Reforms to the Commercial Code: special proceeding in arbitration matters

On January 27, 2011 a bill reforming various provisions of the Commercial Code (Código de Comercio) related to the judicial intervention of Mexican Courts in arbitration was published in the Official Federal Gazette.

Although in some points the reform improves our regulation and updates it, serious contradictions and inconsistencies are introduced with respect to arbitration as a legal discipline.

Regulatory inclusions

Within Chapter V of the Special Title called “The Oral Commercial Proceeding”, the following topics were included:

Remittance to arbitration;

Special matters to process through voluntary jurisdiction;

Special proceeding on commercial settlements and arbitration;

Domestication of the commercial award;

Joinder of proceedings on annulment, recognition and enforcement of commercial awards;

Arbitral precautionary measures.

Specifically, the above listed matters are regulated in the following terms.

Remittance to arbitration (articles 1464 and 1465)

This section regulates (1) the form in which the remittance to arbitration will be processed and (2) the cases in which the remittance will be denied.

Regarding the form for processing the remittance to arbitration, it is provided that: (i) the remittance request must be made in the first submission that the party requesting it files in the commercial proceeding in question; (ii) the judge give notice to the parties and rule on it immediately; (iii) if the remittance is ordered, the suspension of the proceeding will be ordered; (iv) the arbitration will be carried out and, once it is resolved, the judge (at the request of a party) will close the proceeding; (v) if in the arbitration the matter is not terminated in whole or in part, at the request of a party and all interested parties having been heard, the suspension of the proceeding will be lifted.  The ruling on the remittance to arbitration cannot be appealed.

The cases in which the remittance may be denied were reduced to two specific situations: (i) if it is proven in the response to the request for remittance made, that the arbitration agreement had been declared invalid; and (ii) if the invalidity, ineffectiveness or impossibility of enforcing the arbitration agreement is obvious according to the judge (the latter must do a rigorous analysis).

Special matters to be processed through voluntary jurisdiction (article 1466 to 1469)

The following matters will be processed through voluntary jurisdiction according to the terms of the Federal Civil Procedures Code: (1) appointment of arbitrators; (2) judicial assistance for production of evidence in arbitration; (3) arbitrators’ fees.

In the case of the appointment of arbitrators, the judge may, except when under the circumstances of the case it would be inconvenient, (1) hear the parties, (2) consult with specialized institutions and (3) make use of the list system (propose arbitrators).  If even with that, the parties do not appoint the arbitrator(s), the judge will make the appointment.  The ruling of the judge in this case cannot be appealed.  This, of course, does not exclude the right of the parties to recuse.

With respect to judicial assistance for the production of evidence, before such assignment is made all the parties must be heard, except when the circumstances of the case make it inconvenient.

Special proceeding on commercial settlements and arbitration (articles 1470 to 1476)

“Special proceedings on commercial settlements and arbitration” are considered those that address the following matters: (1) recusal of an arbitrator, (2) competence of the Arbitral Tribunal, (3) precautionary measures in arbitration, (4) annulment of commercial settlements and arbitral awards and (5) when the recognition and enforcement of an award is requested as a defense in a proceeding or trial. 

Such proceedings will be processed in the following manner: (1) once the claim is admitted, the defendants will be served process and will have 15 days to answer; (2) if the parties do not present evidence (and the judge does not consider it necessary) the parties will be summoned to attend the closing arguments hearing within three days from the expiration of the above indicated term (it will be held even in the absence of the parties); if evidence is presented (or the judge considers it necessary) before the closing arguments hearing a 10-day term to produce evidence will be opened; and (3) once the hearing is held, the parties will be summoned to hear the decision. Neither the decision resolving this type of proceeding, nor the intermediate rulings issued in it, can be appealed.

Joinder of proceedings on annulment, recognition and enforcement of commercial awards (Article 1477)

In order to join proceedings on annulment, recognition and enforcement of arbitral awards, it is necessary that (1) the closing arguments hearing has not been held and (2) they are not procedures from different territorial jurisdictions or abroad, nor procedures carried out between federal courts and those of the states.  The ruling issued on joinder cannot be appealed.

Arbitral precautionary measures (articles 1478 to 1480)

As a general rule, any precautionary measure ordered by the Arbitral Tribunal must be recognized and enforced, unless the judge shows that (1) the arbitral agreement is not valid, (2) the principle of equity and rebuttal in arbitration was not respected, (3) the decision of the Arbitral Tribunal on the guarantee was not respected, (4) the precautionary measure was revoked or suspended by the Arbitral Tribunal or, (5) the precautionary measure is incompatible with the powers conferred to the judge, or (6) enforcement of the precautionary measure would violate public order.

Both the party requesting the precautionary measure and the Arbitral Tribunal issuing it will be held liable for it and therefore both will pay any damages and losses caused.

Comments and Analysis

In this section we mention some issues which are deficient, reducing the effectiveness of the arbitration reform and which are likely to affect the practice of arbitration in our jurisdiction.

Remittance to arbitration

There is a contradiction between section I of Article 1464 and Article 1424 of the reforms.  The first indicates that the remittance to arbitration has to be requested in the first submission, while the second indicates that it will occur “immediately”, at the time it is requested, and not necessarily in the first submission.  This contradiction creates ambiguity and ineffective regulation.

Joinder of proceedings

Regarding joinder, unfortunately it was indicated that joinder is not valid in the case of proceedings processed in different states of the Republic. This will not result in the advantage that was sought with the joinder of the proceedings and could generate contradictory decisions in the same Mexican legal system.

Precautionary measures

The strongest criticism of the reform is the inclusion of the last paragraph of Article 1480 of the decree which establishes that: “Every precautionary measure is the responsibility of the party requesting it, as well as of the Arbitral Tribunal issuing it, and therefore they are liable for any damages and losses that are caused”.

First of all, the paragraph is inconsistent, given that on the on hand it conditions the granting of the measure on the requester providing a guarantee.  In other words, any possible damages and losses would be guaranteed and it would not be necessary to consider the Tribunal liable.

In addition to the above, the inclusion referred to represents a regression in the regulation of arbitration in our country, given that in matters of contractual liability, our legal system permits the limitation of liability, except for conduct derived from acts intended to cause harm or for serious negligence.

It could be interpreted with the new reform that liability is being attributed to the arbitrator for the issuance of a precautionary measure that results in damages and harm to the party against whom it is issued, without evaluating the conduct of the arbitrator, which broadens, without a logical or legal basis, contractual liability.  In other words, it could be considered that, regardless of having acted with diligence and without intention to harm upon issuing the precautionary measure, the arbitrator could be liable for the damages and losses caused.

Apart from the theoretical discussion on the responsibility of arbitrators, it is a fact that the inclusion of this text will inhibit arbitrators from issuing precautionary measures, which will render nugatory the application of all the articles that the reform includes on this matter.  This reform will indicate our country as an unfavorable place for arbitration since a jurisdiction with this limitation is not attractive for foreign parties.

Mr. Venegas is partner of the litigation and arbitration areas, he is in charge of the International Commercial Arbitration and Investment Arbitration cases, as well as of the Administrative and Intellectual Property Litigation, Civil and Commercial Litigation; Constitutional (Amparo) Litigation.  His experience includes the participation in two of the largest commercial arbitrations in Mexican history (for more than 1.7 billion dollars), as well as in several construction and infrastructure disputes.

Mr. Venegas is a professor on the Arbitration Seminar at the Escuela Libre de Derecho and has written several articles in arbitration and litigation.  He can be contacted on +5255 5258 1034 or by email at mtvenegas@vwys.com.mx