This article is a collaboration between: King & Spalding (Monica Hwang and Silvia Martin) and Ritch Mueller (Gabriel del Valle Mendiola and Marco Portillo Diaz).
On April 5, 2020, in the first quarterly report of his second year of government, Mexico’s president, Andrés Manuel López Obrador (“AMLO”) reiterated his intention to unveil a long-awaited energy-infrastructure plan.[i] The plan will be part of his government’s economic strategy to revive the Mexican economy following the deceleration resulting from the COVID-19 pandemic. Foreign investors interested in investing in Mexico pursuant to the new energy infrastructure plan are likely currently battling fallouts from the COVID-19 pandemic and, in particular, force majeure claims under existing agreements.
Undoubtedly, force majeure is likely a heightened area of concern in respect of any future investments pursuant to Mexico’s energy infrastructure plan. While foreign investors will likely push for a governing law other than Mexican law in its agreements, certain agreements may have to be subject to Mexican law. This article examines force majeure and similar concepts under Mexican law and the key issues investors should consider when structuring an investment in Mexico.
Overview of Potential Opportunities in Energy Infrastructure Plan for Foreign Investors
Mexico’s energy infrastructure plan is expected to be issued as soon as April of 2020. It is anticipated to provide private companies with investment opportunities in a broad portfolio of energy projects, with an estimated total worth of almost $15 billion, based on current exchange rates.[ii] While auctions for joint venture projects with the state oil company Petróleos Mexicanos (Pemex) are not currently anticipated to be covered, AMLO announced that the rehabilitation of all refineries, the development of the new Dos Bocas refinery, and the construction of new thermoelectric plants are still underway. Renewable electric power generation and projects for the transportation and storage of hydrocarbon are also expected to be addressed in the plan. For foreign investors seeking to invest in Mexico for the first time, they may be interested to know that project rate of returns for these projects are typically on par, if not higher, than comparable projects in the U.S.
Is Force Majeure a Concept under Mexican Law?
The general principle under Mexican law is that contracts should be performed pursuant to the letter of such contracts. As such, parties to contracts are bound to observe and comply with the express provisions of such contracts, provided that they will also be obligated to comply with the consequences that may arise in good faith, by operation of law or on the basis of commonly accepted practices, from the nature of such agreements. Consequently, in the evaluation of the impact of the COVID-19 pandemic on the obligations of the parties, along with any potential relief granted to the parties with respect to such event, the express contractual provisions agreed among the parties shall be the basis for any analysis regarding the rights and obligations of the parties in a scenario such as the one posed by this unprecedented pandemic.
Notwithstanding the general principle stated above and, importantly, where contractual provisions are unclear, insufficient or non-existent, provisions of Mexican law may be argued to protect parties from liability resulting from their inability to perform their contractual obligations by virtue of force majeure events and acts of God.
Where Mexican courts and legal doctrine do not provide a precise definition of “force majeure” and “acts of God”, they generally refer to force majeure events as those events resulting from humans and acts of God as those resulting from nature. Although the event or act that results in force majeure or act of God may be different in nature, the legal consequence under the applicable Mexican statute is the same: a party is excused from the failure or delay to perform its obligations under a contract without penalty or liability unless such party has contributed to the relevant force majeure event or act of God, has expressly agreed to be held liable or the law specifically provides for such liability.[iii],[iv] As result, given the general effects and consequences are the same for the two concepts, the Mexican Supreme Court has established that force majeure and acts of God are synonyms.[v] Thus, in this article, references to “force majeure” can be read to refer to both concepts.
Pursuant to the Mexican courts and legal doctrine, a party seeking to claim force majeure must demonstrate that the event (i) renders the affected party unable to comply with its obligations, (ii) is beyond the affected party’s control and is not attributable to the affected party, and (iii) could not be prevented or avoided by the affected party through the exercise of due diligence. One cannot claim relief based on force majeure by the mere increase in the difficulty of performance of the obligation or because it is more onerous to fulfill such obligation.[vi] Consequently, a party seeking force majeure relief pursuant to Mexican law has a high burden of proof, and force majeure claims under Mexican law typically require an intensive fact analysis and must be approached on a case-by-case basis.
In addition, there are a number of legal provisions and judicial precedents in Mexico that may serve, by way of exception, as a basis for parties to commercial agreements to seek a rebalancing or renegotiation of their obligations. This potential right may arise if situations in effect at the time of contract execution change substantially and in a manner that performance of the original obligations become more burdensome or onerous than upon execution of the contract.
