Since the 1994 implementation of the North American Free Trade Agreement (NAFTA), commerce has steadily increased between the signatory countries. The International Monetary Fund reports that total trade among the three NAFTA signatories has more than doubled, increasing from $306 billion in 1993 to almost $621 billion in 2002.1 As would be expected, increased trade brings greater pressure on these countries to provide effective and enforceable resolution of commercial disputes. For local practitioners, an increasing need exists to advise U.S. and Mexican clients regarding cross-border transactions. The following scenarios, loosely based on recent, actual cases, highlight commonly-encountered difficulties when a dispute arises between a U.S. company and a Mexican company.

Scenario #1: AmeriCorp enters into a supply agreement with a Mexican broker to procure construction materials. In the course of performance, the broker arranges the provision of certain materials by manufacturer MexiCorp. Under the supply agreement, AmeriCorp and the broker agree to arbitrate disputes in Houston, Texas, subject to the law of Nuevo Leon, Mexico. AmeriCorp subsequently uses MexiCorp’s materials in construction projects nationwide. Finding itself facing significant claims arising from the projects, AmeriCorp ultimately determines that MexiCorp’s materials were defective. The claims are significant, and easily exceed the broker’s financial wherewithal. MexiCorp has no U.S. offices and is not a party to the supply agreement nor its dispute resolution procedures. In response to AmeriCorp’s demand for indemnity, MexiCorp denies the defect and all liability. AmeriCorp wants to assert its claims directly against manufacturer MexiCorp.

Scenario #2: Pursuant to a written purchase order, AmeriCorp sells materials to MexiCorp, with shipping terms providing for delivery of the materials to Brownsville, Texas. The purchase order calls for all disputes to be resolved by binding arbitration in New York, New York. When MexiCorp fails to pay for the materials, AmeriCorp institutes an arbitration proceeding in New York. MexiCorp withdraws from the proceedings after losing a hearing on its preliminary objection that the arbitrator had no jurisdiction over the dispute or the Mexican entity. AmeriCorp obtains a favorable default arbitration award and seeks to collect, but MexiCorp has no U.S. offices or operations.

These scenarios illustrate questions confronted when U.S. and Mexican companies cross swords in a commercial dispute. Is litigation within the courts of either Mexico or the United States a viable option? If so, which forum is preferred? If the parties have contracted to resolve their disputes through arbitration, is the arbitration clause enforceable? And, perhaps most importantly, does the arbitration clause provide for a proceeding that will allow the eventual award to be enforced and collected in the relevant jurisdiction?

Historically, the United States and Mexico share a mutual distrust of the fairness and efficacy of the other’s legal system. Outsiders frequently view the U.S. legal system as one that involves burdensome and intrusive discovery, erratic jury verdicts and outrageous punitive damages awards. Likewise, Mexican courts are often stereotyped as being ineffective, subject to influence and ill-suited to handle complex commercial disputes. Even though such perceptions are primarily anecdotal, it is safe to conclude that, when possible, U.S. companies lean heavily towards resolving their disputes within the borders of the United States, while Mexican entities prefer to avoid U.S. courts. However, this predilection in favor of resolving disputes in one’s backyard often gives birth to a number of problems in the enforcement and collection stages of litigation.

This article balances the perceived and real advantages associated with litigating at home versus the resulting difficulties that may be encountered in enforcement and collection. It then concludes that an agreement to arbitrate is usually the preferred method for resolving commercial disputes between U.S. and Mexican parties. Furthermore, it also concludes that, in light of recent improvements in the laws and infrastructure of Mexico, U.S. companies and their attorneys should consider selecting Mexico for arbitration proceedings in order to improve results during the enforcement and collection stages disputes.

