Mexico: The Incorporation Of An Arbitration Clause In Commercial Contracts

Although adhering to arbitration is based on the parties' autonomy of will as well as on contractual freedom, formal incorporation of arbitration into Mexican legislation as an alternative mechanism to dispute resolutions had its origin in 1993 with the amendment of the Mexico Commercial Code, according to which the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration was adopted. However, there wascstill certain legal void derived from the fact that the Constitution contemplated one legal procedure only as a means for dispute resolution. In this regard, Article 17 established that "every person hascthe right to be administered with justice by courts ...", which led to the interpretation that the right to claim in court certain benefit without the need to submit to an arbitration procedure (even if it had been previously agreed upon) prevailed, since there was a fundamental right that should be guaranteed by the State.

Derived from the above, compromise on an arbitration agreement was considered as a waiver to exercise the right to start an action before judicial tribunals, same waiver that could be alleged to be null, since while the parties in exercise of their autonomy of will can renounce their rights, as established in Article 6 of the Civil Code, it is important to mention that access to judicial tribunals is defined by enforceable legal precedents ("jurisprudencia") as the individual public right inherent to every person within the terms established by law, to access expeditiously to independent and impartial courts, to raise a claim or defend against it, consisting the first stage prior to the trial, the right of access to jurisdiction, part of the right of action as a kind of petition addressed to the jurisdictional authorities and which motivates a pronouncement.

It was until the amendment to Article 17 of the Constitution published in the Federation Official Gazette on June 18, 2008, in which a paragraph was added that foreseen in the fundamental norm the existence of alternative dispute resolution mechanisms, a foundation that came to dispel any doubt regarding the obligation to attend the arbitration if it has been agreed. The above, since the power to resolve disputes through alternative mechanisms is recognized in the Constitution, the arbitration agreement was conceived as the affirmative exercise of constitutional freedoms, and in this sense it is that the constitutional precept was interpreted by the Supreme Court ("SCJN").

It is increasingly common to find an arbitration clause in commercial contracts, especially in those that involve international issues, either because one of the parties is in another country, or even having presence in Mexico is a foreign company; or for the purpose of the transactions. This is due to the virtues that have been found in agreeing an alternative dispute resolution mechanism such as arbitration, among them mainly:

(i) The faculty of the parties to choose the arbitrator (in the case of a sole arbitrator) or arbitrators (in case it is an arbitration panel) to resolve the dispute, without this meaning that the appointed arbitrator must resolve in his or her favor. This power of the parties affects both the specialized issue of the matter in question (having the faculty to choose an expert in the field ensures in a certain way that the dispute will be resolved "as it should be", whether it have or not the reason) and in the fact of diminishing the possibilities that the procedure could be tainted by corruption issues;

(ii) The degree of voluntary compliance of the awards, since although the arbitral panel is not vested with imperium, the parties generally accept the decision of the arbitral panel and do not seek to annul it. It is also important to mention that if the convicted party does not comply voluntarily with the award, the Commercial Code specifically regulates the enforcement procedure, in which the judge is forced to execute the award without having the power to re-analyze the controversy;

(iii) Normally it has only one arbitral instance, meaning that the decision taken by the arbitral panel will not be subject to further analysis, which usually means a faster procedure (although this may not be the case). However, it is faculty of the parties regulate the procedure, being able in its case to incorporate the instances that they consider appropriate;

(iv) The power of the parties to regulate the procedural rules (although they are generally subject to the arbitration rules of an institution in charge of administering arbitrations), the substantive law applicable to the controversy and the language of the proceedings. This means that the parties can sense themselves on equal terms, since none of them must submit to a procedure under another's jurisdiction;

(v) The non-obstruction of the procedure due to bureaucratic issues, such as the fact that all communications between the parties and the arbitral panel can be made by e-mail, with the exception of the award; and

(vi) The confidentiality of the procedure.

However, the arbitration clause can often be impossible to execute or produce the nullity of the award, which is why they are known as "pathological clauses", due to their over-regulation. This is mainly due to the ignorance of the lawyers who draft them, since they want to "protect" their clients by establishing a series of requirements and conditions, mainly in the characteristics of the arbitrators, their appointment from the contract and the circumstances of the dispute, make inoperative the clause being even able to apply Article 1457 of the Commercial Code, which establishes as grounds for nullity of the award the fact that: (i) the award refers to a dispute not provided for in the arbitration agreement or contains decisions that exceed the terms of the arbitration agreement; or (ii) the composition of the arbitral panel or the arbitration procedure did not comply with the agreement between the parties.

That is why, although it seems to be neglected in the arbitration agreement, it is advisable to adopt the model clause proposed in the regulations of the administrative institutions (such as the International Chamber of Commerce, the American Arbitration Association, the London Court of International Arbitration, the Hong Kong International Arbitration Center, the National Chamber of Commerce or the Arbitration Center of Mexico, among others) as the case may be; For merely exemplary purposes, we will take the International Chamber of Commerce (ICC) for those international arbitrations, and the National Chamber of Commerce (CANACO) if it is a national arbitration:

ICC.- All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.

CANACO.- Any litigation, dispute or claim resulting from this contract or related to this contract, its non- compliance, revocation or nullity, shall be settled by arbitration in accordance with the Arbitration Rules of the Mexico City National Chamber of Commerce, in effect at the time of its commencement.

In this regard, it would only be advisable to add to the model clause the language of the procedure (being able to even agree on two or more languages), the substantive law applicable, the number of arbitrators and the place of the arbitration. This last element does not necessarily have to do with the place where the arbitral panel meets, since it can do it where it considers appropriate, but it is important because it will be where the parties may request the assistance of jurisdictional courts, mainly in the request for precautionary measures, since these will serve to safeguard the goods subject to controversy, being that although the arbitral panel can issue these measures, due to their lack of imperium they will be binding exclusively to the parties, also that the arbitral panel is prevented from issuing orders such as attachment, seizure of assets or consignment that are enforceable against third parties that are not part of the arbitration agreement. That is why it should always be sought that the place of arbitration, as well as the place where the award is to be executed, has friendly legislation with this procedure, which regulates the possibility of agreeing an arbitration and the enforcement mechanisms of the awards dictated; or in the event that its local legislation does not expressly provide for it, that it be at least a State Party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

It is also common to find "Multi-Step Dispute Resolution clauses", which provide that before going to arbitration, the parties must submit to another type of alternative dispute resolution mechanism such as negotiation or mediation. These clauses are not pathological per se, however, they can become so depending on how they are regulated; Frequently an ambiguous language is used and are established imperatively, making the parties compulsory to exhaust them before initiating an arbitration proceeding, understanding that otherwise the arbitration agreement is violated, which makes the award that could be issued voidable. In addition, they are often used as a delaying practice, without being the real intention of the parties to reach an agreement. Therefore, it is generally advisable not to include them, since if the parties are willing to negotiate during the arbitration procedure, nothing prevents them from doing so. On the contrary, the Commercial Code recognizes this situation and establishes in Article 1447 that if, during the proceedings, the parties reach a settlement that resolves the litigation, the arbitral panel will terminate the proceedings and, if requested by both parties and the arbitral panel does not oppose, will record the transaction in the form of an award.

Finally, it should only be emphasized that at the time of drafting an arbitration clause it is important to take into account that, although it seems paradoxical, less is more, so we must limit ourselves to incorporating the essentials of the respective clause, according to the arbitration rules to which the parties agree to submit.

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.

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