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Mexico’s president-elect Claudia Sheinbaum will push through radical constitutional reforms which include the replacement of judges (starting with the Supreme Court) by those who are directly elected by the government. Here the Supreme Court building in Mexico City. (Photo: Mexico’s Supreme Court)
Thursday, June 20, 2024

Mexico: A Spike in Arbitrations?

Amidst Mexico investor anxiety is a spike in arbitration on the cards?

BY NOOR KADHIM AND ASA BUCHANAN

When looking to do business in a foreign country, investors will seek comfort that there is not only a comparatively robust economy, but also a reliable and stable legal system.

Latin America as a region – and in particular Mexico, Peru, Argentina, Colombia, and Venezuela – has long attracted mining, energy, construction and infrastructure projects notwithstanding the sometimes fluctuating political and economic conditions across this region.

Mexico has just suffered a dramatic fall in the peso of almost 9% following the election of Claudia Sheinbaum of the populist MORENA party.  Sheinbaum, the country’s first female president, announced that she will push through radical constitutional reforms which include the replacement of judges (starting with the Supreme Court) by those who are directly elected.

These reforms, which were instigated by her predecessor Mr Lopez Obrador, are ostensibly aimed at reducing corruption.  Critics say that in reality the reforms risk the opposite effect, as they will erode the separation of powers between the executive government and the judiciary and raise the danger that the courts will become an extension of government and therefore too closely aligned with its policies.  The potential anxiety for investors arises from the prospect of seeking to enforce contractual rights relating to Mexican assets subject to contracts governed by Mexican law and subject to the jurisdiction of Mexican courts.

In the face of these potential developments, parties to contracts with Mexico or Mexican companies, who would historically have been governed by Mexican law, may seek to ‘futureproof’ their investments by using another law or switch away from Mexican courts to a favorable seat of arbitration. A more extreme reaction may be to consider a move away from Mexico altogether, to the more hospitable investment landscapes in Chile, Uruguay, or the increasingly popular Peru, whose government is favorable to putting ICC arbitration clauses in contracts.

It is also notable that of all global regions, South America has given rise to the highest number of investor-state (“ISDS”) disputes at ICSID in recent years.  In 2023, over 35% of ISDS cases emanated from South America, and Mexico has been involved in over 50 ISDS cases to date.  Investors will also note that the North American Free Trade Agreement (NAFTA) has now been superseded (for US investors) by the United States-Mexico-Canada Agreement (USMCA) and for Canadians by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).  Almaden Minerals is the first to file a case under the CPTPP, availing itself of the treaty’s jurisdictional gateways to discontinue the legal action it had started in the Mexican courts in favor of arbitration.

The extent of Mexico’s proposed constitutional reforms is yet to be seen. However, there is expected to be a rise in the use of alternative dispute resolution procedures, including arbitration.  Investors into Mexico would do well to undertake thorough due diligence investigations, including ‘treaty shopping’ and red flag reports, in the context of seeking licenses or contracts for high value projects, and to carefully consider their options when setting up their contractual frameworks.

Noor Kadhim is a Counsel in the Dispute Resolution department at Fieldfisher in London. Asa Buchanan is a senior associate and restructuring and insolvency lawyer at Fieldfisher in London.

This article is based on an insight from Fieldfisher. Republished with permission. 

 

 

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