the request of any of the parties, the judge may appoint either one of the arbitrators who should have been appointed by one of them, or even appoint the third arbitrator, in the event that those appointed by the parties are unable to agree.
When appointing an arbitrator, the judge shall take into consideration the conditions required for an arbitrator stipulated in the agreement between the parties and shall take the necessary measures to ensure the appointment of an independent and impartial arbitrator. In the case of a sole arbitrator or the third arbitrator, the judge shall also take into account the advisability of appointing an arbitrator of a different nationality than the parties.
The Commercial Code establishes the rules by which the parties may request the removal of one of the arbitrators. An arbitrator may only be challenged if there are circumstances that give rise to justifiable doubts as to her/his impartiality or independence, or if she/he does not possess the qualities agreed upon by the parties.
A party may only challenge an arbitrator that she or he appointed, or in whose appointment she/he participated, for reasons made known to her/him after the appointment has been made.
A request for removal may be made when the arbitrator is prevented de facto or by law from exercising his/her functions, or for other reasons fails to exercise her/his functions within a reasonable period of time.
In addition, arbitration institutions have the power to remove any arbitrator who lacks independence, impartiality or is not performing her/his functions properly.
The only limitation set forth by the Commercial Code is that the arbitrators are independent and impartial.
An arbitrator is independent when he or she lacks "close, substantial, recent and proven" ties. Of course, the question lies precisely in defining how close, substantial and recent such links must be in order for an arbitrator to be considered lacking in independence.
On the other hand, the impartiality of the arbitrator refers to the absence of preference for one of the parties to the arbitration or on the particular case. It is a 'mental state' of the arbitrator, so quite complex to verify in practice.
Since arbitration is based on trust, the impartiality and independence of the arbitrator are highly relevant in this matter.
As set forth above, the matters that are excluded from arbitration, by legal disposition, correspond to land and water located in national territory, the resources of the exclusive maritime economic zone, acts of authority or related to the internal regime of the State and federal or states’ dependencies, the internal regime of Mexican embassies or consulates abroad, the right to receive food, divorces, marriage annulment actions, conflicts concerning the civil status and capacity of persons, successions, tax, customs and administrative disputes, bankruptcy process, company liquidation, labour matters, social security, nuclear damage, non-contractual damages, maritime and air matters, industrial property, telecommunications, government contracts, and corruption.
The arbitral tribunal can decide on its own competence, based on the German principle 'kompetenz-kompetenz', or competence-competence, which is implicitly recognised in Article 1465 of the Mexican Commercial Code. This article sets forth that when in an ordinary trial one of the parties requests the referral to arbitration, the judge will order the suspension of the judicial procedure and the referral to arbitration will be made immediately. However, the judge must refuse it when the nullity, ineffectiveness or impossibility of execution of the arbitration agreement is notorious, from a court response request to an arbitration referral.
In this regard, it is important to point out that until January 2011, the National Supreme Court of Justice maintained a criteria that in the event that a legal action to nullify an arbitration agreement was filed, it had to be previously resolved by the judge, without prejudice of the parties’ right to initiate arbitration concerning the dispute for non-compliance including the existence or validity of the contract containing the arbitration clause.
A court addresses issues of jurisdiction of an arbitral tribunal when any of the parties raise, for example, an objection of incompetence before a local court.
Notwithstanding, the parties in an arbitration procedure are entitled to raise an objection of incompetence before the arbitral tribunal itself, even if they have already appointed or actively participated in the appointment of an arbitrator. The arbitral tribunal shall rule on the issue of incompetence at the time it is raised, or in the arbitral award.
The plea for lack of competence must be raised, at the latest, by the time of lodging of the claim’s defence. If before issuing the award on the merits, the arbitral tribunal declares itself competent, any party – within 30 days of being notified of this decision – may request the judge for a final decision.
The courts have the ability and competence to resolve questions related to the admissibility or jurisdiction of an arbitration panel, provided that the time limits set out in the above responses are met.