 

Enforcement of U.S. Judgments in Mexico

The U.S. has never entered into a treaty or convention with another country providing for reciprocal enforcement of judgments.2 Although serious attempts to do so have been made over the years, the disparate judicial traditions of the U.S. and other countries are frequently blamed for the eventual derailment of those efforts.3 In particular, many countries perceive U.S. judgments as excessive and object to the broad assertion of jurisdiction by U.S. courts.4 While one of NAFTA’s objectives is to create effective dispute resolution procedures among the three signatory countries, it makes no provision for disputes between private parties.5 The result for cross-border disputes resolved in the U.S. courts between U.S. companies and Mexican defendants, is that, unless the responsible Mexican entity possesses assets in the United States sufficient to satisfy a judgment, a successful U.S. plaintiff is still required to enforce and collect by bringing an action in Mexico to assess liability or to seek formal recognition of that judgment.6

Over the past 30 years, Mexico has been quite proactive in its attempts to modernize its legal system with respect to international legal issues. Mexico has entered into a number of agreements with other countries, primarily the non-U.S. members of the Organization of American States. Those agreements, such as the Montevideo and La Paz Conventions, provide for reciprocal recognition of foreign judgments.7 Beginning in the 1970s, Mexico also entered into a series of multinational agreements designed to promote international judicial cooperation.8 To effectuate these agreements, Mexico undertook an extreme overhaul of Mexican law with the 1988 amendments to the Federal Code of Civil Procedure.9 The amendments established, for the first time, a procedure for the application of foreign law in Mexico; allowed for the processing of letters rogatory; provided for international cooperation for the taking of evidence; and provided for uniform enforcement of foreign judgments.10 Mexico’s efforts to harmonize its laws with international legal principles has recently been ratified by its highest court, the Supreme Court of Justice. In February 2007, the Supreme Court of Justice issued an opinion with potentially far reaching implications, confirming for the first time that international treaties adopted by its government, such as the New York and Panama arbitration conventions, would hold supremacy over any other domestic law except the Mexican Constitution.11 By eliminating the historical vulnerability to Mexican procedural codes, this decision should further ensure the application of international law principles and treaties and the enforcement of foreign arbitration awards in Mexican courts.

Because no cooperative agreement or treaty exists between Mexico and the U.S., to give formal effect to a U.S. judgment (as opposed to an arbitration award) in Mexico, one must institute a judicial procedure known as homologación.12 Under this procedure, foreign judgments are scrutinized to determine whether the requirements under Mexican law for validity have been met. Further, the party seeking enforcement of a foreign judgment must meet several highly technical and troublingly discretionary requirements, proving:

1)   that all the technicalities regarding letters rogatory have been met;

2)   that the originating court had jurisdiction to decide the dispute;

3)   that the defendant had been personally served and presented with an opportunity to defend;

4)   that the originating judgment is not the subject of another pending suit and is otherwise final;

5)   that the judgment does not violate Mexican substantive or procedural law; and

6)   no reciprocity of enforcement issues allow the Mexican court to exercise its discretion in not enforcing the U.S. judgment.13

These requirements are notably more burdensome than those in the reciprocal enforcement of judgment agreements between OAS member states, which generally provide for summary enforcement proceedings upon a minimal showing of authentication, due process, notice and finality.14

The cumbersome homologación process for enforcing a U.S. judgment in Mexico highlights the potential pitfalls associated with making a knee-jerk decision to litigate in the U.S. Even if the U.S. litigation efforts are initially rewarded with a judgment, the ultimate success of the matter will be determined in large part by whether it is necessary to reach assets located in Mexico. In this case, obtaining the U.S. judgment may merely signify the beginning of the true battle – the Mexican enforcement proceeding. In many instances, the determination by a U.S. court that it has jurisdiction over the Mexican entity is not clear-cut. This jurisdictional review–as well as all other matters reviewed by the Mexican court–potentially affords little deference to any already expensive challenge that may have occurred in the U.S. litigation.15

The difficulty in utilizing the homologación process to enforce a judgment is circumstantially confirmed by the frequent tactic of Mexican companies of simply choosing not to participate in the U.S. proceedings, particularly if they do not have assets in the U.S. subject to execution. Understanding the difficulties of judgment recognition in Mexico, a Mexican entity finding itself named as a defendant in U.S. litigation commonly makes a calculated gamble to wait and defend against the claims in the Mexico courts.16 Many judgment debtors simply decide that it is not worth spending more money in light of such uncertainties. Thus, any perceived advantage thought to be gained by a U.S. company initially bringing suit on its home court may prove illusory, and any resources expended may simply be wasted.17

