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As has been widely reported, Mexico recently adopted a constitutional amendment to overhaul its judiciary—most notably requiring popular elections for judges at all levels of the Mexican court system. Observers have widely voiced concerns that the reform threatens to politicize and destabilize the judiciary and undermine judicial independence. The most important of these changes will begin to take effect in 2025.
If your company engages in any trade or investment in Mexico, you should immediately assess the potential impact of the Mexican judicial reform on your business and take measures to mitigate the risks. You may be exposed to the Mexican judicial system either as the forum to resolve legal disputes under your contracts with your Mexican business partners or as the forum to resolve disputes regarding governmental actions taken against your investments in Mexico, such as your Mexican subsidiaries, operations, or contracts.
The good news is that, with careful advanced planning, you can avoid the Mexican courts in many circumstances. You can seek to have any contractual disputes with your Mexican business partners submitted to international arbitration. You may also be able to arrange for access to international arbitration to resolve any disputes with the Mexican government. Womble Bond Dickinson's International Disputes lawyers, in collaboration with our Mexican partners, are ready to advise on the necessary steps.
The Mexican Judicial Reform
The Mexican judicial reform makes major changes to the judiciary. Some of the most important changes are the following:
- Judges will be elected by popular vote to the Mexican Supreme Court, Circuit Courts, and District Courts, as well as others. The initial election will take place in 2025 for about half of judges, including all Supreme Court justices, with a further election in 2027 for the remaining judges.
- All judges will be subject to disciplinary proceedings before a popularly elected Tribunal of Judicial Discipline, which will have the power to impose sanctions on judges up to and including removal from office. The decisions of the Tribunal of Judicial Discipline are not subject to appeal.
- The Mexican judiciary will be prohibited from issuing general injunctions against laws and regulations in response to challenges to their constitutionality.
- The number of justices on the Mexican Supreme Court will be reduced to nine—from the current 11 justices.
Prominent observers—including at high levels of the U.S. government—have warned that the judicial reform threatens to politicize the Mexican court system. As the U.S. Ambassador to Mexico emphasized in a public statement, the reform "will threaten the historic trade relationship we have built, which relies on investors' confidence in Mexico's legal framework" and "[d]irect elections would also make it easier for cartels and other bad actors to take advantage of politically motivated and inexperienced judges."
The Mexican judicial reform creates direct risk for foreign business in Mexico. As Morgan Stanley reported, "[w]e downgrade Mexico to UW [underweight) following the Judicial reform proposal the Executive sent to Congress" because "[w]e believe replacing the judicial system should increase risk, Mexico's risk premia and limit capex."
Trade with Mexican Partners
Just because you do business with Mexican partners does not mean you have to be subject to the Mexican courts. It is straightforward to arrange for other means to resolve legal disputes. A clause inserted into your contracts can ensure that any legal disputes are resolved through international arbitration outside of Mexico. Now more than ever, the Mexican judicial reform makes it critically important to include international arbitration clauses in your contracts with your Mexican partners. Depending on your relationships with your Mexican partners, it may even be possible to amend existing contracts to include such clauses. It is well worth the effort to explore such amendments.
International businesses commonly opt for international arbitration to resolve cross-border disputes. International arbitration is a legally binding form of dispute resolution that is both neutral and private. The parties to the arbitration are able to select their own decisionmakers (called arbitrators) from a range of legal experts, who are not connected to the government of either party. The decisions of those arbitrators are readily enforceable before domestic courts around the world.
Accessing international arbitration requires advanced planning: your contracts need to include an appropriate arbitration clause. This is a provision that commits all parties to the contract to resolve any legal disputes through international arbitration. The arbitration clause can also be specially tailored for the business relationship at hand and any disputes that may arise from it. Arbitration clauses are frequently included in cross-border contracts specifically to ensure that disputes are not resolved before the domestic courts. When a contract contains such a clause, the domestic courts (including those of Mexico) are legally required to ensure that disputes covered by the clause are resolved by international arbitration rather than the courts.
Foreign Investments in Mexico
Unfortunately, governments can and do take measures—such as legislation, regulation, executive actions, or court decisions—that can harm foreign investments. The recent judicial reform will almost certainly make it more difficult to challenge such government measures before the Mexican courts. Even in the absence of a contract with the Mexican government arbitration clauses, there are steps you can take to protect your investments including contracts, subsidiaries, operations, or facilities—against adverse actions taken by the government.
With advanced planning, you can have alternatives to the Mexican courts for disputes against the Mexican government. A network of international treaties protects foreign investors against unfair governmental interference with their investments. If the Mexican government takes harmful measures against your investment, you may commence international arbitration (commonly called investor-State arbitration) and seek monetary damages for any injury you have suffered. The resulting decisions are, as for all international arbitration, readily enforceable before courts worldwide.
However, having access to this international investment protection and international arbitration often requires careful advanced planning. The exact protection available—or its availability at all—depends on the legal structures you use to hold your investments in Mexico. The recent judicial reform makes it especially important to examine the legal structures for your current or future Mexican investments to ensure they have the maximum protection available under international treaties.
How Womble Can Help
Womble Bond Dickinson has top shelf international dispute resolution and transactional practitioners with deep understanding of international arbitration and cross-border litigation. We regularly partner with leading Mexican law firms, chosen for their substantive expertise and industry experience. Together, we can help you assess your legal exposure to the Mexican judicial reform and take steps to help you mitigate the fallout.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