When a party initiates a judicial proceeding in violation of an arbitration agreement, the Mexican Courts normally analyse whether the arbitration agreement is null, ineffective or impossible to execute. In such cases, the judicial procedure would continue its course.
If the above cases do not occur, and a submission to the arbitration clause exists, the judge must order the suspension of the judicial procedure and refer the parties to arbitration.
There is certain reluctance in Mexican Courts to resolve, from the onset, on the nullity, ineffectiveness or impossibility of execution of the clauses of submission to arbitration, primarily considering that during the last years, the criteria adopted by the courts with regard to the principle of competence-competence has been changing and is unclear for some local courts.
Today, arbitration panels allow a third party to intervene in a dispute between two parties provided that all interested parties are party to the arbitration agreement, and the tribunal has not been constituted.
If the third party is not a party to the agreement containing the arbitration agreement, the arbitrators generally do not assume jurisdiction over them.
Arbitration panels are empowered to dictate precautionary measures in arbitration, which are binding on the parties, unless otherwise agreed by the parties to the arbitration agreement, or the arbitration rules chosen by the parties do not allow them. The measures may consist of fines, arrests, precautionary seizures and, in general, any measure whose purpose is to prevent the loss or damage of something, facilitate the preservation of evidence or prevent the squandering of property.
Courts have an important role regarding precautionary measures issued in arbitrations, since they may: (i) grant precautionary measures prior to or during the course of the arbitration proceedings; (ii) assist in their execution.
In Mexico, arbitral awards, regardless of the country in which they were issued, are recognised as binding and enforced in accordance with the Commercial Code, and the judge has full discretion in the adoption of provisional precautionary measures.
The judge has full discretion in the adoption of provisional precautionary measures, which will depend on the applicant's requests and the particular circumstances of the case.
Mexican law does not provide for the use of emergency arbitrators. However, arbitration rules such as the ones set for by the ICC provide the power to request urgent precautionary measures from an emergency arbitrator.
National courts could intervene in the granting of precautionary measures, which differ from the ones requested to the emergency arbitrator.
In Mexico, the determination of the need to require adequate security related to the requested measure is a national discretionary court power and therefore the court may order security for costs accordingly.
In general, Mexican law does not impose any substantive requirements for the arbitral procedure. Parties often agree that the arbitral procedure is governed by any of the rules of international or domestic arbitration chambers.
However, Mexican law sets forth that in every arbitration process, the parties must be treated with equality and that due process rules must be complied with.
Mexican law does not provide for any particular procedural steps in arbitration proceedings conducted in the country.
Mexican law does not impose powers or obligations on arbitrators. On the contrary, the Commercial Code allows them to conduct arbitration in the manner they deem appropriate, including the power to determine the admissibility, relevance and value of evidence.
There are no particular requirements to prove standing of the legal representative of one of the parties in the arbitration. It is sufficient for the party that initiates an arbitration to prove that such representation was granted.
However, it is important to take into consideration the particular rules provided for in the place where the award will presumably be enforced, in order to follow them during the arbitration process and thereby limit nullity claims at the time of the award’s enforcement before the local courts.
The arbitral tribunal will be in charge of administering the evidence and will therefore rule on its admissibility, pertinence, relevance, collection and submission.
There are no special rules as to the period to offer evidence or formalities in the offering, unless otherwise agreed to by the parties. There are also no special rules for the submission of evidence.
In Mexico, the law of evidence is not mandatory, so the parties may agree on a particular regulation regarding evidence.
Mexican laws allow the arbitral tribunal to request assistance from local judges to obtain evidence.
In particular, the Commercial Code gives the arbitral tribunal the power to request the judge's assistance in the taking of evidence, including the summons of third parties to the arbitration.
If the petition of the arbitral tribunal is granted, the court may implement the same enforcement measures that it would use in a trial to enforce its orders.
