Mexico: Supreme Court Backs Commercial Arbitration

Originally published on International Law Office in November 2004

Background

The constitutionality of Article 1435 of the Commercial Code (which reproduces Article 19 of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration) was recently tested when a Mexican telephone company filed a constitutional action for relief against it.¹

A basic principle of arbitration was questioned on the grounds of constitutionality. Among other things, the principle allows the arbitral tribunal to conduct arbitration as it considers appropriate. The text of Article 1435 is as follows:

"Subject to the provisions of the present heading, the parties will be free to agree on the procedure to be followed by the arbitral tribunal in its actions.

In the absence of an agreement, the arbitral tribunal may, subject to the provisions of the present heading, conduct the arbitration in such manner as it considers appropriate. This faculty conferred on the arbitral tribunal includes that of determining the admissibility, pertinence and weight of the evidence."²

In Mexico, constitutional action for relief, also known as the action of individual guarantees or freedoms, is an ultimate recourse of defence by the individual against acts of authority considered to violate the individual rights enshrined in the Mexican Constitution. This means of defence is also a means of constitutional control, as through it the federal judiciary is entrusted with ensuring that Mexican laws and rules of a legal nature accord with the Constitution, neither contravening nor exceeding it. This ensures the supremacy of the Constitution as the overarching law of the land.

The telephone company filed the constitutional action for relief, claiming that Article 1435 of the Commercial Code was unconstitutional because it either (i) did not observe the essential formalities of the procedure³ referred to in Article 14 of the Constitution,⁴ or (ii) granted the arbitral tribunal absolute power to establish the same.

The company argued that constitutional inconsistency arose in either case; Article 1435 either violates the right to due process of law or contains a legal provision incompatible with constitutional requirements, failing to meet the minimum requirements in Article 14 of the Constitution for a due process of law clause.

The constitutional text does not detail what significance should be given to basic requirements for due process of law. However, Supreme Court of Justice precedent⁵ provides that the constitutional guarantee should cover all activities within a procedure that ensure a suitable and prompt defence of the individual against an act of nuisance by the public authorities. In general, this covers the following:

• service of the procedure and its consequences;
  
• opportunity to offer and examine the proofs on which the defence is based;
  
• opportunity to plead; and
  
• return of a resolution which covers the matters under debate.

The company's main argument was that Article 1435 of the Commercial Code was subjective to the extent that it allowed the arbitral tribunal to exercise without limitation the conduct of arbitration conferred under the article.

Decision

The first chamber of the Supreme Court of Justice found that Article 1435 is constitutional. This decision resolved the appeal for review filed by the complainant by upholding the decision of the district judge, who had rejected the constitutional action for relief.

The court held that parties in arbitral proceedings do have an opportunity to offer the evidence on which their defence is based under the terms for presentation and the form of examination, and also have an opportunity to plead. The court found that the faculty conferred on the arbitral tribunal under Article 1435 of the Commercial Code in connection with the procedure is protected by the provisions of the fourth heading to the fifth book of the code, which governs commercial arbitration. The fact that Article 1435 does not provide all the procedural rules necessary to carry out arbitration is not important and does not prejudice the complainant. The court held that the critical factor is the fourth heading of the Commercial Code, which establishes various provisions ensuring observance of the due process of law clause.⁶

The Supreme Court held that it is not sufficient to analyze the literal text of any precept in order to determine its constitutionality; rather a systematic interpretation must be made, taking into account that every precept forms part of a complete legal ordinance. Therefore, Article 1435 of the Commercial Code must be interpreted in the light of the fourth heading (which also incorporates the UNCITRAL Model Law on International Commercial Arbitration). Furthermore, where necessary Article 1435 should be interpreted in the light of supplementary legal norms to the Commercial Code.

The court established that the faculties of the arbitral tribunal, and specifically those for establishing the rules of arbitral procedure inherent to the offering, admission and examination of proofs and pleas, are not absolute or arbitrary, as provided by Article 1435 and the fourth heading of the fifth book of the Commercial Code. Rather, the faculties are limited so that they do not oppose the fourth heading, which reproduces the UNCITRAL Model Law on International Commercial Arbitration and safeguards the due process of law right granted by Article 14 of the Constitution.

Comment

Although the court's decision is welcome, the voluntary nature of the arbitration process should have been stressed, given that parties are free to decide on the arbitration procedure and the faculty under Article 1435 is subsidiary (ie, it applies only in the absence of a specific agreement of the parties). Therefore, there is no arbitral subjectivity, as the parties have at all times the right to establish the procedure; in the case in question the parties failed to agree on rules and thus the subsidiary faculty of the arbitral tribunal applied. This principle cannot be otherwise, since the inability of the parties to agree, or their deliberate failure to do so, should not impede the arbitral process and the principle guarantees that the arbitrator can carry the procedure to conclusion.

The Supreme Court's decision therefore provides convincing support for commercial arbitration.

Endnotes

<sup>1 Action for relief under Review 759/2003.

2 Article 19 of the UNCITRAL Model Law on International Commercial Arbitration, the correlative to Article 1435 of the Commercial Code, provides as follows:</sup>

"Determination of rules of procedure.

Subject to the provisions of this law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings.

Failing such agreement, the arbitral tribunal may, subject to the provisions of this law, conduct the arbitration in such manner as it considers appropriate. The power conferred upon the arbitral tribunal includes the power to determine the admissibility, relevance, materiality and weight of any evidence."

3 Also known as the due process of law right.

(4) Article 14 provides as follows:

"No law shall be given retroactive effect to the detriment of any person whatsoever.

No person shall be deprived of life, liberty, property, possessions or rights without a trial by a duly created court in which the essential formalities of procedure are observed and in accordance with laws issued prior to the act.

In criminal cases no penalty shall be imposed by mere analogy or by a prior evidence. The penalty must be decreed in a law in every respect applicable to the crime in question.

In civil suits the final judgment shall be according to the letter or the judicial interpretation of the law; in the absence of the latter it shall be based on the general principles of law."

5 Ninth period, plenary session. Semanario Judicial de la Federación y su Gaceta Vol II, December 1995. Thesis P/J 47/95, p133, "Essential Formalities of the Procedure: Those Which Guarantee an Adequate and Timely Defence Prior to the Depriving Act".

6 Extract from the judgment under Review 759/2003:

"The parties to the arbitral process have the opportunity to offer the proofs on which their defence is based, within the terms for offering and form of presentation, and also to plead, since the faculty conferred on the arbitration tribunal under Article 1435 of the Commercial Code in connection with procedure is covered under the fourth heading of the fifth book of the code; it is thus inconsequential and without prejudice to the complainant that the legislature has failed to establish in Article 1435 all the rules of procedure necessary for unfolding the arbitration procedure, since what is important is that the heading establishes the essential formalities of the procedure in accordance with the jurisprudence set by the plenary session of the Supreme Court of Justice of the nation, as invoked in the preceding paragraphs."

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