Revisiting the two “hypothetical” scenarios listed above, both of these matters were ultimately resolved in short order because of the extent of the contacts between the Mexican company and the United States. In the first scenario, an investigation uncovered that the Mexican company against whom indemnity rights were sought had previously filed a lawsuit as a plaintiff in federal court in Texas. Upon institution of litigation in the same court, this critical fact undermined what otherwise would have been a formidable jurisdictional challenge, allowing for quick resolution. In the second scenario, additional investigation discovered that the Mexican company owned bank accounts in U.S. border cities to facilitate cross-border commerce and that the company sometimes stored its goods in warehouses in the Port of Brownsville. These facts allowed for the aggressive use of writs of garnishment and attachment in the U.S. proceeding to confirm the arbitration award. Placing the operational abilities of the Mexican company at risk allowed the case to be resolved prior to confirmation of the arbitration award. While the results in these particular cases may be categorized as successes, quick resolution admittedly turned on fortuitous circumstances rather than any preconceived dispute resolution strategy.

When obtaining jurisdiction is clear or when circumstances make it possible to exert leverage upon the Mexican company’s interests in the U.S., a significant advantage may exist for the U.S. company to resolve its claims in the U.S. courts. Under such conditions, the ability to disrupt cross-border commerce or seize U.S.-based assets may be sufficient to give credibility to the U.S. court proceedings. Accordingly, it may indeed be better to leave the dispute resolution process to the hands of the U.S. courts. However, the extent of the Mexican company’s U.S. contacts is beyond the control of its U.S. adversary. Because collection uncertainties and the chosen forum have such determinative implications in cross-border disputes, this issue is best decided at the time of contracting.

 

Enforcement of Arbitration Awards in Mexico

The United States and Mexico have both demonstrated a commitment to fostering international arbitration and in enforcing arbitral awards. Recognition and enforcement of international arbitration awards in Mexico is governed by the multinational agreements to which it is a party and Article 360 of the Mexico Federal Code of Civil Procedure. Commercial law is within the jurisdiction of the Mexican Congress, leaving arbitration of commercial disputes subject to federal law, namely the Mexican Commercial Code.18 Enforcement of international arbitration awards is subject only to Mexican federal law.

Arbitration awards between citizens of Mexico and the U.S are governed by the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention)19 and the 1975 Inter-American Convention on International Commercial Arbitration (the Panama Convention),20 to which both the U.S. and Mexico are signatories.21 Compared with enforcement of a foreign judgment (if not governed by a reciprocal recognition agreement) in Mexico, the requirements to enforce an arbitral award are significantly less rigorous: provide an original or certified copy of the arbitral award and the arbitration agreement and a certified translation of the award, if not already in Spanish.22 A party challenging the enforcement in Mexican court is left with limited defenses: lack of legal capacity by one of the parties to submit themselves to the arbitration process; governing law makes the arbitration agreement unenforceable; lack of notice of the appointment of the arbitrator or the arbitration proceedings; the award went beyond the scope of the arbitration agreement; the composition of the arbitral panel was not in accordance with the parties’ agreement or was contrary to the laws of the country where arbitration took place; lack of finality; or a showing that the award is contrary to the public policy of Mexico.23

Additionally, both Mexico and several U.S. states, including Texas,24 have substantially adopted the arbitration procedure in the UNCITRAL Model Law on International Commercial Arbitration.25 In Mexico, the Model Law was amended into Title IV of the Mexican Commercial Code in 1993.26 The UNCITRAL Model Law draws upon the rules governing recognition and enforcement of awards provided in the New York Convention.27

Despite the cooperative framework to ease enforcement of foreign arbitral awards, it must be recognized that a Mexican court asked to enforce an award issued in the U.S. may still view the award with the skeptical eye under which U.S. judgments are traditionally viewed. Although the steps involved in award recognition under the New York and Panama Conventions appear simplistic in comparison to the homologacíón process, a Mexican court may still refuse to recognize awards for hazily-defined bases, including proof that a party “was unable to otherwise present his case,” that the “award deals with a difference not contemplated by . . . the terms of the submission to arbitration,” if the “subject matter . . . is not capable of settlement by arbitration under [Mexican] law,” or, if “recognition . . . would be contrary to the public policy” of Mexico.28 If a party is able to interject issues indicating that traditional notions of Mexican law have been violated, such as awarding punitive damages, the enforcement proceeding could well be jeopardized. Again, the importance of recognizing the interplay between the arbitration and the eventual enforcement proceeding cannot be overemphasized.