Although arbitration is confidential and private, the parties have the right, but not the obligation, to keep it confidential.
However, the obligation of confidentiality will vary according to its addressee, provided each of the parties does not have the same level of confidentiality vis-à-vis arbitrators, the supervisory institution, witnesses, assistants, etc.
The confidentiality of the arbitration will always be subject to the need to disclose its contents, whether this derives from a disclosure obligation or from an order of a court or administrative authority.
There are no formal requirements for an arbitral award. However, the award must: (i) be issued by the arbitrators; (ii) must resolve a controversial issue; (iii) respect the formalities of the procedure; (iv) be binding on the parties; and (v) carry the weight of res judicata.
There is no time limit for the delivery of the award, unless otherwise agreed to in the arbitration clause.
There are no limits on the types of remedies that an arbitral tribunal may grant.
The arbitral tribunal shall fix the costs of the arbitration in the award.
The fees of the arbitral tribunal shall be reasonable in amount, taking into account the amount in dispute, the complexity of the subject matter, the time spent by the arbitrators and any other relevant circumstances of the case.
The fees of each arbitrator shall be indicated separately and fixed by the arbitral tribunal itself.
When a party requests and the judge consents to perform this function, the arbitral tribunal shall fix its fees only after consulting the judge, who can make observations to the arbitral tribunal with respect to the fees.
The costs of the arbitration shall be borne by the losing party. However, the arbitral tribunal may apportion the elements of these costs between the parties if she/he decides that the apportionment is reasonable, taking into account the circumstances of the case.
Concerning the cost of representation and legal assistance, the arbitral tribunal shall decide, taking into consideration the circumstances of the case, which party shall bear the cost or may apportion it among the parties if she/he decides that it is reasonable.
When the arbitral tribunal issues an order for the conclusion of the arbitral proceeding or an award on agreed terms, it shall fix the costs of the arbitration in the text of that order or award.
The arbitral tribunal may not charge additional fees for the interpretation, rectification or completion of its award.
In arbitration proceedings there are no appeals. The only exception to this principle is when there is a prior written agreement among the parties or when the arbitration rules provide so.
However, in Mexico, the arbitral award is usually challenged by a Juicio de Amparo before the Federal Courts.
The 'amparo' remedies are constitutional recourses normally processed before a Federal Collegiate Court integrated by three magistrates; however, in certain extraordinary cases, the National Supreme Court of Justice – the highest judicial forum in the Mexican court system – can resolve these kind of remedies.
Although appeals are not favoured in arbitration proceedings, as mentioned above, the parties may expressly agree to exclude or expand the scope of an appeal against the arbitral award.
Although the general rule is that there should not be any judicial intervention in the arbitration, there are exceptions in which the courts attend the arbitration. Among these are the execution of the arbitration agreement, the constitution of the arbitration panel, precautionary measures, the arbitration panel’s competence, nullity and/or recognition of the arbitration award.
Mexico acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (New York), thus making it easier for governed people to access both national and international arbitration. As of today, there are still some practical obstacles that limit the choice of binding or non-binding commercial arbitration, both at national and international levels, as the preferred method for controversy resolution.
In Mexico, the competent judge able to recognise or execute an award is the judge of the first federal instance or of the local jurisdiction of the executed address or, in its defect, of the location of the goods.
Only the following awards are enforceable: (i) final; (ii) consented; (iii) not subject to an appeal; (iv) in absentia; and (v) issued in inter-state arbitrations.
A contracting state may condition the enforceability in its territory of a foreign award to the fact that it arises from litigation derived from a legal relationship considered as commercial by the domestic law of the state in which enforcement is sought.
For the enforcement of an award, the courts normally limit themselves to analysing and confirming that both the arbitral award and the process have respected the human and procedural rights of the parties, so that the award may be enforced.
Mexico did not make any of the reciprocity and commercial reservations provided by the New York Convention, thereby providing the opportunity to enforce foreign arbitral awards before the Mexican Courts.
