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28 August 2001
This update outlines the regulations governing breach of contract actions and the remedies for contractual liability in the Mexican legal system according to the rules set forth in the Civil Code of Mexico.(1)
Breach of contract liability arises when a party to an agreement fails to comply, wholly or partially, with its obligations under the agreement. The breach of contract must be intentional and not attributable to an event or effect that cannot be reasonably anticipated or controlled.
In Mexico compliance and non-compliance with contractual obligations is governed by the Civil Code and other special legislation, such as the Federal Consumer Protection Law. In the Civil Code breach of contract liability is governed by Article 2104, which states that "a party that is bound to perform an act and does not, or does not perform under the agreed terms, will be liable for damages and losses".
Additionally, Article 1949 of the code contains a general principle of law stating that parties to an agreement are entitled to rescind or terminate a contract if one of the parties fails to comply with the obligations under the agreement. The non-breaching party has the option of choosing the remedy: either a specific performance under the contract if available, or recission of the obligation. There is an indemnity for damages and losses under both options.
The consequences and remedies available for breach of contract actions depend on the type of contractual obligation that is breached. Under Mexican law, three distinct types of obligation exist, namely:
Contracts for the sale of goods
Article 2107 gives rise to several consequences for the breach of an obligation to tender in sale of goods. One remedy is specific performance. Another is that the breaching party may be required to return the goods promised or return the price paid, or both. Additionally, the breaching party must indemnify the injured party for damages and losses caused by the breach. In the event of a complete or partial loss of the promised goods, the Civil Code provides specific rules for the remedies available based on the different causes attributable for the loss (ie, whether the loss was attributable to an uncontrolled event, or to the transferor, or to the transferee).
Contracts for performance
Article 2027 governs the remedy for the breach of an obligation for performance. If substitution is possible, breach of an obligation to perform entitles the non-breaching party to demand that such performance be carried out by a third party at the expense of the breaching party (Article 2027).
An exception to this rule is a case involving a promise to enter into a unilateral or bilateral contract in the future (Article 2244). The breach occurs when there is a failure to execute an agreement or a promise when preparing to enter into a future contract. This type of breach only gives rise to an obligation to perform, which consists of the execution of the future agreement in accordance with the agreed terms (Article 2246).(2) However, if the promissor refuses to sign the documents necessary for the execution of the preparatory contract, a judge will then sign them, with one exception. The exception occurs if the offered good has been transferred to a third party in good faith, in which case the promise will no longer be effective and the breaching party will be responsible for damages and losses (Article 2247).
Contracts for abstaining from performance
In the case of an obligation to abstain, the non-breaching party cannot seek a specific performance, but only indemnification for damages and losses (Articles 2029 and 2104).
Damages and losses
Article 2108 defines a 'damage' as the deterioration of a person's property. Article 2109 defines 'loss' as the preclusion from obtaining a lawful gain. Article 2110 states that damages and losses must be the immediate and direct consequence of the failure to comply with an obligation. When it comes to contracts the damages and losses must be the immediate and direct consequence of the breach.
Damages and losses are capped at a specific level. If the contract consists of the payment of money, damages and losses collectively may not exceed the legal interest (9% per year in civil obligations or 6% in commercial obligations) or the principal amount under the contract, unless otherwise agreed to by the parties.
Remedies and contractual liability may be entirely regulated by the agreement between the parties, unless the law provides otherwise. In this regard, the Civil Code provides that contracting parties may stipulate certain compensation as penalties if an obligation is breached or is not complied with under the terms of the contract. In other words, conventional penalties are allowed in contracts between the parties. However, the parties must understand that if a conventional penalties clause is included in the contract the non-breaching party cannot seek other damages and losses, but can only obtain the penalties specified in the clause (Article 1840). The compensation stipulated as a penalty cannot exceed the value of the amount of the main obligation (Article 1843).
In the event of a partial breach the penalty shall apply in proportion to the breach, unless the modification cannot be proportionally divided. In this case a judge will reduce the penalty in an equitable manner by taking into consideration the nature and other circumstances of the contractual obligation.
If the breached obligation allows for specific performance the injured party cannot claim both specific performance and the payment of the conventional penalties, but must choose one remedy. The Civil Code contains one exception to this rule. In the event of late compliance with an obligation or if an obligation was not completely complied with under the agreed terms, the injured party may be able to obtain both specific performance and a penalty. For example, a delinquent debtor could be required to pay due interest on a loan, in addition to payments of the principal amount.
The Civil Code contains general provisions applicable to many different kinds of contracts. Therefore, the remedies for contractual liability in the event of a breach are generally consistent with the general principles. However, remedies may also be derived from special legislation that governs specific types of contractual obligations.
Under the Mexican Commercial Code (3) the court to adjudicate breach of contract cases shall be one of the following:
A 'choice of forum' or 'choice of law' clause (see Appendix 1) is required when the parties have expressly agreed in the contract to settle a dispute in a specific court. If the parties expressly submit to a court of a specific jurisdiction, the parties shall be deemed to waive submission to any other court to which they would otherwise be entitled to by operation of law (Article 1093). A tacit submission occurs when the plaintiff files the lawsuit against the defendant in a certain court, or when the defendant files an answer to the lawsuit, or files a counterclaim against the plaintiff, in that court (Articles 1094-1&11).
However, under international treaties to which Mexico is a signatory (4) 'forum shopping' is forbidden. In either a litigation or arbitration proceeding, submission to a court of competent jurisdiction of the party's choice that would result in an undue benefit for the party is forbidden.
It is recommended that commercial, employment, and other contracts executed by Mexican subsidiaries of US companies, contain choice of forum or choice of law clauses. These will protect US parent companies from substantial punitive damages awarded in the United States as illustrated by such as cases as Dubai and Salant (See Structure of Cross-Border Subsidiaries).
In these cases the Mexican plaintiffs argued successfully that US courts were competent to adjudicate contract and tort liability cases that occurred in Mexico because corporate decisions and the amount of control by the US parent company led to those liabilities.
The most valuable recommendation is that contracts in Mexico, particularly employment contracts, are executed correctly and include a choice of forum/choice of law clause.
For further information on this topic please contact John Rogers or Mike Patterson at Strasburger & Price SC by telephone (+525 55 202 7665) or by fax (+525 55 202 2367) or by e-mail (firstname.lastname@example.org). The Strasburger & Price web site can be accessed at www.strasburger.com.
"This agreement shall be governed by the laws of Mexico (specific laws may be cited, depending on the type of contract executed).(5) The parties hereto submit themselves to the jurisdiction of the courts of Mexico City, federal district (or any other Mexican state where the parties are domiciled), for all matters regarding the interpretation, compliance, performance and execution of this agreement, expressly waiving any other jurisdiction that may apply in view of their present or future domiciles or that might accrue to them for any other reason."
Appendix 2: Example of a Waiver of Sovereign Immunity
"The [borrower] acknowledges and agrees that the activities contemplated by the provisions of this agreement and the note are commercial in nature rather than governmental or public, therefore acknowledges and agrees that it is not entitled to any right of immunity on the grounds of sovereignty or otherwise with respect to such activities or in any legal action or proceeding arising out of or relating to this agreement or the note. The [borrower], in respect of itself and its properties and revenues, expressly and irrevocably waives any such right of immunity (including any immunity from the jurisdiction of any court or from any execution or attachment in aid of execution prior to the judgment or otherwise) or claim thereto which may now or hereafter exist, and agrees not to assert any such right to claim in any such action or proceeding, whether in the United States or otherwise."
The materials contained on this web site are for general information purposes only and are subject to the disclaimer
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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