 

Choosing Mexico as an Arbitration Venue

One approach to increase the odds of a successful Mexican enforcement proceeding is to surround the arbitration proceeding with the trappings of Mexican notions of law. Specifically, by choosing a location in Mexico for the arbitration hearing and having an arbitration institution with Mexican ties, it may be possible to ease any preexisting apprehension of the Mexican court during the enforcement stage. As noted, if for no other reason, an eventual need for recognition and enforcement of the arbitration award by a Mexican court is another reason that Mexico should be considered as the seat of the arbitration hearing. It is also beneficial to have a panel with at least one member knowledgeable of Mexican enforcement procedure, laws and policy.

As the law and the infrastructure promoting arbitration in Mexico develops, that country provides an increasingly attractive venue for arbitration. Among the factors favoring a decision to choose Mexico as the arbitration seat are the possible need to request interim measures in Mexico, where the assistance of local courts can be vital, and to compel witnesses and documents. A number of capable arbitral bodies operate in Mexico, and commonly selected institutions in disputes between U.S. and Mexican parties include the International Chamber of Commerce,29 the American Arbitration Association’s International Centre for Dispute Resolution,30 and the Inter-American Commercial Arbitration Commission.31 Four other less-prominent organizations in Mexico also handle international commercial arbitration: the Arbitration Center of Mexico (Centro de Arbitraje de Mexico or CAM),32 the Mexican Association on Mediation and International Commercial Arbitration in Guadalajara, the Arbitration and Mediation Center in Monterrey and the Mexican National Chamber of Commerce’s Center for Alternative Dispute Resolution.33 In addition, ad hoc or non-administered arbitration is permissible, but not recommended. The decision of which administering body to use is a significant one, and knowledgeable Mexican counsel should be consulted. Each of the administering agencies has different pools of available arbitrators, methods of calculating fees and expenses (including up-front charges due at time of filing), default rules regarding discovery and other procedural matters, and hearing locales.

 

Drafting the Arbitration Agreement

Drafting an enforceable and effective arbitration clause is of paramount importance in international transactions. Business people involved in contract negotiations should be strongly counseled not to give short shrift to the agreement’s dispute resolution provisions. The incentive to breach an agreement in a cross-border transaction increases to the extent that the parties fail to provide for an enforcement mechanism with any teeth.

Particular importance should be taken to ensure that the person signing the agreement containing the arbitration provision is authorized to do so. While issues of agency and authority are generally issues of fact in the U.S., under Mexican law the granting of the authority to act on behalf of a Mexican company occurs by a formal power of attorney.34 As lack of capacity is a ground for nonrecognition under the New York and Panama Conventions, copies of the underlying documents granting authority should be reviewed, and warranties of capacity and authority should be written into the body of the agreement.

The arbitration clause should empower the arbitrators to decide their jurisdiction and determine issues of authority and capacity of the signatories. While more appropriate for a separate article, other items should also be considered when drafting an arbitration clause between parties of different countries, including the seat of the arbitration, the place for hearings, the governing law, the method for choosing the arbitrator or panel, the expertise required of the panel, discovery protocols and procedure, the language of the hearing, the relief that can be awarded, and the parties’ rights to appeal the award. While no consensus exists as to the degree of detail to which each of these matters should be addressed, at a minimum, the arbitration clause must be drafted in a manner to provide for a hearing and an award that will be enforceable in every jurisdiction where it might be tested.

 

Conclusion

In transactions between U.S. and Mexican parties, the benefits of considering the likely scenarios to be encountered in the event of a subsequent dispute are heightened. If for no other reason than because both countries favor the process, arbitration is the recommended dispute resolution method. Mexico’s embrace of international law and international arbitration has led to the development of an infrastructure of experienced arbitrators and arbitration institutions within Mexico, and to the extent that enforcement and collection concerns also can be ameliorated by doing so, U.S. entities and their lawyers should be less hesitant to choose Mexico as the place for arbitration.