In Mexico, the law that regulates class actions establishes that those types of actions must be filed before the Federal Courts, in accordance with the provided procedure.
Also, the Supreme Court has determined that regarding consumer relations of goods or services, the procedure provided in the Federal Code of Civil Procedure for class actions is the ideal process to defend their rights as consumers according the Federal Constitution.
There is no ethical code that specifically applies to arbitrators; however, the Commercial Code establishes that they must conduct themselves with impartiality and independence during the arbitration process.
There are no restrictions to allow the financing of the arbitration procedure by third parties; since the arbitration procedure is governed primarily by the parties’ autonomy, they are able to decide the admission of finance by third parties.
Mexican law does not provide for the arbitral proceeding consolidation. However, arbitration rules such as the ones set for by the ICC provide that in order for this to occur, the following requirements must be met:
Today, arbitration panels allow a third party to intervene in a dispute between two parties provided that all interested parties are a party to the arbitration agreement, and the tribunal has not been constituted.
If the third party is not a party to the agreement containing the arbitration agreement, the arbitrators generally do not assume jurisdiction over them.
The Mexican Judiciary Strikes Back… in Aid of Arbitration
Mexico has had a longstanding policy in favour of arbitration. Like most jurisdictions, Mexican courts have understood the guiding principles behind the Model Law and have applied them with reasonable consistency since the adoption of the Model Law by the Mexican Congress in 1993. As noted previously in this yearly report, recent decisions by Mexican courts have confirmed the judiciary’s position in favour of party-autonomy, by limiting state court intervention and affording outright deference to an arbitrator’s award. However, one important issue that had not been addressed in court precedents or jurisprudence but that has recently reached the federal circuit courts, is the extent to which anti-arbitration injunctions – court orders enjoining parties from commencing or continuing arbitration proceedings, or those directing parties or arbitrators to suspend the proceedings – adopted as court-ordered interim measures 'in aid of' arbitration are legal or not, under the Mexican arbitration framework, and if so, to what extent such orders may affect the parties, arbitrators and certainly, the arbitral award.
Many will agree that court orders of such nature will generally constitute a threat to the very foundations of arbitration – party-autonomy, competence–competence, the separability of the arbitration agreement, and minimum intervention from the courts – as well as being a breach of a party’s access to justice rights, and arguably, a breach to Mexico’s undertaking in Article II of the New York Convention. However, three recent but unrelated cases before different state courts produced painful decisions in which the courts either misread or misapplied the Mexican Arbitration Law.
The reason behind the misapplication of the Mexican Arbitration Law’s core principles by the state courts in these three cases was not deliberate, at least one would hope not, but rather a consequence of the lack of exposure of state and federal courts to arbitration-related cases, including courts in Mexico City, which are, by far, the most experienced in the country when it comes to arbitration.
Strange as this may seem, this is not to be taken as a bad sign, but rather, as recently suggested by a Supreme Court justice, that “the lack of cases that reach the judiciary is a clear indication that parties are more likely to honour their commitment to arbitrate than not and will generally comply voluntarily with the resulting award.” Admittedly, this is an important fact that underscores the business community’s approach to arbitration and confirms Mexico’s position as a premier arbitration hub in the American continent.
The recent cases, though, came dangerously close to severely hampering this position and even the future of arbitration in Mexico in its entirety. In the three cases, the courts either ex parte enjoined parties not to initiate arbitration proceedings under a valid arbitration agreement, or instructed arbitrators to suspend the proceedings pending one court’s decision with respect to the existence of the arbitration clause. In adopting the measures requested 'in aid of' arbitration, the courts ignored the specialised nature of arbitration-related provisions and either approached the requests as they would normally do under traditional commercial proceedings, or mixed arbitration provisions with commercial procedural rules.