The principles described above would need to be interpreted strictly and applied cautiously considering that they are exceptions to the general rule under Mexican law regarding the requirement for parties to fulfill their contractual obligations as stated in the contract. In addition, the relief available will largely depend on the type of obligations (civil or commercial) and whether each contract is governed by the federal law of Mexico or the law of any of the 31 Mexican federal entities or Mexico City. Consequently, a case-by-case assessment would be required in order to confirm the potential rights and obligations of a party in any given scenario.
Are Force Majeure Provisions Common in Mexican Law Contracts?
As discussed above, there is a lack of a legal definition for force majeure under the Federal and local Civil Codes in Mexico. Accordingly, it is common even in commercial contracts as between domestic counterparties to negotiate and include force majeure provisions.
A typical force majeure provision in a Mexican law contract is structured very similar to one governed by New York law. There is typically a general definition of force majeure, followed by a non-exhaustive list of both illustrative force majeure events and events that do not constitute force majeure. The burden of proof is on the party seeking to rely on the force majeure provisions, and these are usually construed narrowly against that party based on the specific contract language. Thus, it is advisable to carefully draft and tailor force majeure provisions under Mexican law in the same way it would be done for provisions governed by New York or Texas law.
Other Contracting Consideration for Mexican Law Contracts
Aside from a carefully drafted force majeure clause, foreign investors into Mexico are advised to consider the dispute resolution mechanism. If available (whether pursuant to contract negotiation dynamics or if not restricted by Mexican law), arbitration may be an attractive option for the foreign investor. One, arbitration takes away the perceived home court advantage from the domestic counterparty. Second, as illustrated by COVID-19, jurisdictional entities at the federal, state and municipal level have suspended their operation (and legal terms) except for specific matters that require immediate attention (e.g. constitutional controversies, criminal matters and injunctions). Arbitration may potentially avoid such suspension, as the parties might be able to initiate or continue their hearings via video. However, potential investors should be aware that while some arbitral institution rules generally provide arbitrators with discretion to conduct a merits hearing as they see fit, currently, there are no specific rules for how such video hearings should proceed.[vii]
Mexico’s energy infrastructure plan may offer foreign investors investment opportunities ranging from downstream to power. Such opportunities may prove valuable to Mexico to revitalize its economy following the downturn created by COVID-19. In preparation for any such investment, a foreign investor would be well served to consult legal advice to carefully consider the scope and ramifications of force majeure and contractual protections that may be available.
[i] Speech of the President Andrés Manuel López Obrador in his report to the people of Mexico, April 5, 2020, available at https://lopezobrador.org.mx/2020/04/05/discurso-del-presidente-andres-manuel-lopez-obrador-en-su-informe-al-pueblo-de-mexico/.
[ii] Karol Garcia, Gobierno de AMLO presentará plan energético con inversiones por 339,000 millones de pesos, EL ECONOMISTA (April 5, 2020), available at https://www.eleconomista.com.mx/empresas/Gobierno-de-AMLO-presentara-plan-energetico-con-inversiones-por-339000-millones-de-pesos-20200405-0027.html.
[iii] Article 2111 of the Mexican Federal Civil Code, “No one is obligated under fortuitous events (i.e. acts of God), unless it has contributed to its cause, has expressly agreed to such obligation or when applicable law requires it.”
[iv] Article 1847 of the Mexican Federal Civil Code, “The penalty shall not be given effect when the obligor has not been able to comply with the contract as result of the creditor’s actions, fortuitous event (i.e. acts of God) or force majeure.”
[v] Tesis [A.]: II.1º.C.158 C, T.C.C., Semanario judicial de la Federación y su Gaceta, Novena Época, tomo VII, Enero de 1998, p. 1069. Reg. Digital 197162., available at https://sjf.scjn.gob.mx/sjfsist/Paginas/DetalleGeneralV2.aspx?ID=197162&Clase=DetalleTesisBL&Semanario=0.
[vii] For further discussion on video hearings for arbitration, please see Brianna Kostecka and Jessica Sabbath, Best Practices for Conducting Arbitration Hearings Remotely (THE CRITICAL PATH), available at https://kslawemail.com/312/6537/pages/article4.asp?sid=47ad8282-bf35-46ae-9ec1-9b640df3533e.