Geoffrey H. Bracken and Peter Scaff both practice in the Houston office of Gardere Wynne Sewell, LLP in the firm’s litigation and arbitration sections. The authors would like to thank Jim Sentner and Alicia Cline of South Texas College of Law for their contributions. Gardere Wynne Sewell LLP has offices in Austin, Dallas, Houston and Mexico City.

 

Endnotes

1. Office of the United States Trade Representative, North American Free Trade Agreement, http://www.ustr.gov/Trade_Agreements/Regional/NAFTA/Section_Index.html (last visited Aug. 17, 2007).   2. U.S. Department of Commerce, Recognition and Enforcement of Foreign Money Judgments (March 2002), http://www.osec.doc.gov/ogc/occic/refmj.htm.   3.Id.    4.Id.   5. Dec. 17, 1992, U.S.-Can.-Mex. (effective Jan. 1, 1994), 32 I.L.M. 605 (1993). Chapter 11 of NAFTA sets forth dispute resolution procedures, including arbitration, between private investors and signatory countries. Chapter 19 sets forth procedures for dealing with disputes concerning “antidumping and countervailing duty law” between the signatories. Chapter 20 establishes the Free Trade Commission, a primary purpose of which is to resolve disputes that may arise regarding NAFTA’s interpretation or application. The text of NAFTA may be found at http://www.nafta-sec-alena.org/DefaultSite/index_e.aspx?DetailID=175 (last visited Aug. 17, 2007).   6. For parties seeking to enforce a foreign judgment in the U.S., institution of a U.S. proceeding is also required.  A majority of states, including Texas, has enacted laws based upon the Uniform Foreign Money-Judgments Recognition Act, 13 U.L.A. 149 (1986).   7. Organization of American States, Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards; Inter-American Convention on Jurisdiction in the International Sphere for the Extraterritorial Validity of Foreign Judgments, May 24, 1984, 24 I.L.M. 468. OAS treaties may be viewed at http://www.oas.org (last visited Aug. 17, 2007).   8. Notable multilateral agreements include the Inter-American Convention on Jurisdiction in the International Sphere for the Extraterritorial Validity of Foreign Judgments; the Inter-American Convention on Proof of and Information on Foreign Law; and Inter-American Convention On Letters Rogatory.   9. Jorge A. Vargas, Enforcement of Judgments in Mexico: The 1988 Rules Of The Federal Code Of Civil Procedure, 14 Nw. J. Int’l L. & Bus. 376 (1994) (noting the virtual absence of procedural enactments regarding conflict of laws prior to amendment of the FCCP).   10.Id. (detailing the various multilateral agreements adhered to by Mexico between 1978 and 1998, including the Inter-American Convention on Letters Rogatory (and its Protocol), Proof of Information regarding Foreign Law and the Convention on General Norms of Private International Law, Legal Regime of Powers to be Utilized Abroad, Domicile of Physical Persons, Personality and Capacity of Juridical Persons, Extraterritorial Validity of Foreign Judgments and Arbitral Awards, Competence on the International Sphere for the Extraterritorial Validity of Foreign Judgments and the Additional Protocol on the Reception of Evidence Abroad).   11.Supreme Court Rules That Mexican Constitution Takes Priority Over International Treaties, Feb. 21, 2007, http://www.allbusiness.com/north-america/mexico/4055433-1.html.   12. Fed. Code Civ. P., arts. 564-68.   13. Fed. Code Civ. P., arts. 571-725. In addition to the specific requirements mentioned, an attempt to enforce a U.S. judgment in Mexico may be blocked by an “Amparo” proceeding. Generally, this defensive proceeding, founded upon guarantees of liberty in the Mexican Constitution, allows for suspension of enforcement of the foreign judgment through institution of a separate action. Although mention is relegated to a footnote herein, an Amparo proceeding can be used as a powerful tool and has the potential to eviscerate an enforcement proceeding. For a general overview of Amparo’s use, see Carlos Loperena Ruiz, The Process Of Amparo in Commercial Matters, 6 U.S.-Mex. L.J. 43 (1998) and Bruce Zagaris, The Amparo Process in Mexico, 6 U.S.-Mex. L.J. 61 (1998).   14. Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards, art. 2.   15. Unlike the summary proceeding contemplated by the Uniform Foreign Money-Judgments Recognition Act, the burdens of a homologación proceeding potentially allows for a reexamination of the merits of the award.  Margarita Trevino Balli and David S. Coale, Recent Reforms to Mexican Arbitration Law: Is Constitutionality Achievable?, 30 Tex. Int’l L.J. 535 (1995).   16. If a U.S. entity bringing suit domestically against a Mexican entity contemplates that the judgment may need to be enforced in Mexico, competent Mexican counsel should be retained at the earliest stages of the litigation to ensure that Mexican law is not contravened during the process.   17. Roger R. Evans, Enforcement of U.S. Judgments in Mexico: Illusion or Reality, 64 Tex. B.J. 139 (2001).   18. Articles 1415-37, Book 5, Title IV.   Peculiarities exist regarding arbitration with state affiliated entities such as PEMEX.  See,e.g., Article 14 of the Organic Law of PEMEX.   19. U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature June 10, 1958, 21 U.S.T. 2517, T.I.A.S. No. 6997, 330 U.N.T.S. 38 [hereinafter New York Convention]. The text of the New York Convention is reprinted in the notes under § 201 of Chapter 2 of the Federal Arbitration Act, 9 U.S.C.A. § 201 (West 1999).   20. Inter-American Convention on International Commercial Arbitration, opened for signature Jan. 30, 1975, OAS SER A20 (SEPEF), 14 I.L.M. 336 (1975) [hereinafter Panama Convention]. The text of this Convention is reprinted in the notes following § 301 of Chapter 3 of the Federal Arbitration Act, 9 U.S.C.A § 301 (West 1999). The Panama Convention entered into force on June 16, 1976.   21. This statement admittedly oversimplifies the relationship between the Panama and New York Conventions.  For a detailed discussion on the interrelationship of these agreements, see John P. Bowman, The Panama Convention and its Implementation Under the Federal Arbitration Act, 11 Am. Rev. Int’l Arb. 1 (2000).   22.New York Convention, supra note 19, at art. 4.   23.Panama Convention, supra note 20, at art. 5; New York Convention, supra note 19, at art. 5.   24. Chapter 172 of the Texas Civil Practice and Remedies Code (“Arbitration and Conciliation of International Commercial Disputes”) contains Texas’ adaptation. See also Status 1985 - UNCITRAL Model Law on International Commercial Arbitration, http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration_status.html (last visited Aug. 17, 2007).   25. 1985 - United Nations Commission on International Trade Law Model Law on International Commercial Arbitration [hereinafter Model Law], http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration.html (last visited Aug. 17, 2007).   26. Mexican Commercial Code, Title 4, arts. 1415-63; see also Jose Luis Siqueiros, Mexican Arbitration--The New Statute, 30 Tex. Int’l L.J. 227 (1995) (noting that matters not regulated in the amended Commercial Code regarding specific regulation of arbitral proceedings are dealt with by the applicable rules of the respective Code of Civil Procedure at the arbitral situs).   27.Model Law, supra note 25, at ch. 8.   28.Panama Convention, supra note 20, at art. 5; New York Convention, supra note 19, at art. 5.   29. Arbitration Commission, http://www.iccwbo.org/policy/arbitration/id2882/index.html (last visited Aug. 17, 2007).   30. American Arbitration Association – International, http://www.adr.org/sp.asp?id=28819 (last visited Aug. 17, 2007).   31. SICE – Overview – Inter-American Commercial Arbitration Commission, http://www.sice.oas.org/dispute/comarb/iacac/iacac1e.asp (last visited Aug. 17, 2007).   32. CAM – Reglas del Arbitraje, http://www.camex.com.mx/english/reglasdelarbitraje.htm (last visited Aug. 17, 2007).   33. Leonel Pereznieto Castro, Commercial Arbitration In Mexico, 13 Fla. J. Int’l L. 29 (Fall 2000).   34. Charles E. Meacham, Foreign Law in Transactions Between the United States and Latin America, 36 Tex. Int’l L.J. 506, 511 (2001), available at http://www.gardere.com/Content/hubbard/tbl_s31Publications/FileUpload137/137/Meacham_UTLawSpe.pdf.