Remarkably, the decisions of the federal circuit courts in all three cases ably dissected the extent to which courts are allowed to intervene 'in aid of' arbitration, and ultimately revoked all three orders. In their decisions, the federal circuit courts drew upon recent decisions of the Supreme Court that:
One federal circuit court also invoked a decision from another circuit court that determined that the arbitration framework is specialised to the extent that it excludes any other general provisions of the law.
Anti-arbitration injunction and order to place arbitrator under arrest for contempt… illegal
In the first case, a European investment fund sought arbitration against a Mexican company under a shareholders’ agreement, which called for ICC arbitration in Mexico City. In an attempt to resist arbitration, the Mexican company filed a lawsuit before a municipal court in a northern Mexican state seeking:
Even though the municipal court had no jurisdiction to act 'in aid of' arbitration or to entertain such a lawsuit, the municipal judge admitted the claims and issued an ex parte order instructing the tribunal to suspend the arbitration. The municipal court considered that irreparable harm would be caused to the respondent if the arbitration continued while the court ruled on the validity or existence of the arbitration agreement.
After inviting the parties’ comments on the order, the tribunal decided not to suspend the arbitration on the basis of Article 1424 of the Code of Commerce, which provides that arbitration proceedings may be commenced or continued, and an award may be made, even when a matter involving an arbitration agreement is pending before the court. In addition, the tribunal took into account the fact that the state court had no jurisdiction or legal basis to suspend the arbitration.
Thereafter, the municipal court issued a second order in which it threatened to sanction the tribunal, should it continue to conduct the arbitration despite the order suspending the proceedings. The court also warned that it would consider the tribunal in contempt and would take measures to place the arbitrator under arrest to face the corresponding criminal charges for disobeying a judicial order.
The tribunal challenged the court’s unlawful threats by seeking constitutional relief (juicio de amparo) before a federal district court in Mexico City. The case was finally ruled on appeal by a federal circuit court in Mexico City, the place of arbitration. In its decision, the federal circuit court unanimously confirmed that the municipal court’s order to suspend the proceedings was contrary to the black letter of Article 1424 of the Code of Commerce, which clearly prevents a judge from suspending an arbitration. Moreover, the court held that the continuation of parallel proceedings did not cause any irreparable harm to the parties and thus, that the provisional measure adopted by the municipal judge to suspend the arbitration was illegal. The federal circuit court also held that the court’s threats to hold the arbitrator in contempt and to place him under arrest were also illegal to the extent they . More importantly, the circuit court held that the arbitrator had a legitimate interest in defending his constitutional rights against unlawful action from a court threatening his property and liberty, especially if the court’s jurisdiction and authority under the Mexican Arbitration Law to act in aid of arbitration were at issue.
The circuit court’s decision sends a message that arbitrators do not lose their impartiality by seeking constitutional relief from illegal court intervention with an arbitration, to the extent that such action may cause irreparable harm to arbitrators’ liberty and/or property rights.
Award enforced despite anti-arbitration injunction
In a different case, the respondent also obtained an anti-arbitration injunction against the arbitrator from a federal district court in Mexico City at the outset of the proceedings. The arbitrator decided to move forward with the arbitration and fixed a procedural timetable for the parties’ submissions. The respondent ceased to participate afterwards and did not file any submission on the merits or otherwise. An award was ultimately entered in favour of the claimant who sought its recognition and enforcement before local courts in Mexico City. The respondent moved the local court to refuse enforcement and to vacate the award, alleging that the award was contrary to public policy because the arbitrator had illegally continued with the arbitration, despite its being suspended by a federal court. The respondent further argued that the continuation of the proceedings prevented it from having a full opportunity to present its case because the proceedings had been legally suspended. The local court found in favour of the respondent and vacated the award. The court reasoned that by failing to suspend the time limits foreseen in the procedural timetable in light of the anti-arbitration injunction, the arbitrator had infringed the respondent’s due process rights and that every step taken by the arbitrator in breach of the court’s order was null and void, including the resulting arbitral award.
The claimant challenged the local court’s decision to vacate the arbitral award before the federal circuit court in Mexico City. The circuit court found that the award could not be considered null and void, to the extent that the arbitrator had afforded the respondent a fair opportunity to present its case. The circuit court found that the continuation of the proceedings by the arbitrator despite the anti-arbitration injunction did not amount to a breach of the respondent’s due process rights, considering that the respondent was duly aware of the procedural timetable and nothing on the record suggested that the respondent was otherwise prevented from presenting its case. Moreover, the court found that the anti-arbitration injunction had no basis under the Mexican Arbitration Law and that the arbitrator was bound to fulfil their obligations vis-à-vis the parties to resolve the dispute between them. The respondent was also bound to comply with its obligations under the arbitration agreement, and its decision not to participate in the proceedings despite being duly notified of the procedural timetable was to its own detriment.
As in the previous case, the circuit court considered that continuing the proceedings was expressly allowed under Article 1424 of the Code of Commerce and that, in any event, the fact that the arbitration continued despite the district court’s order enjoining the proceedings was not sufficient reason to deny enforcement of an award nor to vacate it. The circuit court overturned the local court’s decision, recognised the award and ordered its enforcement.
Order enjoining party from initiating an arbitration is a violation of a party’s access to justice rights
In two other cases, two different local courts enjoined the parties from initiating arbitration-related proceedings under an arbitration agreement not otherwise declared null and void. In one case, the court enjoined a party from initiating recognition and enforcement proceedings (anti-suit injunction). In the second one, a local court enjoined a party from initiating arbitration proceedings under a valid arbitration agreement until the issue of whether such agreement was null and void, or incapable of being performed, was resolved by the enjoining court.
In both cases, the federal circuit courts held that an order enjoining a party from initiating proceedings under an arbitration agreement, either for commencing an arbitration or for enforcing the resulting award, infringed the party’s constitutional access to justice rights. Moreover, such an order was manifestly against the principle of party autonomy, which is one of the cornerstone principles of arbitration.
In conclusion, an order that prevents a party from exercising its constitutional right to initiate an arbitration under a valid arbitration agreement is not only illegal and unenforceable, it is unconstitutional. Under the Mexican Arbitration Law, court intervention is strictly limited to acting in aid of arbitration, whether already initiated or not. Court intervention in aid of arbitration certainly does not include the possibility of interfering with a party’s right to resort to arbitration for resolving its disputes. Moreover, anti-arbitration injunctions may arguably be considered a breach of Article II of the 1958 New York Convention, which expressly compels the contracting parties’ state courts to recognise and enforce arbitration agreements.
Constitutional rights and arbitration
In 2011, the Mexican Constitution underwent a major overhaul, which is often referred to as the establishment of a 'new constitutional paradigm.' This new constitutional order is premised on the advancement and protection of human rights recognised by the constitution, as well as those contemplated in the international treaties signed by Mexico. It has been argued that the “the sole purpose of the state’s existence is precisely to guarantee and to protect human rights.” Since 2011, in Mexico, protection of human rights is now the guiding principle behind our Magna Carta.
To this end, Article 1 of the Mexican constitution was amended to impose an obligation upon state entities to advance, protect and guarantee human rights. While a general declaration as to whether or not an act of state or certain legislation is unconstitutional is still the preserve of the federal judiciary, the constitutional amendments specifically authorise state courts to conduct an ex officio analysis of the law which, in exceptional circumstances, may result in the state court’s decision not to apply the relevant legal provision, if it deems that such provision is incompatible with the protection of human rights under the constitution and the international treaties to which Mexico is party.
The constitutional amendments mark an important shift in the control of constitutionality in Mexico, from a centralised (or semi-centralised) system – where the control of unconstitutional acts is exclusive to one organ – to a system of diffuse control of constitutionality, where state court judges are authorised to ignore the application of a legal provision should they deem it contrary to the human rights protected under international treaties, particularly under the American Convention on Human Rights. Under this 'new constitutional paradigm' the Supreme Court has held that if the rights and remedies afforded to parties with respect to human rights are more favourable under international treaties than those afforded by Mexican legislation, then the state court must favour the application of the rule that is more beneficial to that party.
The question that has come up recently is whether, and to what extent, arbitrators are bound to observe this 'new constitutional paradigm' when resolving a commercial dispute and decide, for example, not to apply the contractual interest rate agreed upon by the parties under the argument that such interest rate may amount to usury and thus be a breach of a party’s human rights (exploitation of men by men). The second and more complicated question is whether an arbitrator that decides whether or not to apply, on whatever basis, a legal or contractual provision that may otherwise be considered as contrary to the pro homine principle and the constitution’s mandate to favour the application of human rights, may open the door to judicial review of the merits of the award, either for failing to apply the constitution’s mandate or by applying a legal or contractual provision that may be considered in violation of human rights.
The answer to these questions is not as simple as it may seem. For starters, arbitrators are chosen to resolve a commercial dispute, not to protect human rights. However, because arbitrators are bound to apply the rules of law chosen by the parties to resolve the merits of the dispute, to what extent are arbitrators bound to apply this 'new constitutional paradigm' as part and parcel of Mexican law? Alternatively, what happens if an arbitrator decides not to apply a legal or contractual provision because such provision may be contrary to a party’s human rights? What happens if the arbitrator simply ignores this 'new constitutional paradigm' and decides to apply the legal and contractual provision because of pacta sunt servanda? Does the application or non-application of human rights principles by an arbitrator open the door to an additional ground for annulment or denial of enforcement, forcing the judiciary to carry out a de novo review of the merits of the case?
Firstly, it is undisputed that judicial precedents only bind lower courts, and arbitrators are not under any obligation to apply them. Secondly, Article 1 of the constitution only imposes exercise of diffuse control of the constitution on state courts and state agencies, it does not bind private parties to do this, as the protection of fundamental rights is the preserve of the state. An arbitrator is, however, free to entertain the question of whether a legal or constitutional provision may be contrary to the array of human rights protected by the constitution and international treaties. The fact is that, carrying out diffuse control of the constitutionality of a legal or contractual provision is a question that relates to the merit of the case, and thus, the arbitrator’s decision in any direction cannot be analysed by the judiciary, much less constitute grounds for annulment of the award, in the same manner as the misapplication of a rule of law by the arbitrator on the merits of a case, is also not a basis for annulment.
In a recent case, an arbitrator decided that if the parties wanted their human rights to be protected they would have included a forum selection clause instead of an arbitration clause, as the judiciary is the one that is bound to protect the parties' fundamental rights by exercising diffuse control of constitutionality. However, the arbitrator reasoned that since the parties had agreed that Mexican law was to apply to the merits of the case, the arbitrator found that nothing prevented it from performing an interpretation in accordance with the 'new constitutional paradigm.' The question before the arbitrator was whether a put option under a shareholder’s agreement calling for the purchase of the shares by the respondent in an amount equal to the amount invested plus a 25% premium that was triggered by the respondent’s bad faith, was against human rights to the extent that the premium was considered to amount to usury. The arbitrator found that the 25% annual premium on the amount invested was not against human rights, as such provision could not amount to usury, especially in the context of the business relationship between the parties and the fact that such provisions are more common than not in joint ventures of this nature.
While the case has not reached the federal courts, three Supreme Court justices (one current and two recently retired) have confirmed that such approach is equally valid to one that does not entertain the question (to the extent that the protection of human rights is the preserve of the state). In any event, all three justices were unanimous in holding that whether an arbitrator deals with the issue of human rights or not, or whether the arbitrator’s decision is correct or not, is not a question for the judiciary to resolve, since its analysis should be limited to the grounds established in the New York Convention and the Mexican Arbitration Law (UNCITRAL Model Law).